Early evaluation of the effectiveness of final income tax expenditure for MSMEs as a public policy instrument

This study conducts an early policy evaluation of Indonesia's final income tax expenditure for micro, small, and medium enterprises (MSMEs) following Government Regulation No. 20 of 2026. Publicly available secondary data up to 13 August 2026 are assessed using the OECD-DAC criteria, while causal evidence is classified using an adapted Maryland Scientific Methods Scale. In 2024, the expenditure reached IDR 27.551 trillion for 543,908 beneficiaries, or an arithmetic mean of IDR 50.65 million per taxpayer, although beneficiary-level distribution is unavailable. A benchmark simulation for an individual taxpayer with IDR 1.5 billion turnover shows tax expenditure of IDR 25.90 million at a 20% profit margin, IDR 3.40 million at 10%, negative IDR 3.95 million at 5%, and negative IDR 5.00 million at a 2% margin or loss. Thus, benefits rise with profitability and resemble an upside-down subsidy, while low-margin firms may face negative tax expenditure. The option to elect ordinary taxation mitigates this problem but shifts the constraint toward tax literacy and bookkeeping costs. Policy relevance and simplicity are only partially supported: tax is not identified as the primary MSME constraint, and expanded turnover aggregation and cumulative threshold tracking add administrative complexity. The shared IDR 4.8 billion income-tax and value-added-tax threshold also creates a double notch. Formalisation, compliance, growth, additionality, efficiency, and long-term impact remain unestablished. The study recommends distributional reporting, post-reform projections, integrated beneficiary data, and coordinated evaluation of income-tax and value-added-tax thresholds.