23 May 2024

It is common sense for politicians to campaign on a platform of tax cuts in the run-up to an election, as opposed to making a case for tax hikes, which would be unpopular with the majority of voters. 

But there are some rare circumstances and ways in which policymakers can articulate the idea of a tax hike and still win political support, according to some economists.

Matching funding and pledges

Honest politicians have to keep in mind that when they promise big spending to boost the economy or more social welfare to the people, they have to seriously think about sources of funding.

Vague promises would suggest that the new government would borrow more debt, leading to an unsustainable fiscal deficit. Or, to avoid a debt crisis, they would just offer lip service on increasing social welfare for population segments in need, such as children, the elderly and low-income groups.

Generous promises by politicians

As the general election approaches this year, the Pheu Thai Party has promised to upgrade the country’s universal healthcare scheme, allowing free medical treatment nationwide for anyone, instead of limiting it to only assigned hospitals as at present. The party is also promising free care for bedridden patients.

The Move Forward Party is promising generous social welfare, including a child grant — a one-time sum of 3,000 baht for every newborn and 1,200 baht monthly for every child — free education from kindergarten to high school and a pension sum of 3,000 baht per month for the elderly.

Currently, the government provides a child grant of only 600 baht per month for newborns to 6-year-olds of low-income families. The Move Forward Party wants to make the targeted child scheme a universal one, arguing that many poor children — an estimated 30 percent — get left out of the scheme.

An elderly person currently is paid between 600 to 1,000 baht per month depending on their age.

Chart Pattana Kla is promising personal income tax exemption for monthly income not exceeding 40,000 baht a month.

Politicians tend to not give much detail on how they would raise revenue to support their ambitious plans, while offering vaguely to save money by cutting down spending on security and military. Meanwhile, observers think that the cuts may not be big enough to cover the cost of universal social welfare.

Academics have long urged policymakers to increase land and building taxes, inheritance tax, windfall tax and value-added tax (VAT).

Parties line up to woo Bangkok voters in the biggest battle of Thai election

‘Political earmarking’

Somchai Jitsuchon, a research director at the Thailand Development Research Institute, an independent think-tank, has suggested what he calls “political earmarking” of VAT.

He believes Thailand’s VAT rate is currently too low compared with other countries that have a similar level of economic development. For example, the sales tax rate is 19 percent in Chile. In ASEAN, Singapore raised its goods and services tax, otherwise known as the GST, from 7 percent to 8 percent on January 1, 2023. It’s the first of two scheduled hikes of the GST, with the second slated to take place in January 2024, when the GST will be raised from 8 percent to 9 percent.

Thailand’s low VAT rate has led to a lower tax revenue-to-GDP ratio, while the government is facing pressure for more social welfare spending in an aging society. The total tax revenue-to-GDP in recent years is between 15 to 18 percent compared with an average of 34 percent in Organization for Economic Co-operation and Development developed countries.

Thailand’s VAT collection is estimated to be 869 billion baht in fiscal year 2023, representing the largest share of tax revenue, according to Budget Bureau statistics.

Somchai believes Thailand should increase the VAT rate to 10 percent from 7 percent, as that would generate an additional 200 billion baht in tax revenue.

The trick to win support for a tax hike proposal is the so-called “political earmarking” method, which means politicians have to pledge that every single baht from the VAT hike would be allocated to support the poor and vulnerable groups.

Lessons from Japan

He pointed to the success of late Japanese Prime Minister Shinzo Abe when he increased the sales tax rate and promised voters the additional income would be allocated to support children’s welfare and their education. His government raised the sales tax rate from 5 percent to 8 percent in 2014 and further to 10 percent in 2019. But the Japanese people supported the tax hike, as they were convinced it would benefit low-income people.

Usually, the rich pay more in terms of consumption tax, because they spend more on goods and services than the poor, said Somchai.

Explaining his calculation, he said that when the government collects 100 baht as VAT, it gets about 20 baht from the poor and 80 baht from the rich. But if an additional 100 baht is collected under “political earmarking” and the entire amount is returned to the poor, the underprivileged section of society would be getting 80 baht though their contribution would be only 20 baht.

So far, major political parties have not yet made proposals for political earmarking of VAT.

By Thai PBS World’s Business Desk