Informal Economy Taxation and Justice: Policy Trade-offs in Indonesia

Abstract

The taxation of the informal economy presents significant challenges for equity and revenue mobilization in developing countries. This paper analyzes Indonesia’s policies toward taxing informal economic activities, particularly micro and small enterprises. Using normative policy analysis, the study evaluates trade-offs between administrative feasibility, revenue objectives, and social equity. The findings suggest that aggressive formalization strategies risk excluding vulnerable taxpayers, while excessive leniency undermines horizontal equity. The global contribution of this paper lies in illustrating the complexity of informal sector taxation within tax justice frameworks. Indonesia’s experience provides comparative insights for developing economies seeking inclusive tax systems. The study contributes to global debates by emphasizing that informal economy taxation requires context-sensitive approaches that balance fairness, capacity, and development objectives.