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Local government taxation: An analysis of administrative cost inefficiency

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  • Blane Lewis

Abstract

Local governments in Indonesia administer taxes inefficiently. The average cost of local tax administration as a percentage of revenue generated is estimated to be over 50%. There is, however, a wide variation in administrative inefficiency across local governments. The estimation of a stochastic cost frontier model suggests that administrative cost inefficiency increases significantly as fiscal transfers from the centre rise; the investigation also demonstrates that local governments with elected executives are no more administratively cost efficient than those with appointed heads. The simple and complex measures of cost inefficiency yield broadly similar results concerning the level and variation of inefficiency across local governments, but can offer significantly different estimates of the relative inefficiency of individual local governments. This poses a dilemma for the central government in monitoring and evaluating local government tax administration performance.

Suggested Citation

  • Blane Lewis, 2006. "Local government taxation: An analysis of administrative cost inefficiency," Bulletin of Indonesian Economic Studies, Taylor & Francis Journals, vol. 42(2), pages 213-233.
  • Handle: RePEc:taf:bindes:v:42:y:2006:i:2:p:213-233 DOI: 10.1080/00074910600873666
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    References listed on IDEAS

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    8. Blane D. Lewis, 2005. "Indonesian Local Government Spending, Taxing and Saving: An Explanation of Pre- and Post-decentralization Fiscal Outcomes ," Asian Economic Journal, East Asian Economic Association, vol. 19(3), pages 291-317, September.
    9. Aigner, Dennis & Lovell, C. A. Knox & Schmidt, Peter, 1977. "Formulation and estimation of stochastic frontier production function models," Journal of Econometrics, Elsevier, vol. 6(1), pages 21-37, July.
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    Cited by:

    1. Sjahrir, Bambang Suharnoko & Kis-Katos, Krisztina & Schulze, Günther G., 2014. "Administrative Overspending in Indonesian Districts: The Role of Local Politics," World Development, Elsevier, vol. 59(C), pages 166-183.
    2. Elena Villar Rubio & Pedro Enrique Barrilao González & Juan Delgado Alaminos, 2017. "Relative efficiency within a tax administration: The effects of result improvement," REVISTA FINANZAS Y POLÍTICA ECONÓMICA, UNIVERSIDAD CATOLICA DE COLOMBIA, vol. 9(1), pages 135-149, February.
    3. Laurent Corthay, 2009. "Local Taxes, Regulations, and the Business Environment : Finding the Right Balance," World Bank Other Operational Studies 10566, The World Bank.
    4. United Cities and Local Governments, 2011. "Local Government Finance," Books, Edward Elgar Publishing, number 14696, September.
    5. Paul Smoke, 2013. "Why Theory and Practice are Different: The Gap Between Principles and Reality in Subnational Revenue Systems," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1313, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    6. Paul Smoke, 2014. "Why theory and practice are different: The gap between principles and reality in subnational revenue systems," Chapters,in: Taxation and Development: The Weakest Link?, chapter 9, pages 287-325 Edward Elgar Publishing.
    7. Richard M. Bird, 2015. "Fiscal Decentralization and Decentralizing Tax Administration: Different Questions, Different Answers," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1509, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    8. Ari Perdana & Deni Friawan, 2007. "Economic Crisis, Institutional Changes and the Effectiveness of Government : the Case of Indonesia," Governance Working Papers 21905, East Asian Bureau of Economic Research.

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