Taxation is the backbone of any nation’s development, and for a developing country like Indonesia, with its growing economy and ambitious social goals, mobilising domestic resources is essential.
Yet, collecting taxes is not just about having a strong law or a modern system—it is also about building trust, shared responsibility, and a sense of fairness among citizens.
Indonesia’s tax challenges
Indonesia has made substantial progress in digitalising its tax administration, but it continues to face a fundamental problem: many people still do not file or pay their taxes properly.
Traditional explanations often point to weak enforcement, limited audit capacity, and loopholes in the system. While these factors are important, they do not capture the full picture.
In reality, how people behave is strongly influenced by how they think others behave. This is where the idea of societal compliance norms becomes important. Societal compliance means people (namely taxpayers) are more likely to follow the rules when they believe that others around them are doing the same.
If most people in your neighbourhood or social circle pay their taxes, you’re more likely to do the same—not just out of fear of punishment, but because you don’t want to feel like the odd one out or “morally wrong.” On the other hand, if you think everyone is cheating, it’s easier to justify doing it too.
This insight, drawn from behavioural economics and social psychology, is particularly relevant for Indonesia. With such a large informal sector, low levels of tax literacy, and varying perceptions of fairness in the tax system, building a culture of voluntary compliance is not easy. But it’s not impossible—especially if we pay closer attention to how social norms shape taxpayer behaviour.
Examining how local social norms shape individual tax compliance
In a recent study using a regression discontinuity design, we examined how the behaviour of taxpayers in a given area influenced others’ decision to file or pay taxes. We captured the strength of social norms by examining the subdistrict-level data on the number of taxpayers who complied with or evaded personal income tax.
We used geospatial data to precisely measure their geographical location and historical data on administrative penalties and tax returns to assess compliance behaviour. Jakarta Province was excluded due to its unusually high population density. We used a threshold to separate the sample into treatment and control groups as part of our identification strategy.
The findings were striking: taxpayers were more likely to file their personal income taxes when they believed others around them were doing the same.
This makes sense in the Indonesian context, where strong social cohesion and communal values often influence individual decisions. Filing taxes, in this case, becomes a socially encouraged act—one that reflects your integrity and solidarity with the wider community.
Interestingly, our findings reveal that the influence of social norms was stronger for tax filing than for actual payment. Why?
One reason is that filing a tax return is less costly and less emotionally burdensome than paying a significant amount of money. According to prospect theory—a well-known concept in behavioural economics—people tend to avoid losses more strongly than they pursue equivalent gains. So, even if they know that they should pay more taxes, many prefer to avoid the “loss” of money, especially when penalties or audits are rare.
This brings us to a key limitation of the traditional approach to tax enforcement: deterrence through audits and fines is not enough.
In countries with limited audit capacity, like Indonesia, relying solely on threats and penalties won’t create a strong compliance culture. Instead, policymakers should look to strengthen positive social norms that make tax compliance feel like the normal, expected, and respectable thing to do.
Strengthening social norms
There are several ways to boost tax compliance through strengthening social norms.
First, the government can make better use of public data and transparency. By publishing simple, accessible statistics showing high compliance rates in certain regions or professions, tax authorities can send a powerful message: most people are playing by the rules. This helps reshape public perceptions and builds peer pressure to do the same.
Second, Indonesia’s growing digital connectivity offers an untapped opportunity. The use of social media and community platforms can help promote stories of honest taxpayers and showcase the benefits of contributing to public services. Imagine seeing your favourite public figure or influencer proudly sharing that they just filed their taxes online—it normalises the behaviour and gives it social value.
Importantly, such efforts must also go hand-in-hand with greater transparency and fairness in tax spending. People are more likely to comply when they feel that the system is fair, the money is used well, and corruption is under control. In a country where many still distrust government institutions, building this trust is just as important as building systems.
Enforcement remains important
Of course, social norms are not a silver bullet. When tax evasion becomes widespread and socially tolerated, even honest taxpayers may begin to question their choices. As shown in our research, when others are cheating without consequence, the personal cost of breaking the rules goes down.
That is why visible enforcement still matters—not to punish the majority, but to signal that rules are taken seriously and there are consequences for abuse.
In the end, improving tax compliance in Indonesia is not just a technical problem—it’s a cultural and social one. The key is not only to make it easier or riskier to file and pay taxes, but to make it more normal, more expected, and more appreciated.
As we move forward with tax reform and digitalisation, let us not forget the power of people’s perceptions, beliefs, and values. A society where most people pay their taxes proudly and voluntarily is a society that has succeeded not just in enforcement, but in trust-building and shared purpose.
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