The Merits and Drawbacks of Taxation (2)

In the theatre of power, some rulers refuse to descend from the stage, not because of love for the people, but because the curtains hide vaults of corruption. Their hands, stained by the theft of public wealth, tremble at the thought of exposure, and so they cling desperately to their thrones. Taxes, once the sacred contribution of citizens to build schools, hospitals, and roads, become the very fuel for laundering schemes, disappearing into offshore accounts where no auditor’s gaze can reach. The people, dutiful in payment, unknowingly finance not only the state but also the silken comforts and golden cages of their own deceivers. And thus, the longer such leaders remain, the heavier the burden upon those who bear the yoke of taxation, while the promise of justice becomes an ever-fading echo.

In truth, when a ruler clings to power not out of duty but out of fear of exposure, the balance sheet of the nation becomes a theatre of deception. The public is told of grand surpluses, of coffers overflowing with the fruits of wise stewardship, while in hidden chambers the accounts are silently bleeding, turning gold into deficit through the alchemy of corruption. Taxes, the lifeblood of the state, are dressed in the rhetoric of patriotism but siphoned into secret vaults abroad, laundered into clean fortunes that no longer carry the scent of theft. Thus the ruler insists that his throne is a pillar of stability, when in reality it is the last refuge of a man terrified that the numbers will finally tell the story his speeches cannot silence.

A budget surplus occurs when a government’s revenue exceeds its expenditure within a given fiscal year, allowing it to either save the excess funds or pay down existing debt. Such a position often indicates prudent fiscal management, although it may also reflect underinvestment in public services if the surplus is achieved by cutting essential spending. Conversely, a budget deficit arises when a government spends more than it earns, covering the gap through borrowing or the issuance of debt instruments. While deficits can be a deliberate strategy to stimulate economic growth during downturns, persistent and unmanaged deficits may erode investor confidence, increase debt servicing costs, and limit the state’s financial flexibility in future crises.

Many countries operate with budget deficits, either temporarily or as a recurring feature of their fiscal policy. Major economies such as the United States, Japan, and the United Kingdom frequently run deficits, often justifying them as necessary for financing infrastructure, social welfare programmes, or economic stimulus measures. The key distinction lies in how these deficits are managed; nations with strong economic fundamentals and credible repayment capacities can sustain deficits for long periods without triggering financial instability, whereas weaker economies may quickly face debt crises if borrowing becomes excessive.

In the past, Indonesia adhered to a Balanced Budget. The term Anggaran Berimbang refers to a budget where government expenditure is designed to equal its revenues—no surplus, no deficit. Historically in Indonesia, especially during the New Order era, this system allowed development spending to be sustained by foreign loans or grants, which were counted as part of revenues; meanwhile, domestic revenues would cover routine expenses. This approach was intended to maintain fiscal discipline while avoiding inflationary financing.

In principle, a “balanced budget” system means the government plans its annual expenditure to match its anticipated revenue, aiming for neither a surplus nor a deficit. In Indonesia’s historical context—particularly during the New Order era—the concept of Anggaran Berimbang was officially adopted, meaning every rupiah of spending was expected to be backed by an equal amount of income. However, in practice, the definition was somewhat elastic: loans and grants from abroad were counted as part of “revenue,” allowing the budget to appear balanced even though it was structurally dependent on external borrowing. In modern times, Indonesia no longer strictly follows this doctrine, as fiscal policy is allowed to run deficits (within a legal cap, such as the 3% of GDP rule before the COVID-19 exception), making the term “balanced budget” more a historical reference than an operational reality.

But currently, Indonesia does not strictly adhere to a rigid Anggaran Berimbang model. Instead, the government operates within a legally capped fiscal deficit—up to 3% of GDP—as stipulated by Law No. 17 of 2003. Recent fiscal policies confirm this approach: the 2024 budget recorded a deficit of approximately 2.29% of GDP, while the 2026 proposal aims to reduce the deficit further and promises to achieve a balanced budget by 2027 or 2028.

Indonesia’s deficits are, in law and practice, policy tools constrained by a long-standing fiscal rule (the 3% of GDP ceiling from Law No. 17/2003) and are financed through regulated mechanisms—primarily competitive auctions of rupiah government bonds via Bank Indonesia’s system and, at times, global bonds placed with syndicates—under the oversight of the Ministry of Finance and state auditors. International assessments (e.g., IMF surveillance and the World Bank’s debt-management frameworks) generally characterise Indonesia’s fiscal framework and debt management as disciplined by regional standards, even if the deficit widens in some years. That said, corruption risks in Indonesia are real and well-documented at a systemic level, but these findings do not amount to proof that budget deficits are intentionally created to siphon fees from debt deals; rather, they underscore the need for vigilance, transparency of issuance costs, and robust audits. In short, Indonesia’s deficit exists because expenditure exceeds revenue and is financed by borrowing through rules-based channels—not because the state has set out to profit a cadre of debt arrangers.

Indonesia can indeed achieve a budget surplus, and it has happened before, albeit rarely. A surplus would occur if the government’s tax revenue, non-tax revenue, and other income streams exceeded its expenditure in a given fiscal year. Such a scenario could arise from a combination of robust economic growth, improved tax compliance, high commodity prices boosting export revenues, and prudent government spending. However, sustaining a surplus in Indonesia’s context can be politically challenging, as pressures to increase infrastructure investment, expand social assistance, and respond to regional development demands often outweigh the temptation to save. In short, while technically possible, a surplus in Indonesia tends to be more of an exceptional event than the norm.

Indonesia’s state budget deficit is not caused solely by debt or corruption, although both can play a role in shaping its size and persistence. In formal fiscal terms, a deficit arises when government spending exceeds revenue, regardless of the underlying cause. Borrowing is often the chosen mechanism to cover this gap, meaning debt is more a consequence of the deficit than its root cause. Corruption, on the other hand, does not appear as a line item in the budget, but it can silently drain public resources, inflate project costs, and reduce the efficiency of spending, indirectly widening the deficit. In reality, Indonesia’s deficit is typically the result of a combination of structural factors—such as limited tax revenue relative to GDP, high expenditure commitments, economic shocks, and yes, leakages from governance weaknesses—rather than a single culprit. When he was still a presidential candidate, Prabowo often shouted about budget leakages, and “Termul” frequently mocked him by calling it “Bocor, bocor [leaky, leaky.]” Well, now the proof is right in front of us, and the question remains: who has benefited the most from those leakages? You can answer that for yourself. Maybe the money is kept in the Cayman Islands.

Now, back to our topic. In Taxation: A Very Short Introduction (2015, Oxford University Press), Stephen Smith provides a concise yet comprehensive overview of taxation, explaining not only how taxes are raised but also why governments rely on them as the central tool for financing public services. He situates taxation within a broader economic, political, and social framework, highlighting how taxes are not merely financial instruments but also reflections of collective choices about fairness, redistribution, and the role of the state. The text also delves into contentious debates surrounding efficiency versus equity, the design of tax systems in different countries, and the pressures of globalisation that complicate tax policy in the twenty-first century. Smith’s work is accessible in style, avoiding excessive technicality, yet rigorous enough to serve as a reliable guide for anyone seeking to understand both the mechanics and the philosophies underpinning taxation.

According to Smith, the reason salaries are subject to deductions each month is that governments require a reliable and continuous flow of revenue to finance their spending commitments. By collecting income tax directly through payroll systems, the state ensures that contributions are regular, predictable, and difficult to avoid. This system of withholding does not only provide administrative efficiency but also prevents individuals from experiencing the psychological burden of paying large lump sums at the end of the year. As for the government’s calm insistence that “tax is for development,” it stems from the fundamental role taxation plays in funding public goods and services. Roads, hospitals, schools, and security infrastructure cannot be sustained without collective contributions, and so taxation is framed as a civic duty that transforms private sacrifice into public benefit. Governments present it in this manner not only to justify the extraction of resources but also to foster a sense of legitimacy and shared purpose among citizens.

Governments are acutely aware that taxation, by its very nature, provokes resistance, since it involves taking away a portion of people’s hard-earned income. To soften this resistance, they engage in what might be described as the “branding” of taxation, presenting it as a noble contribution to the collective good rather than as a mere exaction. In many countries, this has been achieved by linking taxes directly to visible public goods: Britain, for example, often highlights the funding of the National Health Service as a justification for high levels of taxation, while Scandinavian nations frame their heavy tax burdens as the price of universal welfare and social equality. By offering tangible benefits that citizens can experience in their daily lives, governments transform taxation into a form of social contract, thereby cultivating legitimacy and compliance. At the same time, this branding allows political leaders to present themselves not as collectors of revenue but as guardians of national development, subtly shifting the perception of tax from a private loss to a public investment.

In Indonesia, the branding of taxation has shifted dramatically across different political eras, reflecting the changing nature of the state’s relationship with its citizens. During the New Order under Suharto, taxation was often presented less as a civic partnership and more as a mechanism of obedience. The government framed tax compliance as a form of loyalty to the regime, where citizens were reminded that their contributions underpinned national stability and economic growth. At the same time, the opacity of state finances meant that citizens rarely saw direct, tangible returns on their payments, yet propaganda portrayed taxation as a patriotic duty, a silent but essential role in the nation’s modernisation. In the Reformasi era and beyond, however, the rhetoric shifted: governments began emphasising “pajak untuk pembangunan,” a phrase designed to link tax payments to visible infrastructure such as toll roads, airports, and bridges. More recently, campaigns have adopted a friendlier, almost conversational tone, with slogans and mascots that attempt to humanise the tax office and position paying taxes as a normal, everyday act of responsible citizenship. Despite persistent concerns about corruption and inefficiency, the branding strategy is clear: taxation must be seen not as coercion but as participation in a collective project of nation-building, even if that participation sometimes feels more like compulsion than choice.

Smith offers a compact yet insightful exploration of taxation, weaving together history, theory, and contemporary relevance. He begins by reminding us that taxation is the lifeblood of the modern state, funding vital public services such as roads, courts, defence, welfare, healthcare, and education. Indeed, in many OECD countries, more than a third of national income is collected in taxes.

Smith then delves into the origins of taxation, pointing out that it predates money and may well have been a catalyst for the development of writing, through ancient Mesopotamian tax records. He describes how early taxation was rendered in kind, such as labour or produce, before evolving into more structured systems, as seen in Greece and Rome—with the latter establishing more robust systems such as land and poll taxes and detailed land registers.

He proceeds to outline the structure of taxes across modern economies, noting common forms such as income taxes, corporate taxes, and sales taxes, while emphasising the vast diversity in tax bases, rates, and legislation from one country to another. Over the past fifty years, taxation has grown sharply in real terms, propelled by rising incomes, increased spending, and the adoption of new instruments such as VAT.

A particularly striking theme is the incidence of tax—who actually bears the burden. Smith explains that while indirect taxes like VAT tend to be regressive—impacting the poor proportionally more—direct taxes on income are often progressive. Nonetheless, the overall tax system must be assessed in aggregate to understand its distributional impact.

The book further tackles how taxation influences the economy. Smith scrutinises how taxes reduce disposable income and provoke behavioural changes, such as seeking tax-free investments or engaging in cross-border shopping to avoid higher levies. He also explores the inefficiencies embedded in tax systems—such as compliance costs and behavioural distortions—that can generate economic deadweight loss.

Tax evasion and the mechanisms of enforcement form another crucial chapter. Smith looks at the delicate balance between voluntary compliance and coercion, acknowledging that the hidden economy and aggressive avoidance strategies pose serious challenges to policy-makers (details from summary structure).

Finally, the concluding chapter reflects on broader policy issues. Smith invites readers to contemplate the tension between fairness and efficiency, the expansion of the welfare state, and the political as well as moral dimensions of tax policy. He argues persuasively that advancing public decision-making on taxation relies on a clear, evidence-based appreciation of its role and impact.

In Stephen Smith’s Taxation: A Very Short Introduction, the collection of revenue through taxation is presented as a highly structured yet deeply political process. On the surface, it appears merely administrative: governments design tax bases, establish rates, and set up mechanisms such as payroll deductions, value-added taxes on consumption, and corporate levies. Yet Smith emphasises that these choices are never neutral. The very decision about who is taxed, on what, and by how much reflects competing visions of society. A tax system that leans heavily on consumption may burden the poor disproportionately, while one that emphasises progressive income taxation signals a commitment to redistribution and social justice. Thus, taxation becomes a mirror of political philosophy: conservative governments may prioritise efficiency and minimal distortion, whereas social democratic regimes may accept economic costs in exchange for fairness and equality. Beyond economics, taxation also functions as a demonstration of authority. By compelling citizens to contribute, the state asserts its sovereignty and reminds individuals of their subordination to a larger political order. In this way, taxation is not simply a tool for raising money; it is a ritual of governance, a recurring act that reveals who holds power and how that power is justified.

According to Stephen Smith, taxation is a mirror of the drama of national life because it condenses within a single system the tensions, compromises, and contradictions that define how a state governs its people. Taxes are not just streams of revenue; they are also expressions of who is valued, who is protected, and who is asked to sacrifice more. In this sense, the tax code becomes a living script of politics and society: the wealthy lobby for lower rates, workers demand fairness, governments balance efficiency against justice, and all of these competing forces are written into the laws that decide who pays and who benefits. Smith suggests that through taxation, one can trace the narrative arcs of power and ideology: whether a state tilts towards social solidarity or stark individualism, whether it prioritises redistribution or economic growth, and whether citizens see their contributions as burdensome or as investments in a shared future. It is precisely this interplay between money, morality, and authority that makes taxation a reflection of the nation’s ongoing political drama.

In comparing Indonesia’s tax drama with that of other nations, Stephen Smith’s perspective allows us to see how taxation becomes a stage on which different societies perform their anxieties, values, and aspirations. In Indonesia, taxation often carries the shadow of mistrust: people grumble that their contributions are siphoned away by corruption, while the government responds with slogans and campaigns that promise every rupiah will return as “pembangunan.” This tension between suspicion and reassurance creates a perpetual cycle, where citizens hesitate to comply fully and the state struggles to prove its credibility. By contrast, in Scandinavian countries such as Sweden and Denmark, the drama unfolds as a story of pride and reciprocity. There, citizens generally accept very high taxes because the state delivers transparent and tangible benefits—healthcare, education, childcare—that validate the sacrifices made. Meanwhile, in the United States, taxation is cast in a different register, one that often borders on ideological theatre: conservatives frame taxes as government overreach, liberals present them as tools for fairness, and the result is a bitter polarisation that turns every budget debate into a national spectacle. What unites all these variations, Smith would argue, is that taxation is never neutral—it is always a reflection of how power is negotiated, how fairness is imagined, and how citizens see themselves in relation to the state.

[Part 3]
[Part 1]

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