Reforming Tax Policies for Greater Economic Equity: The Case of Indonesia’s Progressive Taxation

Abstract

This paper explores the potential for tax policy reform to address economic inequality and promote greater economic equity in Indonesia. Despite Indonesia’s relatively high economic growth in recent years, income inequality has remained a persistent challenge, with the wealthiest segments of the population benefiting disproportionately from economic development. The paper critically examines the role of Indonesia’s tax system in perpetuating or mitigating these disparities, focusing on the structure of the country’s progressive taxation system, which includes income taxes, corporate taxes, and value-added taxes (VAT). While the tax system is nominally progressive, the paper identifies several shortcomings in its implementation, including inadequate enforcement, loopholes for the wealthy, and an over-reliance on consumption taxes, which disproportionately affect lower-income households. Drawing on comparative case studies from other countries with more progressive tax policies, the paper argues that Indonesia could improve its tax system to better address inequality. The study suggests several reforms, including expanding the tax base, improving tax collection efficiency, and increasing the progressivity of both personal and corporate income taxes. The paper also explores the role of tax revenue in funding social programs aimed at promoting economic equity, such as education, healthcare, and social protection initiatives. The paper concludes by recommending a comprehensive tax reform agenda that aligns with Indonesia’s broader goals of reducing inequality and fostering sustainable economic development.