Friday, January 11, 2008

The pros and cons of tax reform

The pros and cons of tax reform

Long-overdue tax reform awaits the new government.

Published on January 7, 2008

Voters want to hear about tax cuts rather than tax hikes. Fortunately there is room to do that. Yet unfortunately it may come along with other tax hikes.

Entrepreneurs have long called for corporate income tax to be cut from 30 per cent to 20-25 per cent in order to maintain industry competitiveness.

Their request may be met this time as every political party has promised this tax cut during the election campaign.

But local firms are facing high production costs, largely from rising crude-oil prices, about which the government can do nothing. However, the government can help in other ways by looking at corporate income tax. A lower rate might result in more firms willing to pay it.

According to the Revenue Department, 30 per cent of 495,900 registered companies in 2005 paid tax due on their profits; other firms cooked their books to evade payment, owing partly to a higher rate than in other Asean countries.

Salary-earners have complained that they shoulder a higher burden of personal income tax than those whose income comes from capital gains or the self-employed. The Revenue Department had planned to increase the personal tax threshold from Bt60,000 to Bt100,000, but at the last minute it withdrew the proposal from the National Legislative Assembly's agenda.

According to a study by the staff of the Bank of Thailand, the personal income-tax base is very small. Last year only 16 per cent of the 36.4 million labour force paid tax. The rate is zero to 37 per cent, but the average effective rate is only 5 per cent due to exemptions and credits.

The study suggested reorganisation of tax allowances and credits to promote fairness and expand the tax base.

The other side of the coin is a hike of value-added tax (VAT) and land and property tax and the possibility of new taxes on pollution, medical services to foreigners and estate or inheritance.

Former deputy finance

minister Sommai Phasee proposed that the new government increase VAT from 7 per cent to 8 per cent. A 1-per-cent rise would increase government revenue by about Bt30 billion.

He argued that if the

government wanted to im-

plement many populist and social welfare projects it would have to increase taxation.

But a VAT hike would be a blow to consumption, which will still be weak. The new government may postpone a tax hike until 2009 or later.

Reform of land and property tax has been pending at the State Council, the government's legal advisory body, for several years, partly because it would hit the pockets of politicians but also becau7swe local governments are reluctant to collect a lot of tax on land and property.

The Fiscal Policy Office has studied the introduction of estate or inheritance tax, the former on a person's wealth at death, the latter on wealth inherited. The office prefers the inheritance-tax approach. The study suggested 10 per cent might be levied on wealth transferred from the deceased to children or other recipients, with the first Bt10 million exempted.

According to the study, the rationale for introducing an inheritance tax is mainly to create more equal income distribution between the rich and the poor. Dividing the population into five groups, in 2004 the top 20 per cent had 12.9 times the income of the bottom 20 per cent, much more than in most countries.

Deputy Prime Minister Paibool Wattanasiritham urged Finance Minister Chalongphob Sussangkarn to introduce an inheritance tax, saying it would have a far-reaching impact on conflicts in society as people would believe in the justice of the tax system, but Chalong-phob insisted on leaving tax reform for the new government.

Some economists suggested that the government tax medical services to foreigners, because taxpayers had invested a lot of money in the education of doctors and nurses and competition from tourists was at the expense of locals.

If there is no tax reform, the Fiscal Policy Office estimates that Thailand will run a fiscal deficit for up to 10 years.

There are many things on which the government has an obligation to spend money: the universal health scheme, farm subsidies, the capital increase of state-owned banks, contributions to the Government Pension Fund, the rising of cost of state officials' medical bills and new populist schemes.

Ammar Siamwalla, acting president of the Thailand Research Institute, supports tax hikes to cover the cost of social welfare and populist schemes.

"The middle class in particular should shoulder a higher tax burden, because populist schemes would benefit them the most," he added.

Wichit Chaitrong

The Nation

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