Munich Personal RePEc Archive

Distributional Welfare Impact of the 2013 Adjustment of Tax-Free Income Threshold in Indonesia: A CGE Simulation

Amir, Hidayat and Hewings, Geoffrey J.D. (2013): Distributional Welfare Impact of the 2013 Adjustment of Tax-Free Income Threshold in Indonesia: A CGE Simulation.

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Abstract

A tax-free threshold, the level of income that the tax rate is zero, in Indonesian tax system is initially motivated by equity principle. The government of Indonesia periodically adjusts the tax-free threshold to keep the purchasing power of the low-income household’s group. Within the last decade, there were three times adjustment in 2006, 2009, and the last started effectively implemented in January 2013. The magnitude of the last adjustment is relatively high, the tax-free threshold increased by 53.4%. The policy objective is not only to protect the poor from paying tax but also to stimulate the economic growth through consumption. This study analyses the impact of the 2013 tax-free threshold adjustment with the main focus on the distributional welfare impact using an integrated multi-households computable general equilibrium (CGE) model. The model’s database consolidated from three key data sources: (a) the 2008 Indonesian Input-Output Table; (b) the 2008 Indonesian Social Accounting Matrix; and (c) the 2008 National Socioeconomic Survey.

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