Is Thailand ready for negative income tax?

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.”