Abstract
Many countries have used fiscal policy Tax and subsidy as a tool to reduce income inequality and many of them have succeeded to achieve it. In contrast, tax and subsidy in Indonesia tend to have a neutral effect on inequality today. This research aims to identify the factors caused Indonesia fiscal policy doesn't have a significant impact on income inequality reduction and what steps should be taken by the government to improve the role of fiscal policy in order to reduce income inequality. From the literature review, this paper finds that Indonesia should improve the quality of public spending. Indonesia government should Prioritize social spending and infrastructure to improve the fiscal policy role to reduce inequality. In addition, increasing direct tax such as personal income taxes should be done in order to make it more effective.
Highlights
IntroductionGini Coefficient, a measure of income inequality, has raised significantly from 0.3 points in 2000 to 0.4 points in 2014 (World Bank, 2015)
Increases in commodity prices were the major factors of the Gini increasing in these periods. This most recent trend of the Gini shows that Indonesia has an unequal distribution of income, which means the gap between the rich people and the poorer one becomes larger
Much of the Indonesia tax revenue is gained from indirect taxes, mainly Value Added Tax (VAT), which do not have much effect on inequality
Summary
Gini Coefficient, a measure of income inequality, has raised significantly from 0.3 points in 2000 to 0.4 points in 2014 (World Bank, 2015). According to the World Bank, Indonesia economic growth benefits only 20% of people in Indonesia during the last decade, while 80% – or about 205 million people – were left behind (World Bank, 2015). If this gap is kept in the future, the economic growth and poverty rate reduction will be hampered and the social conflict will potentially occur. This paper aims to identify the role of fiscal policy on income inequality in Indonesia and how to improve fiscal policy effectiveness in order to reduce inequality
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