GUIDELINES ON SEARCHING FOR A DALTON-IMPROVING TAX-REFORM - AN ILLUSTRATION WITH DATA FROM INDONESIA

This article documents the search for a Dalton-improving tax and expen diture reform using a methodology developed by Yitzhaki and Slemrod (1 991) and Mayshar and Yitzhaki (1995). The methodology overcomes the ne ed to define a specific social welfare function by searching instead f or reforms that improve each social welfare function belonging to a wi de class of functions. The authors apply the method to the energy sect or of Indonesia, ignoring distributional constraints, and find that bo th the subsidy on kerosene and the tax on gasoline should be reduce. B ut taking distributional concerns into account, the present structure of energy taxes is reasonable and the country may benefit by increasin g the subsidy to kerosene, taxing electricity, and reducing the gasoli ne tax. These conclusions are robust to changes in the relevant parame ters representing the Indonesian economy.