Wednesday, April 20, 2005

Providing evidence of corruption in economic perspective

The Jakarta Post, Jakarta | Wed, 04/20/2005 2:58 PM | Opinion

Two prominent economists who are well-known for their critical analysis of economic affairs and corruption were legally warned by Taxation Directorate of the State Department of Finance. In the warnings, the directorate challenged the two economists to prove the corruption at the tax office, which they had alleged.

The first case was related to Kwik Kian Gie, who wrote in a nationally circulated newspaper, that a total of Rp 180 trillion (US$19 billion) in value-added tax had been lost. Similarly, Faisal H. Basri said Rp 40 trillion ($4.3 billion) in tax revenues had been lost.

The legal threats against Kwik and Faisal could influence the success of the eradication of corruption in this country, and may even threaten democracy and academic freedom.

It was unfortunate that Kwik had succumbed to the tax directorate's demand and apologized to them via a very large advertisement in Kompas newspaper earlier this month.

Based on the size of the advertisement, Kwik likely paid the equivalent of thousands of dollars for that advertisement, much greater than the small fee Kwik probably received for his article in the same newspaper.

Kwik said he placed the advertisement/apology only because that was much cheaper and simpler than a litigation process that could cost him much more in terms of money and time.

In contrast to Kwik, Faisal has stood firm and refuses to apologize. He has now challenged the tax office to a public debate, demanding that the tax office prove that it was free of corruption. He also asserted that the burden of proof should fall on tax officials by proving that their wealth had been acquired through legal means.

If the cases were brought to court, Kwik and Faisal would surely lose because academic evidence cannot be accepted as legal evidence.

As an experienced economist and former chief of the Department of Economics and Development Study of the University of Indonesia, Faisal must have been quite sure about his method and analysis that brought him to a conclusion that Rp 40 trillion (US$4.3 billion) in potential tax receipts had been embezzled.

Kwik's decision to apologize is a small portrait of how difficult it is to eradicate corruption in this country. A well-known, honest, clever and intelligent man, Kwik is also a key figure in the second largest political party (PDI-P) as well as a former minister. That he did not have the courage to stand up against the tax directorate is telling indeed and a real setback for the anti-graft camp.

However, Kwik's decision can also be understood as a fairly clever move economically. As a former minister, Kwik would surely understand the process and system of law in this country. Economically, the price he paid for publishing the request for forgiveness was much smaller than the price he would have had to pay for lawyers if the case went to trial.

Meanwhile, Faisal feels sure that his method and analysis can academically, though not legally, prove that corruption has taken place. Legal evidence and the truth of science might be two different things.

An economist such as Faisal must believe in his model and analysis, while Kwik seems to be acting more like a politician. Kwik and Faisal remind me of Socrates (329BC-399BC) who had to face the death penalty for his scientific opinion, or Aristotle (384 BC-322 BC) who died in exile, and Galileo (1564-1642) who was forced to withdraw his theory that the earth revolves round the sun.

During the New Order era, the guru of Indonesian economists Sumitro Djojohadikusumo also criticized the government for wasting 30 percent of its development budget.

Speaking at a forum of the Indonesian Economists Association Sumitro said the state budget wasted 30 percent of taxpayers' money through inefficiency and corruption. Sumitro did not have concrete administrative and legal evidence.

The then Cabinet ministers under the Soeharto administration, who were attacked by Sumitro's observation, did not serve a legal warning on Sumitro, as the tax officials did against Kwik and Faisal.

However, as an economist, Sumitro then wrote his method of analysis explaining the 30 percent waste and loss. His analysis used the ICOR method (Incremental Capital Output Ratio), a parameter that shows how much investment needs to be made to generate one unit of output.

Sumitro described then that Indonesia had an ICOR 5, while its neighboring countries had only 3.5. Using the ICOR method, Sumitro concluded that Indonesia needed to invest much more than its neighboring countries to generate one unit of output, meaning that there had been losses amounting to 1.5 percentage points, or 30 percent of 5.

This is the way economic science provides evidence of losses, both because of bad management and corruption.

In the perspective of economics, economic indicators, or parameters, are information in analyzing whether the economy runs efficiently or inefficiently. If it runs inefficiently, it means that there is a waste and loss because of bad management or corruption, just like Kwik's analysis.

If a taxpayer, through unscrupulous negotiations with tax officials, is able to pay only half his or her actual tax obligation, then about 50 percent of potential tax receipts are lost.

Consequently, if the total tax revenue is Rp 180 trillion ($19 billion), it means the total potential waste and loss will be another Rp 180 trillion (US $19 billion). If the Taxation Directorate challenges him to provide legal evidence or supporting documents, which legally and administratively validate his conclusions in court, Kwik must have been unable to do so because what he presented is an analysis of economic science.

Another example is Ari Kuncoro's research findings carried by the Bulletin of Indonesian Economic Studies (BIES), Volume 40 No. 3, December 2004). The research shows that nearly 74 percent of 1,808 respondents confessed that they felt compelled to bribe tax officials and the bribe money represented an average of 10.3 percent of their production costs.

If the government challenges Ari to provide evidence by mentioning who bribes whom and who is being bribed, how much money is involved on each transaction, when and where, Ari must be unable to do so. However, the conclusion that corruption does exist is scientifically clear and convincing. The logic of economic science proves that.

At the end of the day, the tax directorate's legal warnings against Kwik and Faisal are a threat to democracy and the freedom of scientists.

The experiences of Kwik and Faisal shows that corruption tends to be more and more difficult to eradicate in this country.

Actually, in the perspective of economic science, providing the evidence of corruption does not need the legal evidence such as who and where, or even a receipt. Government, in this case the Taxation Department, should not be making efforts to restrict the freedom of scientists by hiding behind the law.

The scientific world has its approaches, tools and methods to analyze and provide evidence of corruption and the management of the country's economy. But with the tax office's legal threats, economists will now be wary of legal action, which will obviously restrict most of them.

The writer is economic observer life in Medan. He is also a lecturer in the Economics Department at North Sumatra University. He can be reached at

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