The Thailand Development Research Institute says it has proposed a way to reduce inequality using a negative tax system that compensates those on low incomes based on the poverty line set by the Fiscal Policy Office.
The system also facilitates more efficient tax collection in the long run, it said.
TDRI research director Somchai Jitsuchon said that tax reform could take one of two forms – reform that sought to increase revenue and reform that sought to reduce inequality.
In order for the latter method to have the greatest impact, he said it should be a “negative tax system”, or negative income tax.
He said in a negative tax system, the principal objective was to pay funds to the lower income groups.
Negative tax systems were relatively easy to implement as they identified people on low incomes who were more willing to declare their monthly income to the Revenue Department.
If their income fell below a certain threshold, they would receive compensation from the government.
“It is just the same method of income declaration as in a normal system, but instead of having to pay tax you may receive compensation instead. This form of tax assessment has been used successfully overseas,” Somchai said.
He said the advantage of using the negative tax system was that it attracted everyone into the tax system.
Over time, those people who had received low-income compensation mught earn more and rise above the taxable threshold, meaning they would then have to pay tax.
Because thay were already in the tax system, tax collection became much more efficient.
Somchai said that changes to the law were necessary to implement a tax system that would require everyone, regardless of their income level, to declare their income to the Revenue Department. Even those with no income were not excluded.
He said low-income people who were eligible to receive compensation could be defined as those with incomes falling below the poverty line.
Studies conducted by the National Economic and Social Development Board had determined that people earning less than Bt2,400 per month could be considered “poor”.
Somchai said that if this criterion were used as the basis of compensation for the system, the total amount paid out would be roughlu Bt2-3 billion.
However, to provide sufficient compensation so that low-income families could pay for the education of their children, which was a necessary factor to reduce inequality in the future, it might be necessary to pay more than the level of the poverty line.
The way to achieve this was to ensure that compensation did not exceed a certain maximum annual amount. For example, not more than Bt100-200 billion per year.
“In the past we squandered large sums of money on people who should never have received it through populist schemes,” he said.
“I believe many people who were not poor at all benefited from these schemes. Any scheme of welfare must ensure that the people who benefit are really the poorest and that it covers everyone in its implementation.”
Raising funds to pay for a negative tax system was not difficult. Somchai said.
Adjusting tax rates on just two to three types of tax could generate sufficient revenue for the government to pay for the systems, whether from value-added tax, tax on land and buildings, tax from stock trading and more.
First published: The Nation, September 10, 2014