The first vision statement by former premier Thaksin Shinawatra, after 17 years away from Thailand, has garnered interest on several points, including the proposal of a negative income tax (NIT).
This concept aims to reform the Thai tax structure by providing financial support to individuals with low or no income, encouraging them to enter the tax system.
The NIT concept is not new in Thailand. It was proposed by the Finance Ministry's Fiscal Policy Office (FPO) about 10 years ago and was included in the 12th National Economic and Social Development Plan for 2017-2021, as well as the National Reform Plan of the Prayut Chan-o-cha administration. However, it remained dormant in those plans.
In last year's election, the Pheu Thai Party incorporated a concept similar to NIT into its party policy, but dubbed it "Start-Up Money Transfer Policy".
Q: What is negative income tax?
NIT is a concept aimed at addressing poverty and social inequality through a liberal approach that encourages people to work. If someone's income is below a certain threshold, the government allocates a certain amount of tax money to him or her.
As a person's income rises, the government provides further incentives by increasing the support, known as the "phase in" period. When a person's income reaches a certain point, the government's support will remain steady, and if their income exceeds the minimum threshold, the support ceases.
The NIT concept has been called workfare, where individuals must work and be part of the tax system.
For people whose income does not meet the minimum threshold, they receive financial support from the government. This differs from welfare, where individuals may receive benefits from the government without having to work, such as with the current state welfare card.
Moreover, NIT brings people into the tax system. Those who receive government assistance must enter the Revenue Department's tax system, filing their income for verification.
In the short term, the government may not receive tax revenue from this group, but in the future, as their income grows beyond the threshold for government support and they earn enough to pay personal income tax, the department will have their income data.
The NIT concept comes from Nobel laureate economist Milton Friedman, who explained that in calculating personal income tax, various expenses and deductions are subtracted to determine net income, which is then multiplied by the tax rate to find the tax amount payable to the government.
A major principle of tax relief is the government should not tax income that is spent to cover basic living needs.
NIT differs from the personal income tax system, which is a positive income tax system where individuals with income above a certain threshold must pay taxes. In contrast, with NIT individuals with income below the threshold will receive a money transfer from the government.
Friedman's concept of NIT was driven by the desire to solve poverty issues in the US after World War II without distorting the free market. He acknowledged that the free market cannot ensure that everyone in society has enough income to meet basic living standards.
Nonetheless, Friedman believed that a just society is one that offers equality of opportunity, not equality of income, unlike socialism, where the state forcibly redistributes income equally, which can undermine economic efficiency.
He set a minimum income threshold of $600 per person per year in 1961 and established a compensation rate of 50% of the difference between the individual's income and the minimum threshold.
For example, if Mr A has no income, he would receive $600 multiplied by 50%, or $300 in compensation from the government. If Mr B has income of $200, he would receive $400 multiplied by 50%, or $200 in compensation.
Mr C has income of $600, the minimum threshold, so he would receive no compensation.
Q: What steps are needed to implement the NIT system in Thailand?
The NIT system is tied to the tax system. Those who wish to receive financial support from the government must be part of the tax system.
According to Revenue Department law, individuals earning 60,000 baht or more per year are required to file tax forms, even if they have no tax liability. In practice, many people do not file taxes despite meeting the legal income threshold.
If the NIT system were to be implemented in Thailand, the tax filing requirements under Section 56 of the Revenue Code require amendment. The amendment should state that anyone earning even one baht must file a tax form, ensuring that everyone enters the tax system, while granting the Revenue Department the legal authority to verify individuals' income.
Q: What are the obstacles to implementing the NIT system?
The key issue is verification of the income of those seeking financial support from the government.
This problem is similar to the challenge the government faces with registration for the state welfare card, which caps annual individual income at 100,000 baht as an eligibility requirement.
Under the state welfare card system, the Revenue Department cannot legally verify a person's income, but with the NIT the department has the legal authority to conduct such checks.
Another significant challenge is explaining the NIT system to the public and gaining acceptance. As this system is linked to the tax system, people may fear being taxed, making it politically difficult to promote.
However, in recent years the Pheu Thai Party proposed policies similar to NIT, but without any reference to taxes.
Another issue is the NIT requires individuals to work to receive government support, meaning unemployed individuals would not be covered. This means the government should find other schemes to assist the unemployed, such as using the Skill Development Department to provide vocational training.
Q: How does the NIT system reform the state welfare system?
The FPO, which originally proposed the concept, suggested NIT could be part of a broader reform of the welfare system, targeting the most deserving groups because income would be declared annually.
Over time, this would likely reduce the fiscal burden of welfare payments compared with the current system that uses the state welfare card.
Q: What will happen if the welfare system is not reformed?
The fiscal burden on the government from various welfare programmes continues to rise.
One major welfare programme placing significant pressure on the budget is the Universal Coverage scheme, also dubbed the Gold Card scheme, which required a budget of 217 billion baht approved by the cabinet for fiscal 2024 and is expected to increase annually as Thailand is an aged society. Another is the elderly allowance programme, which costs nearly 100 billion baht per year, while the state welfare card programme costs 50 billion annually and the disability allowance scheme 25 billion.
There are also welfare schemes for child support and school milk.
Meanwhile, political parties in Thailand are increasingly focused on expanding welfare benefits to attract more voters, such as the Move Forward Party's proposal to provide 3,000 baht per month to each elderly person, which would require a budget of around 500 billion baht per year.
In contrast, government revenue policies have reduced tax burdens on individuals and businesses significantly in recent years. For example, the corporate income tax rate was reduced from 30% to 20%, the top rate of personal income tax was lowered from 37% to 35%, and the value-added tax (VAT), a major source of government revenue, has remained at 7% since 1992. In some developed countries, VAT rates exceed 20%.
When considering the government's revenue collection capacity relative to GDP in the medium term, it is expected to be between 14.4% and 14.5%, lower than before the pandemic and meagre compared with emerging economies.
As a consequence, over the past 20 years the government has been operating with a budget deficit, meaning expenditures have consistently exceeded revenues.
To reduce fiscal risks, the FPO has regularly advocated for the government to push forward with tax and revenue structural reforms to enhance debt repayment capacity and accommodate declining government revenues related to changing economic structures and consumer behaviour.
This includes reviewing various exemptions and deduction measures, as well as minimising unnecessary cost-of-living support measures, such as energy subsidies, to ensure they are essential and beneficial to the economy and society.
