| This study utilizes a computable general equilibrium (CGE) model designed for an open economy to analyze the incidence of a consumption-type value-added tax (VAT) in Indonesia. Tax incidence is broadly defined to include the impact of the VAT on relative commodity prices, demand and supply of products, investment and saving, government revenues and the balance of payment. Using the 1980 Indonesian economic data as a benchmark equilibrium, the effects of the VAT are investigated within a differential incidence framework by substituting existing taxes in the system by the VAT. It is found that compared to the pre-VAT tax system, the VAT improves the allocation of resources indicated by the positive welfare gain measured in the Hicksian compensating variation. The VAT is also found to be slightly regressive with respect to household income and the distribution of the welfare gain. Yet it becomes less regressive after tax exemptions on some necessities are considered. |
