Taxing the Underground Economy: The Case of Indonesia

Abstract

This study examines the relationship between economic factors, particularly tax variables and the growth of underground economy in Indonesia. The study also examines the size of underground economy and loss in tax revenue. The approaches which were selected in this study to estimate the underground economy were based on tax audit and Multiple Indicator and Multiple Cause. The research finding suggests strong evidence that underground economy increases significantly in response to individual tax policy changes and the rise in the unemployment rate. Furthermore, an increase in tax awareness to pay and submit the tax returns were also confirmed would minimize the growth of the underground economy in Indonesia. As a last finding on the study, the size of underground economy in Indonesia between 2000 and 2008 were estimated on average at 20% of GDP.

Keywords: Underground Economy, Tax Evasion, Indonesia, GLLAMM