Optimal Tax Policy for the Ultra-Rich in Indonesia

Enhancing Revenue and Social Equity

Abstract

This paper explores Indonesia's income tax policies by employing Mirrleesian optimal taxation theory to address revenue enhancement and social equity amidst a burgeoning population of high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs). Using a normative-quantitative approach with calibration and numerical simulation, the study draws on secondary data from Forbes, Knight Frank, the Directorate General of Taxes, and the World Bank, covering approximately 5,443 individuals in the top tax bracket in 2023. By analyzing wealth data and applying theoretical models, we identify the current top marginal tax rate of 35% as suboptimal and recommend an increase to 50%–75%. Our simulations demonstrate that higher tax rates, coupled with a reduction in tax avoidance and evasion, could boost tax revenue by up to Rp 36 trillion, significantly impacting poverty alleviation by lifting around 5.5 million individuals out of poverty. These findings imply that progressive tax reforms, complemented by stronger tax administration, are essential for reducing income inequality and fostering sustainable economic growth in Indonesia.