The impact of taxation and public expenditure on income distribution in Indonesia

Abstract

Even though Indonesia has experienced high economic growth, around 5 per cent per year during 2000–2008,many people are still living in poverty. Income inequality, as measured by the official Gini coefficient, has increased since 2001. The question is: which segment of the population benefits most from government programs, both taxation and expenditure? This thesis evaluates taxation and public expenditure programs using benefit incidence analysis and a broad definition of household income. Here, household income includes both market and non-market income to obtain a more accurate measure of actual income affecting living standards. Taxation includes income tax and taxes on production. Government spending includes cash transfers and benefits in-kind. The results suggest that using only market income to measure income distribution in Indonesia is misleading. An important finding is that both direct and indirect taxation are regressive, especially for lower and middle-income households. The result suggests that Indonesian taxation worsens income inequality. Cash transfers and public expenditure on health and education reduce income inequality, but not subsidies. If the aim is to reduce income inequality, cash transfers and public spending on health and education need to increase further and the subsidy system can be improved by moving from price subsidies to targeted subsidies. To understand the impact of decentralisation, the analysis in this thesis is disaggregated by province. The impact of non-market income, taxation, cash transfers and benefits in-kind on income distribution is similar between regions and provinces. Non-market income has a significant role and tends to reduce income inequality between regions and provinces. Taxation increases income inequality, cash transfers and benefits in-kind reduce income inequality, except subsidies.

Date of Award	2013
Original language	English
Supervisor	Phil Lewis (Supervisor), Tesfaye GEBREMEDHIN (Supervisor) & Muni Perumal (Supervisor)