Will the Thai middle class rebel against populist policies?
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Will the Thai middle class rebel against populist policies?

The Nation in an editorial:

The small number of people who actually pay taxes in Thailand are being forced to finance potentially disastrous schemes they don’t support

It is now almost certain that the Yingluck government will not make balancing the budget one of its policy priorities, largely because the Pheu Thai Party has to fulfil its campaign promises to supporters. But has the government asked the nation’s small number of taxpayers whether they want these massive spending schemes?

The country’s tax revenue is provided by only a small group of people. According to statistics released last year, only 2.3 million people nationwide pay personal income tax to help finance public spending for the country’s population of more than 64 million. Some 9 million people file personal income tax returns each year, but the majority are exempt from tax liability as they earn less than Bt20,000 per month.

In the meanwhile, middle-income earners have been squeezed between the rich and poor. Some 60,000 people each year pay taxes in the highest bracket of 37 per cent, which applies for an annual income of more than Bt4 million per year. This group of 60,000 accounts for as much as 50 per cent of total personal income tax collected each year. And a full one-third of income tax collected is paid by just 2,400 people in the country who earn over Bt10 million per year. The richest 20 per cent of the population accounts for 54 per cent of total income, while the poorest 20 per cent accounts for just 4.8 per cent, according to the Finance Ministry.

The Yingluck government’s populist policies are unlikely to address this inequality in income figures. But even worse, they could make the gap even wider.

This small group of taxpayers does not expect a populist windfall to benefit them, but it does expect a decent return for hard work and a productive, fair and conducive environment for their businesses to thrive on. Unfortunately, their voices are being ignored by the government.

BP: Raising the minimum wage won’t address inequality in income and will make the gap wider? Below are some excerpts from an Asian Development Bank report (PDF) in relation to Indonesia:

Between 1993 and 2007, nominal minimum wages have increased more than eight-fold while real minimum wages have increased by roughly 50%.

Wage inequality has decreased in Indonesia over the past few decades. Our results suggest that minimum wage legislation has played a significant role in reducing wage inequality in Indonesia by raising the wage levels of working individuals in the formal sector who initially have monthly wages below 90% of the monthly minimum wage line, while having no effect on working individuals with monthly wages 90% and above the monthly minimum wage line. We found these results are robust to variations in the specification. Our findings are in contrast to much of the development literature on minimum wages (Fajnzylber 2001 and Maloney and Nunez 2001) that have found that increases in the minimum wages in the formal sector often spill over to the self-employed or informal sector, as we find no such effect.

Rises in minimum wages however are accompanied by significant and substantial increases in the number of hours worked per week for those who make roughly the minimum wage. Moreover, increases in minimum wages are accompanied by a decrease in the probability of employment in the formal sector. These potentially negative effects can work to mitigate any overall benefits that may accrue from increases in the minimum wage. In particular, given that formal sector work provides more stable and consistent income streams and leads to better health outcomes as emphasized by Loewenson (1998), especially at the bottom end of the wage distribution, then gains in wages make it difficult to assess whether the lower end of the distribution of working individuals are actually better off overall given that they also experience significant decreases in formal sector employment. Bird and Manning (2008) suggest that on the whole, minimum wages really do not have a positive beneficial effect for the majority of the population. Our results seem to confirm this conclusion as working individuals throughout the wage distribution appear to lose formal sector employment. However, if policy makers are simply concerned with combating rising wage inequality in Indonesia, it does appear that marginally raising minimum wages may serve as a somewhat effective tool as the increase in monthly wages at the bottom end of the wage distribution overall outpaced any loss in monthly wages from people transitioning to the self-employed sector. Further work is needed to assess whether minimum wage legislation is truly an effective tool for combating inequities between the rich and poor populations by jointly estimating the wages, hours worked, and sector of employment.

BP: Obviously, not in all circumstances, will increases in the minimum wage have benefits, but it is relevant that for Thailand, according to the ILO, unemployment is very low and wage increases have not kept pace with productivity. The government will need to find a way to help SMEs who are likely to be disproportionately affected by an increase in minimum wage.  There are also some downsides to a rise in a minimum wage, but in regards to inequality in income the above report shows it does not make the gap wider – the editorial doesn’t cite a source or study either…..

On the other point about the small number of taxpayers, the editorial only seems to count those who pay personal income tax, but government revenues do not only come from those who pay personal income tax. From the Budget Bureau for 2011 (at p29 of this PDF):

For FY 2011, various types of revenues are estimated at 1,958,500 million baht.
Deductions consist of the Revenue Department’s tax rebates of 212,800 million baht,
allocation of Value Added Tax to the Provincial Administrative Organization of 11,900
million baht, export compensation of 13,300 million baht, and allocation of 70,500
million baht to the Local Administrative Organizations as specified by the Determining
Plans and Process of Decentralization to Local Administrative Organization Act B.E. 2542
(A.D. 1999).

Net revenue amounts to 1,650,000 million baht.
Collection of revenues can be classified as follows:
(1) Taxes (Net)
Net taxes amount to 1,510,387.7 million baht, equivalent to 73.0 percent of the
estimated receipts. They consist of direct and indirect taxes.

(1.1) Direct taxes of 737,200.0 million baht include
A. Personal income tax 217,000.0 million baht
B. Corporate income tax 430,200.0 million baht
C. Petroleum income tax 90,000.0 million baht

(1.2) Indirect taxes of 1,081,687.7 million baht include
A. General sales tax 568,150.0 million baht
– Value added tax 536,800.0 million baht
– Specific business tax 23,000.0 million baht
– Stamp duties 8,350.0 million baht
B. Specific sales tax 424,867.2 million baht
– Petroleum and petroleum products 151,700.0 million baht
– Excise tax on imports 36,590.0 million baht
– Consumption tax 198,771.8 million baht
– Mining royalties 802.0 million baht
– Petroleum royalties 36,997.2 million baht
– Natural resources royalties 6.2 million baht
C. Export – Import duties 86,100.0 million baht
D. Licensing fees 2,570.5 million baht

BP: Last time that BP checked poor people paid VAT and they also pay various other taxes. The poor will be paying more VAT too.

In regards to “[b]ut has the government asked the nation’s small number of taxpayers whether they want these massive spending schemes?”, how would we ask the personal income taxpayers? Perhaps, a New Politics-style “functional constituency” where people from various professions are appointed instead of a one-person-one-vote system? Or we could think of some system of asking all citizens who pay taxes to vote for groups of people who propose spending schemes, oh wait, we had one of those on July 3……

btw, one game BP likes to play everyday is guessing who wrote the editorial. This one screams Thanong….

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