Tax Revenue and Income Inequality: A Provincial Level Evidence

Damayanti Sari (Department of Economics, Faculty of Economics and Business, University of Indonesia)
Riatu Mariatul Qibthiyyah (Director. Institute for Economic and Social Research, University of Indonesia)

Jurnal Perencanaan Pembangunan
Vol. 6 No. 2 (2022): August 2022

This study examines the relationship between tax revenues and income inequality at the provincial level in Indonesia from 2011 to 2019. Applying a fixed-effect approach, this study finds that total tax revenue has no significant effect on income inequality. This result implies that Indonesia's current tax system and structure, both national and sub-national, have been unable to contribute to reducing provincial income inequality. Likewise, by the type of taxes, both income tax and value-added tax revenue have a relatively insignificant effect. However, the ratio of local taxes to gross regional domestic product (GRDP) has a considerable positive effect on income inequality, indicating that the majority of consumption taxes in the local tax component are regressive. Accordingly, at the sub-national level, expenditure programs may play role in reducing provincial inequality instead of the tax system.