Guidelines on Searching for a Dalton-Improving Tax Reform: An Illustration with Data from Indonesia

Shlomo Yitzhaki and Jeffrey D Lewis

The World Bank Economic Review, 1996, vol. 10, issue 3, 541-62

Abstract: This article documents the search for a Dalton-improving tax and expenditure reform using a methodology developed by Yitzhaki and Slemrod (1991) and Mayshar and Yitzhaki (1995). The methodology overcomes the need to define a specific social welfare function by searching instead for reforms that improve each social welfare function belonging to a wide class of functions. The authors apply the method to the energy sector of Indonesia, ignoring distributional constraints, and find that both the subsidy on kerosene and the tax on gasoline should be reduced. But taking distributional concerns into account, the present structure of energy taxes is reasonable and the country may benefit by increasing the subsidy to kerosene, taxing electricity, and reducing the gasoline tax. These conclusions are robust to changes in the relevant parameters representing the Indonesian economy. Copyright 1996 by Oxford University Press.

Date: 1996
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