VAT Reform and Household Welfare: Assessing the Regressive Effects of Indonesia’s 12 Percent Value-Added Tax Policy

Abstract

Consumption taxes can generate substantial public revenue while simultaneously imposing different welfare costs across socioeconomic groups. This study investigates the potential regressive effects of Indonesia’s 12 percent value-added tax policy on household welfare. The research is motivated by concerns that households with lower incomes allocate a larger proportion of their resources to consumption, particularly essential goods and services, potentially increasing their relative tax burden. The study employs a distributional incidence framework to examine differences in VAT exposure across household income groups. Household expenditure patterns are analyzed to identify the relative share of taxable consumption and the potential welfare implications of changes in the VAT rate. The analysis also considers the role of government exemptions, social assistance, and other compensatory mechanisms in mitigating adverse distributional effects. Rather than assuming that VAT is inherently regressive, the study evaluates regressivity as an outcome of tax design, consumption structure, and redistributive policy. The study argues that the fairness of VAT reform should be assessed jointly through revenue efficiency and household welfare effects. Its contribution lies in integrating tax incidence analysis with economic justice perspectives in the Indonesian context. The findings provide policy implications for designing consumption taxation that supports fiscal sustainability without disproportionately burdening economically vulnerable households.