Individual Income Tax in Indonesia: Behavioral Response, Incidence, and the Distribution of Income Tax Burden

• Main Author: Yuwono, Thalyta Ernandya
• Format: Others
• Published: Digital Archive @ GSU 2009
• Subjects: microsimulation; income tax; behavioral response; Economics
• Online Access: http://digitalarchive.gsu.edu/econ_diss/36; http://digitalarchive.gsu.edu/cgi/viewcontent.cgi?article=1035&context=econ_diss

This dissertation estimates the relationship between tax-reporting decision and the change in marginal tax rates, relying on taxpayer's responses (standard labor supply response) as well as reported behavioral responses (compliance). There are still limited studies on elasticity estimates for developing countries. We utilize an applicable theoretical model by using standard labor supply model and summarize a tax avoidance model as the base of our elasticity estimation. The labor supply theoretical model suggests ambiguity of the labor supply decision and the tax avoidance model suggests that the responsiveness of taxpayers in the reporting decision differs across income groups. As previously stated, in developing countries, empirical evidence on reporting decision is still very limited. For our empirical analysis, we estimate reporting income elasticity for microsimulation purposes. We use this elasticity to estimate a dynamic behavior microsimulation model. The elasticity result shows that higher-income groups are more responsive and lower-income groups are less responsive to changes in tax policy. Our empirical analysis continues with estimating differences in taxpayers’ responses to the change in tax policy. We use a modified difference-in-difference model to analyze behavioral responses of taxpayers who are highly affected by the change in marginal tax rate compared to those who are least affected. The result shows that the treatment group, who experienced larger reductions on their marginal tax rate, reported more of their income relative to the control group, whose members are least affected by the change in marginal tax rate. The last part of our empirical analysis examines the distribution of income tax burden across different income groups and examines the government's tax collection from withholding income from some proposed scenarios. We proposed several scenarios and estimated the change in income tax burden compared to that under current income tax law. We also examined the government's revenue loss by calculating the tax differences under current and proposed scenarios. The overall microsimulation results suggest that there is a trade-off between government revenue loss and the distribution of income tax burden.