Is Thailand ready for negative income tax?

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OPINION

Is Thailand ready for negative income tax?
Achara Deboonme
The Nation


A farmer follows his buffalo while ploughing a field in Suphan Buri.

Scheme offers hope to millions on low income but contains pitfalls too

BANGKOK: -- Research on "negative income tax" (NIT) by the Fiscal Policy Office should be a cause for joy among low-income earners and dismay among the rich.

If this idea becomes law, workers with annual earnings deemed below the poverty line will be entitled to a subsidised top-up. The "losers" will be the rich, who will have to finance this measure - though the entire nation could suffer if the scheme is not wisely planned and turns out to be another huge burden on public finances.

The research presented at the office's symposium was based primarily on work by famed US economist Milton Friedman, especially his book "Capitalism and Freedom" (1962). Former US president Richard Nixon welcomed the idea, which under his administration became law as Earned Income Tax Credit (EITC or EIC).

Friedman's concept focuses on the poverty line. Suppose that the poverty line is set at earnings of $3,000 per annum and NIT at a flat rate of 50 per cent: Those whose income fell below $3,000 would be paid a subsidy of 50 per cent of the difference. If you earn $2,000, for example, you would receive $500; if you earn $1,000 you would receive $1,000; and if you earn no income you would receive $1,500.

The four Thai economists who researched the concept had noble intentions. They witnessed that though Thailand's economy has grown impressively in the past decades, the country needs to do something to address its wide and expanding wealth gap.

They are right to say that Thailand suffers poor income distribution.

The World Bank's Gini index, which measures the extent of deviation of income distribution, gave Thailand a score of 39.4 in 2010 and 40 in 2009. A score of 0 represents perfect equality, while 100 implies perfect inequality. The index shows that growing economic prosperity has mostly fallen to a small group of people. The combined earnings of those living under the poverty line represented only 1.6 per cent of national income in 2011.

In 2012, 8.4 million Thais - 12.64 per cent of the total 66.5 million population - lived below the poverty line (Bt29,900 earnings per annum), against 8.8 million (66.2 million) in the previous year, when the poverty line was fixed at Bt28,979.

They estimated that only 2.38 per cent of the population would need NIT subsidies, which would cost the government just Bt6 billion a year.

"This is small compared to the subsidy programmes being carried out at this moment," they said, pointing out that in the past decade public spending on education, health and welfare averages 37 per cent of the total annual budget.

The effects of such huge spending have been minimised by governments failing to identify the recipients in genuine need.

One example is the elderly-allowance scheme. Due to complications in identifying recipients, the government adopted a universal scheme, which means all seniors are entitled to the monthly allowance whatever their income. The Office of National Economic and Social Development Board estimates that in 2011, 69.76 per cent of income-earning seniors in urban areas and 84.82 per cent in rural areas were eligible for the allowance.

Meanwhile, street vendors and small farmers were excluded from the scheme and its monthly Bt2,000 cheque even though they were on low incomes and not under state welfare schemes.

The economists are right in noting that the scheme would be a first step in getting all Thais into the tax system. To be eligible for tax credit, everyone - street vendors, small farmers, motorcycle taxi drivers, etc - will need to file tax forms.

Yet, they are also right to stress that the scheme would be effective only when the government has sufficient information to identify who is eligible and how much they earn.

The economists and their supporters should also consider some pitfalls.

They need to admit that, like other social schemes, the cost of NIT would vary according to the location of the poverty line, which is annually adjusted to gross domestic product.

In the US, the scheme under EIC cost over $50 billion in 2012. First enacted in the 1950s, EIC was held as the largest-ever cash transfer programme for low-income Americans.

In 2013, the credit was offered to working people who earned less than $51,567 and had three or more dependent children. This has been increasing even with the economy in trouble - from$49,078 in 2011 to $50,270 in 2012.

Aside from administration, there is also a moral issue.

Friedman wrote: "The advantages of this arrangement are clear. It is directed specifically at the problem of poverty. ... Like any other measures to alleviate poverty, it reduces the incentives of those helped to help themselves."

In his book "Man Vs the Welfare State", journalist Henry Hazlitt warned that this would raise serious problems of equity. He raises the example of a subsidised family that enjoyed tax credit on earnings of less than $51,567, while a family that earned just slightly more got nothing.

According to Hazlitt, another big issue lies with political interference. Once the poverty line is set, there will be irresistible political pressure to lift the line.

This will be the case especially in Thailand, where politicians come and go and are far more desperate to win popularity than secure sustainable public financing.

As Thailand's 29th prime minister, General Prayuth Chan-ocha apparently supports the notion of subsidies for the poor, saying in his weekly speech last week that some would lose but some would gain from an upcoming change to tax-system structure.

As Hazlitt said: "When advocates of the guaranteed income and similar schemes insist that 'we can afford' to pay for more and more of such schemes, they ought to specify just who 'we' are."

Source: http://www.nationmultimedia.com/opinion/Is-Thailand-ready-for-negative-income-tax-30241855.html


-- The Nation 2014-08-27

[terryp]

more Keynesian garbage...this way of thinking is very reasons the financial system is so messed up ...make investments that create quality jobs ..not just keeping the poor down with idiotic state hand outs and still doing the same old employment jobs that obviously are not working to raise people out of poverty

[siampolee]

If this idea becomes law, workers with annual earnings deemed below the poverty line will be entitled to a subsidised top-up. The "losers" will be the rich, who will have to finance this measure - though the entire nation could suffer if the scheme is not wisely planned and turns out to be another huge burden on public finances.

Does this proposed measure mean that there is going to be a reversal of the current system whereby those in power top up their incomes by commissions from the state and private industries and the odd passing vehicle driver etc at the expense of the poor ?

[EricBerg]

The rice scheme scam was more or less the same... pay the poor farmers too high prices with public money.

[Suriya4]

Oh shit. I only have 2 kids. Better get busy tonight.

[smileplur]

more Keynesian garbage...this way of thinking is very reasons the financial system is so messed up ...make investments that create quality jobs ..not just keeping the poor down with idiotic state hand outs and still doing the same old employment jobs that obviously are not working to raise people out of poverty

Not exactly Keynesian. It's a bit more complicated than that. As I just woke up, I need some time to think about this clearly. Our program in America does good things for poor people. Many of them just piss the money away, and it has no meaningful impact on their lives in the long-run. This is mostly due to their lack of education and lack of long-term planning ability. They are bound by their social class due for various reasons. While social mobility is possible, it isn't probably, and this is just a drop in the bucket with little chance on providing any long-term relief in terms of lessening the gap between rich and poor. I agree that jobs that require skills need to be created. These skills need to be taught to future workers. Don't throw cash at them. Help them improve their stake in life through class mobility. Job creation and class mobility are the keys. Education is paramount!

[ramrod711]

I'm no economist, but I would favour a system that helped the working poor and those who cannot work because of disability, not a system that hands out funds to drunken lay abouts.

[trogers]

I'm no economist, but I would favour a system that helped the working poor and those who cannot work because of disability, not a system that hands out funds to drunken lay abouts.

Follow Singapore's system of social welfare, where the real poor and disadvantaged are first identified and verified.

[submaniac]

OK, what is the point of this article? That Thailand should turn into a welfare state like the West? Where the wealthy should subsidize the poor to sit on their behinds rather than working? Welfare mothers sitting at home having children to get more state benefits...yes, this is what Thailand needs.

[Thanet]

Isn't this just another word for Social Security?

Sounds populist to me. The junta are breaking their own rules.

[alant]

The bill keeps piling up, I predict a huge tax hike as revenue crashes and costs rise to meet the needs of the state. The circle will grow, prices will rise, salary will rise, prices will rise, tax will rise, prices will rise, prices will rise, tax will rise. OR huge job losses in the public sector.

[ezzra]

If it ain't broken, why fix it? .. what? throw more money at the "poor" farmers? negative tax deductions yes,

top ups? what for?

[shirtless]

I really dont think Thailand can afford this , As the rich as always will avoid most of the tax burden.

[maoro]

Also the poverty line would should be dofferent depending on where one's location is, for instance it costs a lot nore to live in Bangkok than somewhere in the country.

[drand11]

This is very normsl tax scheme in industrialised nations. Help the poor, try to keep the income for poverty line moving upward. I agree with it. But thailand has alot of unreported income due to street vendors etc... govt needs to go find these folks & get them reporting their income!

[h90]

more Keynesian garbage...this way of thinking is very reasons the financial system is so messed up ...make investments that create quality jobs ..not just keeping the poor down with idiotic state hand outs and still doing the same old employment jobs that obviously are not working to raise people out of poverty

right. If you want to do something for the poor: help on the health care. Build good schools and universities and make them free, so people who want to learn something can do it even their parents don't have money.

If more is needed, schools for adults can be made. Learn a needed job (CNC operator, for example).

If they want to rise the education and salaries, reduce the worker from Cambodia. Automatically the salaries of Thai worker will increase. There will be more need for automation which will require higher skilled people who get more salaries....

They will buy themself better things creating again higher skilled jobs.

Handing out free money helps no one.

[gemini81]

Best solution is a high tax on bananas, since its such a Banana Republic.

[Emptyset]

Isn't this just another word for Social Security?

Sounds populist to me. The junta are breaking their own rules.

The article suggests the idea is being proposed by civil servants rather than by the junta themselves. I'd be pleasantly surprised if the junta did decide to implement it, even on a trial basis amongst the very poorest, though. If they did, even I might begin to accept that the coup could leave a positive legacy in this one respect at least. I'd actually go much further as I'm in favour of a basic citizen's income which guarantees a minimum standard of living to every citizen as a right. But this would be a very positive step towards that eventual goal. Of course, people make the same old moral hazard argument that people will just stop working and decide to be lazy if you just give them money. Actually in one trial I heard about, which took place in impoverished rural villages in Bangladesh, they found that productivity and entrepreneurialism actually increased. Contrary to popular belief, not having to worry about starvation can actually lead to more creativity rather than less. Also to the person above who was discussing education as a solution, to my mind it would surely be much easier to find time and enthusiasm for education if you're not having to work 16 hours a day to survive.

It's actually ironic that terryp describes the idea as Keynesian because the person the article mentions as being one of the most influential proponents of this idea, Milton Friedman, is also one of the key architects of the right-wing economic doctrine (now generally known as neoliberalism) which was adopted by Thatcher and Reagan in the 80s, beginning a radical shift away from the post-war Keynesian consensus which had hitherto prevailed. It's actually strange that an idea favoured by a right-wing economist and a right-wing president (Nixon) is now thought to be some sort of totally insane communist scheme. I suppose it shows how far to the right things have swung since the early 70s. This now actually seems to be one of the few things most on the left and some of the libertarians who favour the idea can agree on. The difference is that I guess the libertarians, like Friedman, think that the negative income tax should replace all state entitlements. I don't agree with that. I think it should be an adjunct to other redistributive policies & part of a social support system that guarantees every citizen certain rights, including free access to a decent standard of health care and education.

[h90]

Best solution is a high tax on bananas, since its such a Banana Republic.

Or on hub ideas.

[klauskunkel]

That's a nice picture from the '60ties...showing a farmer on a tractor wouldn't have the same connotation, I guess.

[nong38]

Not much encouragement for people to work then is there? Benefits are great and free, wonderful idea askk about the costs in the west before implementation, then attend more pressing matters.

[konying]

So the lazy ones can do even less?

[BSJ]

From Australia's example it can be seem that the welfare system is the cause of an ever more demand for $$'s to fuel the ever increasing number of welfare needs. The system creates work for people to help the welfare recipients which is of no value to the economy but adds to the burden on the taxpayer.

Thailand should think very carefully about it before they act.

[slipperx]

Maybe the emphasis should be on hounding down the rich to make sure they pay their fair share first. Tackle the huge abuse of the VAT system and move towards using the VAT system as a replacement for income tax on a sliding scale according to product starting at zero for essentials to much higher taxes for expensive cars and luxury goods. I think the sales tax system is much easier to police and control and with less chance to avoid paying tax unless you horde it all away in which case you can tax that too. Eventually cash had to be spent and thereby tax collectef

[Loles]

This is the BST of 2014 .

Just think about how much cheater will be created by this idiocy.

[Thai at Heart]

The Thai system already makes allowance for.payments to family in your income tax return.

This is all about.starting to get everyone into the tax system. The govt cannot make effective central development plans if the rich evade their taxes and the poor keep screaming" give me more", with no measure

[h90]

That's a nice picture from the '60ties...showing a farmer on a tractor wouldn't have the same connotation, I guess.

Well now the smart farmer can sell his product as organic, sell organic meat from buffalo and doesn't need diesel or fertilizer.

The richest farmer in our village switched to organic 10 years ago. In the forest he works with horses as they make less damage (or it is just smart marketing).

I am sure working with buffalo, making some show, they could sell half kg bags rice for 100 Baht each.

[Bulldozer Dawn]

Social security funds are derived from taxing the middle class. The rich can avoid paying tax. A middle class is what distinguishes 1st world countries from 3rd world countries. Thailand is only just developing a middle class. If it is taxed into non existance back to the 3rd world position Thailand will go.

Wouldn't a more simple and transparent solution to poverty be removing Burmese and Cambodia workers who work for far less than 300THB per day. In the absence of cheap slave labour the day wage must increase. It is simple supply and demand. Then if someone is poor it is because they are drunk, lazy, or stupid. Or perhaps all three. The money saved by not subsidising drunk, lazy and stupid people can then be spent on support for those with genuine disabilities or maladies that prevent them from working. The remaining can be spent on a proper education system to address the stupidity issue.

[vogie]

I'm no economist, but I would favour a system that helped the working poor and those who cannot work because of disability, not a system that hands out funds to drunken lay abouts.

Are you referring to Thailand or the UK?

[kerrysum]

more Keynesian garbage...this way of thinking is very reasons the financial system is so messed up ...make investments that create quality jobs ..not just keeping the poor down with idiotic state hand outs and still doing the same old employment jobs that obviously are not working to raise people out of poverty

Amen, brother..... WE are all living it now....