[Analytics] Tax reform to promote Indonesia’s female labour participation

Women in Indonesia are forced, at some point, to choose between career and family. As governments around the world seek to cushion the impacts of COVID-19, the role of taxation in empowering women and addressing gender disparity has been revisited. Tax and gender are on the agenda of Indonesia’s G20 presidency this year. But Indonesia’s current taxation system is prone to be biased against women, requiring meaningful changes to promote female labour force participation. Citra Handayani Nasruddin specially for the East Asia Forum.

Before the pandemic, Indonesia’s female workforce participation had remained around 50 per cent for the last 20 years, significantly below the 80 per cent participation of males. Participation declined from 55.5 per cent in 2019 to 50.72 per cent in 2020 when the pandemic hit. Closing this gender gap by 25 per cent by 2025 could generate Rp 406 trillion (US$27.7 billion) in tax revenue and add Rp 2.9 quadrillion (US$197.8 billion) to the economy.

Getting married and having children are two key drivers of low female participation in the labour market. Research in 2021 also suggested that childbearing and domestic duties lead women to leave the workforce after tying the knot. These findings align with Moser’s framework of women’s triple burdens, which are heightened during crises.

Pervasive gender roles constrain the distribution of domestic chores, perpetuating higher bargaining power for men to work outside the home and a relatively more elastic female labour supply. This means that women’s decisions to work are highly sensitive to changes in wages and other workplace benefits. Their gains from staying in the workforce should be greater, and the cost, including the tax burden, must be lower.

Like in many other developing countries, Indonesian women are underrepresented in the formal sector, constituting 14 per cent out of the total 131 million workers. The lack of a gender perspective in tax policy exacerbates this problem due to explicit and implicit biases.

Explicit gender bias is common in personal income taxes since they affect individuals or family units, allowing different treatment based on gender. Tax discrimination happens when it is officially associated with genders, such as in the allocation of exemptions and deductions, tax preferences, tax rates and responsibility for filing tax.

Unlike most countries, Indonesia’s tax system is a household income tax, considering the family as a taxation unit with the husband as the default head. This system contains explicit bias since it unequivocally treats men and women differently. Such tax codes also create implicit bias by imposing higher effective marginal rates on secondary earners, mostly wives.

When a working woman marries, she must choose to file her tax separately or jointly with her husband. If she reports jointly, she will need to give up her Tax Identification Number and use her husband’s. Choosing otherwise comes with a price. A married woman with one employer filing income separately has a higher tax burden because she is no longer eligible for non-taxable income, a deduction applied prior to marriage. But a working man enjoys a higher level of non-taxable income because the wife is considered his dependant.

This system may seem not to penalise working married women willing to jointly file taxes. But since their decision to continue working is more elastic, this system could disincentivise them from doing so. Additionally, although working wives no longer have to report annual tax returns, revoking their Tax Identification Number means that if their marital status changes due to divorce or becoming a widow, they will have to re-apply for a new number. Another caveat is that when combined earnings move them up a tax bracket, spouses pay a higher tax rate.

Indonesia should look to move away from household-unit taxation and adopt the more equitable approach of individual income taxation, which will help balance the gender disparity in labour market participation. The tax harmonisation law has mandated the integration of the Tax Identification Number and the national residence number granted to all citizens, which makes this proposal viable.

The government should reduce the tax burden on married women through deductions, such as non-taxable income as given to men. This will lower the marginal tax rate and encourage more women to work. The policy also incentivises spouses to re-bargain household chores since it economically benefits the family, supporting an equal allocation of domestic duties and a gender-balanced labour market.

An individual income focused tax system should be used to complement other instruments to promote gender equality, such as child tax credits, tax incentives for companies, childcare allowances and shared parental leave. It should also support existing healthcare, education, infrastructure and social provisions that have promoted gender equality.

Such actions will require a change in the law. But this first step would help implement other tax policies and provisions to empower women. Achieving the goal of gender equality and economic growth needs a comprehensive set of policies. Taxation should play a role in counteracting the gender bias holding back women from fulfilling their economic potential.

Citra Handayani Nasruddin is Senior Analyst in the Fiscal Policy Agency at the Ministry of Finance, Republic of Indonesia. The views expressed in this article are solely those of the author.