This study finds that an increase in Indonesia’s domestic and foreign tourism led to a reduction in poverty and an increase in income inequality in both rural and urban regions. The important finding that greater reductions in poverty were accompanied by greater increases in income inequality highlights the difficulty in addressing this trade-off from a tourism boost. Accompanying policies, such as investment to raise labour productivity in tourism-related sectors of hotels and restaurants, led to greater poverty reduction than a cash transfer policy. The cash transfer policy, on the other hand, reduced urban poverty but did not increase urban income inequality, unlike in the rural areas. Thus, there is no ‘one size fits all’ policy to address poverty and income inequality in rural and urban areas, and whether or not policies need to be targeted differently for touristic and non-touristic urban/rural regions is an area for future research.

This article highlights the impacts on poverty, income inequality, and the macroeconomic and sectoral output resulting from increases in the value-added tax and sales tax on hotels and restaurants using Indonesia as a case study. While taxing tourism-related sectors was ineffective in reducing poverty and income inequality, using tax revenue from the value-added tax as a cash transfer policy was effective and more so in rural Indonesia. Tax revenue used for infrastructural development was however limited in its impact on poverty and income distribution. Overall, the negative effects of taxation on various industries and the contraction of GDP and employment in the economy need to be mitigated. This can be done with an appropriate policy mix for the use of tax revenue between cash transfers and expenditure in education and health, with the view to address potential resource misallocation and output contraction in other industries.