Why are we cutting tax for the most wealthy people?

The Yingluck government claims that the new tax structure is meant to create justice for all taxpayers. However, justice cannot be achieved by cutting the personal income tax rate for the rich.

The government has announced it will cut personal income tax via progressive rates. For instance, those earning Bt150,000 up to Bt300,000 will be subject to a 5-percentage point cut. However, the government also cut the tax rate for whose earning more than Bt4 million – by 2 percentage points, from 37 to 35 per cent.

While cutting tax for low-income earners is understandable, as it would ease the financial burden they face, the government does not have a good reason to cut the tax rate for the richest people in Thailand.

Top income earners will reap significant benefits from the new tax policy. That’s because high-income earners already receive tax deduction benefits for investments in mutual funds.

The latest tax cut is a piecemeal approach by the government aimed at winning it popular support, especially from low-income earners and a small group of top income earners. Some of these people are supporters of the Pheu Thai Party or millionaires with business connections. Naturally, tax cuts can be politically popular. However, any government has to find sources of income to offset the loss of tax revenue caused by such cuts. The Finance Ministry expects that the government will lose around Bt25 billion annually from the new tax rates. 

The question for the government is how to find additional sources of income to offset the loss of revenue as a result of cuts and other programmes such as the car policy which also waived tax payments for first car buyers. After all, tax revenue helps the government finance its programmes to promote a redistribution of wealth and benefits to the poor.

In the US, tax changes have always provoked heated political debate, as evidenced in the recent US presidential election, and current dispute on how to resolve the looming “fiscal cliff”. But there has been almost no public debate here.

Who will benefit from the tax cut – the rich, the middle class or the poor? And where the government find extra sources of money to fund its spending on public health and education programmes?

The government also needs to consider measures to ensure fair tax collection, so it can claim that reform of the tax system is being done for reasons of “social justice”.

In Thailand, only a very small number of people – about two million people – actually pay personal income tax. Most of these people are office employees. The rest usually avoid paying tax by either misinforming the amount of their income or doing business in the massive informal sector, which is beyond the scrutiny of tax collection officers.

The proportion of tax collected in this country is lower than many countries. Tax revenue in Thailand accounts for around 16 per cent of gross domestic product, compared to a desirable rate of 20 per cent or more.

The tax collection system also favours the rich because Thailand’s wealth tax is ineffective. Stock-related earnings and translations are not sufficiently taxed. And property and land taxes are also extremely limited, and fail to ensure the wealthiest people pay tax commensurate to their earnings and assets. This is why the Kingdom has one of the worst levels of wealth disparity in the world. 

If the Yingluck government really wants to really create a just tax collection system, it must reform the current set-up and close all loopholes so all eligible income-earners pay fair rates of tax. The government must ensure that taxes on the rich equate with their wealth and social responsibility – instead of claiming to help the poor, when they are really just handing more benefits to the rich.