Fiscal Discretion and Moral Hazard in Regional Tax Administration

A Legal Evaluation of Sanction Exemptions in Surabaya

Abstract

This study examines the legal validity and policy impact of administrative tax penalty waivers on taxpayer compliance and Regional Original Revenue (PAD) in Surabaya. It applies a normative juridical approach to assess legality based on local government authority and principles of good governance, alongside an empirical approach using panel data econometric analysis.  The findings indicate that formally the policy has a valid legal basis, but substantively it still raises issues related to fairness and legal certainty. At the micro level, estimation using a Linear Probability Model (LPM) with Fixed Effects shows a coefficient of -0.4798, significant at the 1% level, indicating a 47.98% decrease in the probability of taxpayer compliance. At the macro level, taxpayer compliance has a coefficient of 0.0754, also significant at the 1% level, suggesting that increased compliance contributes positively to PAD.  Additionally, a non-linear U-shaped relationship is identified between the frequency of policy implementation and PAD, with coefficients of -1.929 for the linear term and 4.602 for the squared term. This pattern indicates a decline in PAD in the short term but potential increases in the long term. Overall, the policy produces mixed effects, requiring careful design and implementation to avoid moral hazard while supporting the optimization of regional revenue.