What is the Negative Income Tax system that Thaksin spoke about

Former prime minister Thaksin Shinawatra piqued the interest of many people with his suggestion at the Dinner Talk event organised by the Nation Group on August 22, under the topic "Vision for Thailand", to implement the Negative Income Tax. 

Assist Prof Yutthana Srisavat, a tax law professor, posted on Facebook, that he was excited when Thaksin mentioned that the Ministry of Finance was considering reducing income tax for both individuals and corporations to ensure fairness, attract people to live in Thailand and ensure that every Thai citizen, regardless of wealth, was a part of the tax system. Yutthana explained the characteristics of the idea in his post.

What is Negative Income Tax?

The idea, first proposed in 1962 by American economist and Nobel laureate Milton Friedman, adds a new feature to the traditional income tax system. Under this system, individuals with no income or income below a certain threshold are not only exempt from paying taxes but also receive financial support from the government to reduce social inequality.

To ensure that low-income individuals receive adequate support, this system incentivises everyone to enter the tax system and file their returns as proof to receive government assistance.

What are the key advantages of Negative Income Tax?

Negative Income Tax provides targeted financial assistance to those with incomes below a certain threshold. This system ensures that aid reaches the most deserving groups in a precise and comprehensive manner. It is more budget-efficient than universal welfare programmes, which sometimes require a high budget but may not be fully effective.

In the long run, Negative Income Tax can increase the number of people in the tax system. Therefore, if these individuals' incomes rise to the point where they need to pay taxes in the future, the government can immediately collect taxes.

How does the Negative Income Tax system work?

The mechanism of the Negative Income Tax, as proposed by Friedman, consists of two main components:

Income Threshold: The minimum income level required to pay taxes.

Rate of Subsidy: The percentage of the difference between a person’s actual income and the income threshold that the government will compensate.

To illustrate, let's consider a simplified example:

Suppose the government sets an income threshold of 150,000 baht per year, with a 50% subsidy rate. The outcomes in different scenarios could be as follows:

Mr A has no income: He would receive a subsidy from the government of 150,000 x 50% = 75,000 baht per year.

Mr B has an income of 100,000 baht per year: He would receive a subsidy based on the difference between the income threshold and his actual income. The difference is 50,000 baht (150,000 - 100,000), so Mr. B would receive 50,000 x 50% = 25,000 baht per year.

Mr C has an income of 150,000 baht per year, which matches the income threshold: He would not receive any subsidy from the government.

Mr D has an income exceeding 150,000 baht per year: He would be required to pay taxes to the government according to the applicable personal income tax rates.

 

Challenges of the Negative Income Tax System

There are two main challenges:

High screening costs and increased tax filing burden: Low-income individuals as well as those with no income must file taxes to ensure they are registered in the system. This requirement could impose a burden on them.

Increased budgetary requirements: Providing financial assistance under this system necessitates additional budget allocation. This could conflict with the Ministry of Finance's plans to reduce income taxes.

Are Negative Income Tax and Universal Basic Income the same concept?

A key difference is that UBI provides a basic income to everyone, regardless of their income level, while Negative Income Tax offers financial assistance only to those with low incomes, with the amount varying based on how low their income is.

Have any countries implemented the Negative Income Tax system?
Several countries have adopted similar policies, though with different names and details. These are generally affluent countries, raising the question whether Thailand is currently prepared for such a system.

"Personally, I support this policy, as it could potentially increase the number of taxpayers from 11 million to 66 million," Yutthana posted.

“The direct benefit would be that, in situations requiring financial assistance like the programme during Covid-19, the Ministry of Finance would have the data needed to provide immediate support without requiring citizens to register. With digital platforms like Paotang and digital wallets, assistance could be transferred instantly, with the ability to retract funds if necessary," he added.

"The new government has three years left — let’s see if the Thaksin administration can push the Negative Income Tax policy into reality." Yutthana said.