Indonesia Will Always Need Taxes

by Fatikha Faradina, Directorate General of Taxes officer

Benjamin Franklin, a renowned American statesman, famously wrote in 1789, “Nothing can be said to be certain, except death and taxes.” This simple yet profound statement has remained relevant for centuries, underscoring the critical role of taxation in sustaining the machinery of government.

In the United States, taxes have always served as a backbone of national revenue. According to the Monthly Treasury Statement published by the U.S. Department of the Treasury, most government income is derived from contributions by individual taxpayers, small businesses, and corporations. In fiscal year 2024, individual income taxes alone accounted for 50% of total federal revenue, while Social Security and Medicare taxes contributed another 35%. This means that even one of the world’s largest and most economically powerful nations continues to rely heavily on taxes to fund its national priorities.

Now let’s look at Indonesia. Taxes have long been intertwined with the nation’s history, even before the idea of Indonesia as a country came into being. Prior to colonization, various kingdoms and sultanates across the archipelago maintained their own systems of taxation—ranging from tributes paid by vassal states, agricultural levies, and trade-related duties. These systems ensured the rulers could maintain their courts, armies, and infrastructure.

During the colonial era, taxation became even more structured and, in many cases, more exploitative. The Dutch East India Company (Vereenigde Oostindische Compagnie or VOC) implemented tax policies that supported their trade monopolies and enforced labor systems such as the cultuurstelsel, or cultivation system, which forced farmers to grow export crops instead of food. The Japanese occupation continued this trend, with taxes and requisitions imposed to support Japan’s wartime economy.

After Indonesia’s independence in 1945, one of the early challenges faced by the new government was to establish a fair and modern taxation system. A key figure in this transformation was Radjiman Wedyodiningrat, often called the Father of Indonesian Taxation, who advocated for legal reforms that laid the foundation for the modern tax code. Since then, Indonesia’s tax system has undergone significant evolution to meet the growing needs of a developing and dynamic nation.

Fast forward to today, and taxes remain central to Indonesia’s national budget. As cited in the 2024 Annual Report of the Ministry of Finance, tax revenue contributes a staggering 82.43% of the country’s total income. The remainder comes from sources like natural resources (oil, gas, and mining), dividends from state-owned enterprises, and other non-tax revenues. This clearly illustrates that without tax revenue, the government would be unable to fund its many programs and responsibilities.

What does tax revenue support in practice? Everything from building roads and bridges to running public schools and hospitals. It pays for police and military operations, subsidizes fuel and electricity, and supports programs for the poor. Taxes are also essential for ensuring long-term economic stability, helping the government respond to crises like natural disasters or global pandemics, and investing in strategic sectors like digital infrastructure and renewable energy.

So, Could Indonesia be a Tax-free Nation?

Some may wonder, are there countries that can survive without taxes? Surprisingly, yes. Several small nations like Bermuda, Monaco, The Bahamas, and the United Arab Emirates (UAE) have no personal income taxes. These countries tend to rely heavily on other sources of revenue—particularly tourism, financial services, or oil and gas exports. But can Indonesia follow suit?

In reality, it’s highly improbable. For example, countries like the UAE and Brunei are able to operate without income taxes largely because of their abundant oil and gas reserves. The UAE has an estimated 107 billion barrels of oil, while Brunei’s energy sector accounts for over 90% of its exports. Indonesia, by contrast, holds just 3.6 billion barrels of oil—a mere 0.2% of the world’s reserves. Its 104.25 trillion cubic feet of gas accounts for around 1.7% of global reserves. This is far from enough to replace tax revenues as the primary funding source for national development. Moreover, as the world transitions toward renewable energy sources and away from fossil fuels, dependence on oil and gas becomes increasingly risky. Indonesia must diversify and strengthen its revenue base, and taxation is the most sustainable and equitable way to do so.

Taxes are Here to Stay

Taxes are not just about collecting money, they are a reflection of a nation’s social contract. They fund public goods, redistribute wealth, reduce inequality, and enable national development. They are a tool of sovereignty, allowing a nation like Indonesia to shape its own future without overreliance on debt or foreign aid. In conclusion, Indonesia will always need taxes. They are indispensable for maintaining economic stability, building infrastructure, fostering education and health, and ensuring good governance. A future without taxes may sound appealing on the surface, but in reality, it is neither practical nor desirable for a country of Indonesia’s size, population, and development goals.

*)This article is the author's personal opinion and does not reflect the attitude of the agency where the author works.

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