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The Distributional Impact of Fiscal Policy in Indonesia

Jon Jellema, Matthew Wai-Poi and Rythia Afkar
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Jon Jellema: CEQ Institute
Matthew Wai-Poi: World Bank
Rythia Afkar: World Bank

No 40, Commitment to Equity (CEQ) Working Paper Series from Tulane University, Department of Economics

Abstract: In recent years, income inequality has become a pressing issue in Indonesian politics. From 2000-2014, a rise in GDP per capita coincided with a 10% rise in the country’s Gini coefficient. This paper uses the 2012 National Socioeconomic Survey (SUSENAS) collected by the Central Statistical Agency in Indonesia and 2012 public expenditure and revenue data from the Audit Board of the Republic of Indonesia (BPK), to generate an empirical framework that assesses the redistributive impact of several fiscal measures undertaken by the Indonesian government. This paper finds that every income decile represented in SUSENAS is a net receiver from fiscal policy after taxes, transfers, in-kind transfers and subsidies are all added to “market income” to create “final income.” Gains amongst the poorest household are made much greater by the inclusion of in-kind transfers for health and education. However, SUSENAS included very few of the richest 0.5% of Indonesians, who account for the majority of personal income tax (PIT) collections, so it was assumed that Indonesians do not pay income tax. Interestingly, this study finds that 40% of the poor, measured at “consumable income,” are impoverished by taxes and transfers. This percentage drops considerably with the addition of in-kind transfers. Overall, it was found that fiscal policy does reduce inequality and poverty by a modest amount. The Gini index is lowered from 0.394 to 0.370 under the study’sbaseline scenario, which differs only slightly from scenarios utilizing different underlying assumptions. The poverty headcount (measured at $1.25 UDS per day) is reduced from 12.1% to 10.5%.

Keywords: fiscal incidence; taxation; social spending; inequality; poverty; Indonesia (search for similar items in EconPapers)
JEL-codes: H22 D31 I38 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev and nep-sea
Date: 2017-05
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Published in Commitment to Equity, May 2017, pages 1-38

Downloads: (external link) First version, 2017 (application/pdf)

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