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Personal Income Tax Exemption and Labor Supply: A Preliminary Study

Author

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  • Riatu Mariatul Qibthiyyah

    (Department of Economics, Faculty of Economics and Business, Universitas Indonesia)

Abstract
During 2013–2016, there are policy changes on Personal Income Tax (PIT) exemption, stated in PMK No.162/PMK.011/2012, PMK No. 122/PMK.010/2015, and PMK No. 101/PMK.010/2016. Nonetheless, there is no empirical study yet, to my knowledge, that evaluates this policy. An increase of PIT exemptions can be viewed from distributive aspect, of how the incidence (benefit) distributed across taxpayers’ disposable income, as well as on the efficiency aspect, whether it has or has not affected labor supply. This study explored on the efficiency aspect. The agents – taxpayers as workers – now may experience an increase in net income due to a more generous exemption, and whether the policy of PIT exemption may in?uence taxpayers’ labor supply is more of an empirical question. I use SAKERNAS data from 2010–2018 and estimation model is limited to only consider paid (labor) employment rather than self-employment. On paid (labor) employment, firms function as withholding that can extract some of PIT from employee’s salary, and thus paid (labor) employee may then file PIT return. My preliminary result shows that effect of PIT exemption policy change is heterogenous across group of population. PIT exemption expansion increases labor supply of paid (labor) employees of the previously lowest income bracket of PIT. However, although to an extent tax saving may be higher for middle to high income individuals, taxpayers referring to individuals in income bracket of 15% rate tend to be not affected by the policy of PIT exemption.

Suggested Citation

  • Riatu Mariatul Qibthiyyah, 2019. "Personal Income Tax Exemption and Labor Supply: A Preliminary Study," LPEM FEBUI Working Papers 201939, LPEM, Faculty of Economics and Business, University of Indonesia, revised 2019.
    • Handle: RePEc:lpe:wpaper:201939
    as

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    File URL: https://www.lpem.org/repec/lpe/papers/WP201939.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    personal income tax — tax exemption — labor supply;

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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