Presumptive Tax Regimes for Employee Income: Opportunities for Tax Simplification and Challenges to Compliance and State Revenue in Indonesia

Abstract

This study explores the potential implementation of a final or presumptive tax regime for employee income in Indonesia as an effort to simplify tax administration and improve voluntary compliance. Under the current system, Income Tax Article 21 presents significant complexity, particularly for small-scale employers and employees with limited tax literacy. Drawing from international best practices and domestic MSME final tax success, the study employs a SWOT analysis to assess the strengths, weaknesses, opportunities, and threats of applying a simplified tax scheme for employee income. Findings suggest that a final tax regime may enhance administrative efficiency, reduce compliance costs, and broaden the tax base. However, it also poses challenges such as potential regressivity, loss of tax equity, and risks of system abuse. A microsimulation analysis reveals that lower-income earners may bear a heavier burden under a flat final tax compared to the existing progressive scheme, emphasizing the need for careful policy design. The study recommends a selective, data-driven approach to policy formulation, including minimum income thresholds, optional participation, and periodic evaluation mechanisms. While a final tax on employee income is not a panacea, it may serve as a transitional tool within a broader strategy for tax reform and inclusivity.