A small number
of Indonesians are benefitting from financial and physical assets — sometimes
acquired through corrupt means — that, in turn, drive higher wealth concentration
and inequality in the future, according to the World Bank.
The World Bank’s report titled Indonesia’s Rising Divide which analyzes inequality in Indonesia, says that an increasing concentration of wealth in the hands of a few means that income from financial and physical assets are driving inequality higher.
Below are excerpts from the World Bank report, which was prepared by its poverty global practice team in its Jakarta office and released here on Tuesday.
Households earn income not only through jobs but also financial and physical assets. The share of income generated by labor has been falling and the share generated by capital, such as financial and property assets, has been increasing in Indonesia as elsewhere in the world.
In Indonesia, this partly reflects the strong returns on these assets over the past decade. It is largely rich households, however, that have access to these resources.
The richest 10 percent of Indonesians own an estimated 77 percent of all the country’s wealth. In fact, the richest 1 percent own half of all the country’s wealth, which is the second-highest level (along with Thailand) after Russia from a set of 38 countries. This means that income from financial and physical assets benefits fewer households in Indonesia than in many other countries.
Financial and physical assets are generating higher incomes for only a few wealthy households in Indonesia, and these households are then saving this income as even more wealth.
The share of wealth owned by the richest 10 percent in Indonesia increased by 7 percentage points between 2007 and 2014, in the top 10 of countries over that period.
These increased assets today will also generate even higher incomes tomorrow.
Increasing wealth concentration is due, in part, to differences in the way income tax is collected from labor and capital. For example, dividend withholding tax is only 10 percent (and earned interest withholding is only 20 percent), lower than all but one labor income tax rate and considerably lower than the 30 percent top marginal tax rate that most dividend earners would otherwise be paying. At the same time, the significant capital gains that have been made from the housing and stock markets are theoretically subject to personal income tax, but are not subject to withholding taxes.
With weak monitoring and compliance on personal income taxes, low withholding tax rates often mean less taxes paid. Meanwhile, for many workers income tax on salaries are withheld by employers, ensuring a high degree of compliance for labor income.
As a consequence, around 95 percent of personal income taxes (around 20 percent of total income taxes) with corporate taxes making up the rest are collected by withholding, mostly on salaries, and only the remaining 5 percent from capital income. For some, their financial and physical assets aspects are gained through personal connections and corrupt practices. In 2014 Indonesia’s Corruption Perception Index, which measures perceptions of public sector corruption around the world, was a lowly 34 out of 100 (where 0 means very corrupt and 100 very clean), ranking it 107th out of 175 countries.
This suggests that some of the wealth accumulation has occurred through corruption or at least is perceived to have been accumulated this way.
However. In some areas, particularly the political economy of Indonesia’s institutions and the nature of corruption, not enough is known about the nature of the problem and the best actions to take.
Not enough is known about the nature of corruption in Indonesia and how it drives inequality. Public perception suggests it is wide spread, and high-profile cases provide vivid examples of how the rules of the game are being based in favor of insiders or circumvented altogether without legal consequences.
Both forms of corruption seem highly likely to be linked to inequality through lower growth, high wealth concentration and policymaking that exacerbates inequality (for example, rigid labor markets that prevent productive job creation or switching, or import restrictions that drive food prices higher).
However, an analysis of the political economy is needed to identify the underlying causes. Which aspects of the political, economic and legal framework in Indonesia provide the incentives for such rent-seeking practices to take place?
That is, how are policies made, by whom and for whose benefit? When is corruption or rent-seeking due to a lack of appropriate checks and balances? And when it due to lack of enforcement of these checks (whether through discretion on investigation and prosecution of potential corruption or the outright subversion of the legal process through judicial capture)?
The World Bank’s poverty global practice team is led by lead economist Vivi Alatas and the report writing of Indonesia’s rising dividewas led by senior economist Matthew Wai-Poi
The World Bank’s report titled Indonesia’s Rising Divide which analyzes inequality in Indonesia, says that an increasing concentration of wealth in the hands of a few means that income from financial and physical assets are driving inequality higher.
Below are excerpts from the World Bank report, which was prepared by its poverty global practice team in its Jakarta office and released here on Tuesday.
Households earn income not only through jobs but also financial and physical assets. The share of income generated by labor has been falling and the share generated by capital, such as financial and property assets, has been increasing in Indonesia as elsewhere in the world.
In Indonesia, this partly reflects the strong returns on these assets over the past decade. It is largely rich households, however, that have access to these resources.
The richest 10 percent of Indonesians own an estimated 77 percent of all the country’s wealth. In fact, the richest 1 percent own half of all the country’s wealth, which is the second-highest level (along with Thailand) after Russia from a set of 38 countries. This means that income from financial and physical assets benefits fewer households in Indonesia than in many other countries.
Financial and physical assets are generating higher incomes for only a few wealthy households in Indonesia, and these households are then saving this income as even more wealth.
The share of wealth owned by the richest 10 percent in Indonesia increased by 7 percentage points between 2007 and 2014, in the top 10 of countries over that period.
These increased assets today will also generate even higher incomes tomorrow.
Increasing wealth concentration is due, in part, to differences in the way income tax is collected from labor and capital. For example, dividend withholding tax is only 10 percent (and earned interest withholding is only 20 percent), lower than all but one labor income tax rate and considerably lower than the 30 percent top marginal tax rate that most dividend earners would otherwise be paying. At the same time, the significant capital gains that have been made from the housing and stock markets are theoretically subject to personal income tax, but are not subject to withholding taxes.
With weak monitoring and compliance on personal income taxes, low withholding tax rates often mean less taxes paid. Meanwhile, for many workers income tax on salaries are withheld by employers, ensuring a high degree of compliance for labor income.
As a consequence, around 95 percent of personal income taxes (around 20 percent of total income taxes) with corporate taxes making up the rest are collected by withholding, mostly on salaries, and only the remaining 5 percent from capital income. For some, their financial and physical assets aspects are gained through personal connections and corrupt practices. In 2014 Indonesia’s Corruption Perception Index, which measures perceptions of public sector corruption around the world, was a lowly 34 out of 100 (where 0 means very corrupt and 100 very clean), ranking it 107th out of 175 countries.
This suggests that some of the wealth accumulation has occurred through corruption or at least is perceived to have been accumulated this way.
However. In some areas, particularly the political economy of Indonesia’s institutions and the nature of corruption, not enough is known about the nature of the problem and the best actions to take.
Not enough is known about the nature of corruption in Indonesia and how it drives inequality. Public perception suggests it is wide spread, and high-profile cases provide vivid examples of how the rules of the game are being based in favor of insiders or circumvented altogether without legal consequences.
Both forms of corruption seem highly likely to be linked to inequality through lower growth, high wealth concentration and policymaking that exacerbates inequality (for example, rigid labor markets that prevent productive job creation or switching, or import restrictions that drive food prices higher).
However, an analysis of the political economy is needed to identify the underlying causes. Which aspects of the political, economic and legal framework in Indonesia provide the incentives for such rent-seeking practices to take place?
That is, how are policies made, by whom and for whose benefit? When is corruption or rent-seeking due to a lack of appropriate checks and balances? And when it due to lack of enforcement of these checks (whether through discretion on investigation and prosecution of potential corruption or the outright subversion of the legal process through judicial capture)?
The World Bank’s poverty global practice team is led by lead economist Vivi Alatas and the report writing of Indonesia’s rising dividewas led by senior economist Matthew Wai-Poi
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