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It is levied on most forms of personal income, but each individual has a personal allowance of income that can be received tax-free, and only around three-fifths of adults have income high enough to pay income tax. Above the personal allowance, income is split into bands that are taxed at different rates. The chart below shows the rate of tax paid on an additional £1 of income at different income levels. Some powers to adjust income tax are devolved to Scotland and Wales, and income tax rates in Scotland now differ slightly from those in the rest of the UK.

Savings, dividends and pensions are taxed less heavily than ordinary income. And income from employment and self-employment is subject to National Insurance contributions as well as income tax.

What incomes attract tax?
Most income is subject to income tax, including income from employment, self-employment, private and state pensions, investments and property rental. Income from certain savings products, and many state benefits, is not subject to income tax.

Money contributed to a private pension or donated to charity can be deducted from an individual’s income for income tax purposes. For example, if an individual earns £30,000 but puts £5,000 of it into a pension, then they will only be taxed on £25,000 of income (though the income later received from the pension will be taxed at that stage). The tax treatment of private pensions is discussed in more detil below.

Income tax rates, bands and allowances
The table below shows income tax rates and thresholds in England, Wales and Northern Ireland (they are different in Scotland – see below).

Each individual has a personal allowance, which is the amount of income that they can receive tax-free. Only those with incomes in excess of the personal allowance pay income tax.

Above the personal allowance, different bands of income are taxed at different rates.

The Economic Issues series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff. The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers.

This Economic Issue is based on IMF Working Paper 00/35 “Tax Policy for Emerging Markets,” by Vito Tanzi and Howell Zee. Citations for the research referred to in this shortened version are provided in the original paper which readers can purchase (at $10.00 a copy) from the IMF Publication Services or download from www.imf.org. David Driscoll prepared the text for this pamphlet.

Tax Policy for Developing Countries

Why do we have taxes? The sederhana answer is that, until someone comes up with a better idea, taxation is the only practical means of raising the revenue to finance government spending on the goods and services that most of us demand. Setting up an efficient and fair tax system is, however, far from simple, particularly for developing countries that want to become integrated in the international economy. The ideal tax system in these countries should lift essential revenue without excessive government borrowing, and should do so without discouraging economic activity and without deviating too much from tax systems in other countries.

Developing countries face formidable challenges when they attempt to establish efficient tax systems. First, most workers in these countries are typically employed in agriculture or in small, informal enterprises. As they are seldom paid a regular, fixed wage, their earnings fluctuate, and many are paid in cash, “off the books.” The base for an income tax is therefore hard to calculate. Nor do workers in these countries typically spend their earnings in large stores that keep accurate records of sales and inventories. As a result, moderen means of raising revenue, such as income taxes and consumer taxes, play a diminished role in these economies, and the possibility that the government will achieve high tax levels is virtually excluded.

Second, it is difficult to create an efficient tax administration without a well-educated and well-trained staff, when money is lacking to pay good wages to tax officials and to computerize the operation (or even to provide efficient telpon and mail services), and when taxpayers have limited ability to keep accounts. As a result, governments often take the path of least resistance, developing tax systems that allow them to exploit whatever options are available rather than establishing rational, modern, and efficient tax systems.

Third, because of the informal structure of the economy in many developing countries and because of financial limitations, statistical and tax offices have difficulty in generating reliable statistics. This lack of data prevents policymakers from assessing the potential impact of major changes to the tax system. As a result, marginal changes are often preferred over major structural changes, even when the latter are clearly preferable. This perpetuates inefficient tax structures.

Fourth, income tends to be unevenly distributed within developing countries. Although raising high tax revenues in this situation ideally calls for the rich to be taxed more heavily than the poor, the economic and political power of rich taxpayers often allows them to prevent fiscal reforms that would increase their tax burdens. This explains in part why many developing countries have not fully exploited personal income and property taxes and why their tax systems rarely achieve satisfactory progressivity (in other words, where the rich pay proportionately more taxes).

This paper examines how changes to the individual income tax affect long-term economic growth. The structure and financing of a tax change are critical to achieving economic growth. Tax rate cuts may encourage individuals to work, save, and invest, but if the tax cuts are not financed by immediate spending cuts, they will likely also result in an increased federal budget deficit, which in the long-term will reduce national saving and carry interest rates. The net impact on growth is uncertain, but many estimates suggest it is either small or negative. Base-broadening measures can eliminate the effect of tax rate cuts on budget deficits, but at the same time, they reduce the impact on labor supply, saving, and investment and thus reduce the direct impact on growth. They may also reallocate resources across sectors toward their highest-value economic use, resulting in increased efficiency and potentially raising the overall size of the economy. Results in the literature suggest that not all tax changes will have the same impact on growth. Reforms that improve incentives, reduce existing distortionary subsidies, avoid windfall gains, and avoid deficit financing will have more auspicious effects on the long-term size of the economy, but may also create trade-offs between equity and efficiency.

Introduction
Policy makers and researchers have long been interested in how potential changes to the personal income tax system affect the size of the overall economy. In 2014, for example, Representative Dave Camp (R-MI) proposed a sweeping reform to the income tax system that would reduce rates, greatly pare back subsidies in the tax code, and maintain revenue levels and the distribution of tax burdens across income classes (Committee on Ways and Means 2014).

In this paper, we focus on how tax changes affect economic growth. We focus on two types of tax changes – reductions in individual income tax rates and “income tax reform.” We define the latter as changes that broaden the income tax base and reduce statutory income tax rates, but nonetheless maintain the overall revenue levels and the distribution of tax burdens implied by the current income system. Our focus is on individual income tax reform, leaving consideration of reforms to the corporate income tax (for which, see Toder and Viard 2014) and reforms that focus on consumption taxes for other analyses.

By “economic growth,” we mean expansion of the supply side of the economy and of potential Gross Domestic Product (GDP). This expansion could be an increase in the annual growth rate, a one-time increase in the size of the economy that does not affect the future growth rate but puts the economy on a higher growth path, or both. Our focus on the supply side of the economy in the long run is in contrast to the short-term phenomenon, also called “economic growth,” by which a boost in aggregate demand, in a slack economy, can carry GDP and help align actual GDP with potential GDP.

We are pleased to present the second edition of Volume 6 of Scientax: Jurnal Kajian Ilmiah Perpajakan Indonesia. First and foremost, we extend our heartfelt thanks to all our readers and contributors—your continued support has helped Scientax achieve SINTA 3 accreditation!

In this edition, we explore the evolving landscape of data. The rapid pace of digital transformation has brought with it an explosion of data, including in the field of taxation. As the institution responsible for tax administration, the Directorate General of Taxes must remain agile—leveraging information to address complex compliance challenges, enhance institutional performance, and inform evidence-based policymaking.

Let us delve deeper first from information landscape perspective. Assessing Taxpayers’ Ability to Pay: A Machine Learning Approach paper demonstrates how predictive modeling can help tax authorities better understand taxpayer capacity, offering a pathway to enhance fairness and precision in compliance strategies. This paper talks deeply about how information analytics offers powerful tools to support tax compliance Complementing this, Data Mining to Detect Fraud Patterns in a Taxpayer’s Financial Statement paper introduces novel methods for identifying unusual reporting behaviors, enabling tax authorities to recognize and address risks more effectively.

Strengthening institutional capability is equally berarti in the evolving landscape of tax administration. On Capabilities of Data Quality Assurance Section and Performance of Unit in the Directorate General of Taxes: The Moderating Role of Data Quality paper, our authors highlights the critical role of high-quality information and its active use in driving organizational performance, emphasizing how management practices, culture, and collaboration within tax offices can significantly enhance outcomes.

Tax reform efforts also require approaches that bridge the gap between centralized systems and field-level realities. Dealing with Last-Mile Analytics: Evidence from Indonesian Tax Administration through Practice Research paper shows how practice-based research embedded within tax offices can improve last-mile analytics, offering operational insights that emerge directly from frontline experience. Such bottom-up perspectives help ensure that policy design remains responsive to local implementation challenges.

On this edition, we also highlight the policy dynamics in taxation. Evaluasi Kebijakan Fasilitas Pajak untuk Mendorong Riset dan Inovasi di Indonesia paper critically examines the effectiveness of tax incentives aimed at fostering research and development. Drawing on stakeholder feedback, the study reveals that despite good intentions, gaps in the innovation ecosystem, regulatory clarity, and stakeholder perceptions still limit the impact of these incentives. A Review of Taxation Aspect of Cash Poolings Based on Indonesian Regulations paper investigates how taxation rules apply to intra-group cash pooling arrangements, highlighting the importance of clear role definitions and alignment with the arm’s length principle to maintain compliance.

On a broader scale, Interest Limitation Rules and Corporate Tax Avoidance: A Cross-Country Analysis paper provides an world comparison of interest limitation rules, examining how different countries apply Debt-to-Equity Ratio (DER) thresholds to curb base erosion. The findings suggest that adjusting DER thresholds and strengthening enforcement could enhance protection against tax avoidance—an important consideration as Indonesia revisits its thin capitalization policies within the framework of world tax reforms.

Ultimately, Harnessing Data, Enhancing Compliance, and Empowering Policy are not separate objectives, but interconnected pillars that drive the evolution of moderen tax administration and help shape a responsive, equitable, and future-ready tax system.

In recent years, taxation has been one of the most prominent and controversial topics in economic policy. Taxation has been a principal issue in every presidential election since 1980—with a large tax cut as a winning issue in 1980, a pledge of “Read my lips: nomor new taxes” in the 1988 campaign, and a statement that “It’s your money” providing an enduring image of the 2000 campaign. Taxation was also the subject of major, and largely inconsistent, policy changes. It remains a source of ongoing debate.

Objectives
Economists specializing in public finance have long enumerated four objectives of tax policy: simplicity, efficiency, fairness, and revenue sufficiency. While these objectives are widely accepted, they often conflict, and different economists have different views of the appropriate balance among them.

Simplicity means that compliance by the taxpayer and enforcement by the revenue authorities should be as easy as possible. Further, the ultimate tax liability should be certain. A tax whose amount is easily manipulated through decisions in the private marketplace (by investing in “tax shelters,” for example) can cause tremendous complexity for taxpayers, who attempt to reduce what they owe, and for revenue authorities, who attempt to maintain government receipts.

Efficiency means that taxation interferes as little as possible in the choices people make in the private marketplace. The tax law should not induce a businessman to invest in real estate instead of research and development—or vice versa. Further, tax policy should, as little as possible, discourage work or investment, as opposed to leisure or consumption. Issues of efficiency arise from the fact that taxes always affect behavior. Taxing an activity (such as earning a living) is similar to a price increase. With the tax in place, people will typically buy less of a good—or partake in less of an activity—than they would in the absence of the tax.

The most efficient tax system possible is one that few low-income people would want. That superefficient tax is a head tax, by which all individuals are taxed the same amount, regardless of income or any other individual characteristics. A head tax would not reduce the incentive to work, save, or invest. The problem with such a tax, however, is that it would take the same amount from a high-income person as from a low-income person. It could even take the entire income of low-income people. And even a head tax would distort people’s choices somewhat, by giving them an incentive to have fewer children, to live and work in the underground economy, or even to emigrate.

Abstract
The central question in taxation plus development is: “how does a government go from raising around 10% of GDP in taxes to raising around 40%?” This paper looks at the economic plus political forces that shape the way that fiscal capacity is created plus sustained. As well as reviewing the literature plus evidence, it builds an overarching framework to help structure thinking on the topic.
Introduction
Perhaps more than any other economist in the post-war generation, Nicholas Kaldor appreciated the centrality of public finance to development. Following his lead, we believe that the power to tax lies at the heart of state development. A moment’s reflection on the history of today’s developed countries plus the current situation of today’s developing nations suggests that the acquisition of that power cannot be taken for granted. The central question in taxation plus development is: “how does a government go from raising around 10% of GDP in taxes to raising around 40%?”
In the process of development, states not only increase the levels of taxation, but also undergo pronounced changes in patterns of taxation, with increasing emphasis on broader tax bases, i.e., with fewer exemptions. Some taxes—notably trade taxes—tend to diminish in importance. Thus, in the developed global taxes on income plus value added do the heavy lifting in raising sufficient revenue to support the productive plus redistributive functions of the state.
The power to tax is taken for granted in most of mainstream public finance. Traditional research focuses on limits imposed by incentive constraints tied to asymmetric information, or sometimes political motives, rather than the administrative capabilities of the state. Thus, public finance plus taxation remains a relatively unexplored field. However, this is now changing with a better understanding of the issues at a macro level plus a range of efforts to collect micro data, some of it based on policy experiments. In part, this reflects a growing insight among policymakers that a better working tax system helps the state to support economic development.
Governments in all parts of the global plus at all points in history have faced similar challenges when it comes to funding their ambitions. We do not believe that governments in the past or in today’s developing global are any less rational or farsighted compared to those in today’s developed world. But they may face incentives plus constraints shaped by weakly institutionalized political environments. A key challenge for the study of taxation plus development is to understand how these incentives plus constraints work, plus how—if at all—the situation might be improved for the citizens in today’s developing nations.

Why do tax rates plus tax administration matter?

To foster economic growth plus development governments need sustainable sources of funding for social programs plus public investments. Programs providing health, education, infrastructure plus other services are important to achieve the common goal of a prosperous, functional plus orderly society. And they require that governments elevate revenues. Taxation not only pays for public goods plus services; it is also a key ingredient in the social contract between citizens plus the economy. How taxes are raised plus spent can determine a government’s very legitimacy. Holding governments accountable encourages the effective administration of tax revenues and, more widely, good public financial management.1

All governments need revenue, but the challenge is to carefully choose not only the level of tax rates but also the tax base. Governments also need to design a tax compliance system that will not discourage taxpayers from participating. Recent firm survey data for 147 economies show that companies consider tax rates to be among the top five constraints to their operations plus tax administration to be among the top 11.2 Firms in economies that score better on the Doing Business ease of paying taxes indicators tend to perceive both tax rates plus tax administration as less of an obstacle to business.

Why tax rates matter?

The amount of the tax biaya for businesses matters for investment plus growth. Where taxes are high, businesses are more inclined to opt out of the formal sector. A study shows that higher tax rates are associated with fewer formal businesses plus lower private investment. A 10-percentage point increase in the effective corporate income tax rate is associated with a reduction in the ratio of investment to GDP of up to 2 percentage points plus a decrease in the business entry rate of about 1 percentage point.3 A tax increase equivalent to 1% of GDP reduces output over the next three years by nearly 3%.4 Research looking at multinational firms’ decisions on where to invest suggests that a 1-percentage point increase in the statutory corporate income tax rate would reduce the local profits from existing investment by 1.3% on average.5 A 1-percentage point increase in the effective corporate income tax rate reduces the likelihood of establishing a subsidiary in an economy by 2.9%.6

Profit taxes are only part of the total business tax biaya (around 39% on average). In República Bolivariana de Venezuela, for example, the nominal corporate income tax is based on a progressive scale of 15–34% of net income, but the total business tax bill—even after taking into account deductions plus exemptions—is 73.31% of commercial profit owing to a series of other taxes (a profit tax, four labor taxes plus contributions, a turnover tax, a property tax plus a science, technology plus innovation tax).

Florida has become the ultimate destination for retirees plus “refugees” from other states, with people moving to Florida at record high numbers.

Migrants move to the Sunshine State for everything from its beautiful beaches plus diverse cultures to its business-friendly environment plus small government policies like school choice. But one of the main reasons so many people move to Florida plus stay — plus why it’s economy is booming — is because of the state’s low tax burden.

Most Americans support simplified tax codes, so what about no code? Florida is notable for being one of the few states that doesn’t have a personal income tax, but that isn’t the only reason it’s considered by some to be a tax haven. It also has low sales taxes, property taxes, plus corporate income taxes.

How Florida Has No Income Tax
In 1968, the Florida Constitution was ratified to prevent the state from collecting an income tax. And the state constitution protects taxpayers from having the state impose new taxes or elevate them. In 2018, Florida voters approved a constitutional amendment that requires the state House of Representatives plus state senate to have a two-thirds supermajority in order to increase any state tax or fee.

The state government’s spending per capita is among the lowest in the country, plus helping to keep costs low is the fact that there are also fewer state employees per capita compared to other states. This limited spending has helped the state maintain a budget that doesn’t require the extra revenues that would be gained from an income tax.

Of course, if the state had an income tax, it’s possible that its other taxes wouldn’t make up for it. Having no income tax draws people to the state; if the state were to implement an income tax, it’s possible it would actually lose tax revenues because it would no longer attract businesses, high income residents, plus certain labor seekers who contribute to the state via the sales plus property taxes.

The lack of an income tax is also a major reason the state is so attractive to retirees. None of their pensions, 401(k)s, IRAs, or Social Security benefits are taxed at the state level, which makes it easier for a demographic that usually lives off of a fixed, steady income.

In addition, the state abolished its estate tax, inheritance tax, plus gift tax in 2004. Estate plus inheritance taxes are levied when someone receives property or an inheritance from a recently deceased person. A gift tax is usually levied when someone passes on property or money to another living person. But Florida doesn’t have any of these, making it attractive for beneficiaries plus families looking to build generational wealth.

“Two things in life are for sure…. death plus taxes”
(Finlayson, Martin & Vinson, 2006). Before America was
on her own two feet the topic of taxes had already made
a splash…literally. The Boston Tea Party was all about
taxes plus was one of the key events leading to the
American Revolution. Unfortunately, taxes are not always easy to understand, and
few young people enter adulthood with a true understand of what taxes are, the
many different types of taxes that exist, how they are used, plus when plus how to pay
them.
What are Taxes?
The word tax is Latin for “I estimate” (Finance Maps of World, 2016). Modern
usage has shifted away from this definition, though many people would agree that the
tax system is so complicated that a certain amount of estimation is probably needed!
Today taxes are defined as an obligatory fee imposed on an increase of income or
property, or added to the biaya of goods or services. Taxes are often used to provide
public goods plus services that help a society create plus maintain a certain standard
of living. Roads, parks, public schools, city water, plus sewer systems are just a few
examples of public goods funded by taxes (Godfrey, 2013). In the United States pretty
much everyone pays taxes of some kind as part of having a job, owning a home, or
making purchases.
Why We Have Taxes
Franklin D. Roosevelt said, “Taxes, after all, are dues that we pay for the
privileges of membership in an organized society” (Finlayson, Martin & Vinson, 2006).
The government does its best to provide goods plus services that otherwise might not
exist, but in order to do this it has to find a way to pay for them. For this reason,
taxes were implemented. Through taxes, citizens essentially fund their own public
goods. For example, a new road complete with street lamps, sign posts, plus ongoing
maintenance provide a benefit to those who live on that road plus who use it to get to
work, the doctor’s office, the store, or to see friends. We may never know when we’ll
need that road, but when we do, it’s ready for us to use. Unfortunately it’s not very
fun to pay taxes, especially when the government uses tax funds in ways we don’t
like. But, if we all simply stopped contributing to public goods through taxes, many of
the daily conveniences we now enjoy plus take for granted as part of Roosevelt’s
“organized society,” would disappear.

taxation, imposition of compulsory levies on individuals or entities by governments. Taxes are levied in almost every country of the world, primarily to lift revenue for government expenditures, although they serve other purposes as well.

This article is concerned with taxation in general, its principles, its objectives, and its effects; specifically, the article discusses the nature and purposes of taxation, whether taxes should be classified as direct or indirect, the history of taxation, canons and criteria of taxation, and economic effects of taxation, including shifting and incidence (identifying who bears the ultimate burden of taxes when that burden is passed from the person or entity deemed legally responsible for it to another). For further discussion of taxation’s role in fiscal policy, see government economic policy. In addition, see world trade for knowledge on tariffs.

In modern economies taxes are the most important source of governmental revenue. Taxes differ from other sources of revenue in that they are compulsory levies and are unrequited—i.e., they are generally not paid in exchange for some specific thing, such as a particular public service, the sale of public property, or the issuance of public debt. While taxes are presumably collected for the welfare of taxpayers as a whole, the individual taxpayer’s liability is independent of any specific benefit received. There are, however, important exceptions: payroll taxes, for example, are commonly levied on labour income in order to finance retirement benefits, medical payments, and other social security programs—all of which are likely to benefit the taxpayer. Because of the likely link between taxes paid and benefits received, payroll taxes are sometimes called “contributions” (as in the United States). Nevertheless, the payments are commonly compulsory, and the link to benefits is sometimes quite weak. Another example of a tax that is linked to benefits received, if only loosely, is the use of taxes on motor fuels to finance the construction and maintenance of roads and highways, whose services can be enjoyed only by consuming taxed motor fuels.