Refining Indonesia’s Intergovernmental Transfers Mechanism

This paper discusses the application of the conceptual framework for potential revenue estimation using Indonesia’s existing macroeconomic indicators. The authors find that Gross Regional Domestic Product (GRDP), population, and urbanization rate are good predictors for most tax sources. These three indicators also predicted the total district’s OSRs well, providing an empirical foundation for an aggregated macro-based model to estimate all OSRs using the abovementioned variables. The rest of the paper is structured as follows: section 1 provides a description of Indonesia’s system of intergovernmental transfers and subnational taxation. It shows subnational fiscal reliance on transfers rather than OSRs. Section 2 makes the case for reforming the DAU formula and explains recent efforts by the Government of Indonesia on that front. Section 3 discusses the limited existing empirical literature on estimating potential revenues for transfers formula. Section 4 explains and applies our conceptual framework for potential revenue estimation. It also provides the empirical justification to use an aggregated approach to estimation rather than estimating each individual tax base. Section 5 applies the aggregated approach to estimating potential revenues. Section 6 discusses the equity implications and makes the case for using district fixed effects. Finally, section 7 provides a conclusion of this paper.

Bibliographic Details

Main Authors:	Chattha, Muhammad Khudadad, Blum, Jurgen Rene, Ilman, Assyifa Szami
Language:	English
Published:	Washington, DC: World Bank 2024-01-25
Subjects:	TAX REFORM, FISCAL POLICY, INTERGOVERNMENTAL TRANSFERS, SUBNATIONAL TAX EFFORT, FISCAL CAPACITY ESTIMATION,
Online Access:	http://documents.worldbank.org/curated/en/099012524034514173/P1741581e7b9550501a7cf16d8a83aff345 https://openknowledge.worldbank.org/handle/10986/40975
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