Transcript Income Distribution

Ten Myths about the Relationship
between Taxes and Income Distribution
in Thailand
Professor Medhi Krongkaew
NACC Commissioner
Income Distribution
Income inequality as relative poverty
Theory of income distribution, sources and causes of
income inequality
Various measures of income distribution
Importance of Income Distribution Problems
• Thailand is one of the most unequal economy among
countries of equal level of development
• Academic scholars and policy makers often do not
take into consideration inequality issues when
discussing development plans and policies
Robert McNamara, former President of the World Bank once
said:
“When the highly privileged are few and the desparately poor
are many…and when the gap between them is worsening
rather than improving…it is onlya question of time before a
decisive choice must be made between the political costs of
reform and the political risks of rebellion”.
The Role of Taxes in Reducing Income
Inequality
• Initial conditions matter most on the existence and
degree of inequality
• Effects of taxes on the source (earning) side vs the
use (expenditure) side
• Absolute burden of tax vs. relative burden of tax
• Shifting of tax burden and tax elasticity
Myth no. 1: Income distribution is not
important as long as average income of the
people keeps on rising
• The truth is the assumption on the immutability of an
increasing average income must be made, as well as
the ceteris paribus assumption of all other changes;
• The political elements of income inequality are often
unpredictable and difficult to control;
• Self interest of policy makers prevails in normal case.
Myth no. 2: Taxes should be as few and as low
as possible to allow or enable the taxpayers to
have more freedom in their participation of the
economy
The truth is the existence and extent of tax burden
depends on the economic status or position of the
state, and the state’s policy on how it wants to use the
transfer of resources from the people.
Myth no. 3: Tax on income is bad as it reduces
work efforts
The truth is that income may not necessarily or fully
derived from work efforts but is influenced by many
other extraneous factors such as social positions, and
economic or political connections. In other words,
the opposite may be true that if the rich income class
are made to realise that they have to pay more taxes,
they may work harder.
Myth no. 4: As a collerally to Myth no. 3, tax on
consumption is better because it affects the
spenders not the savers
The truth is that the starting income inequality is so
severe that additional tax burden on low income class
may worsen the existing inequality even more
The consumption tax movement in developed
economies is not a good example because of the
difference in initial income distribution conditions
Myth no. 5: Progressive income tax is always
good for reducing income inequality
The truth is that, in Thailand, progressive income tax is hardly
allowed to exert its full impacts on income sources. On the
contrary, the rich in Thailand have often know how to
avoid progressive income tax burden through various
exemptions and exclusions. The state is often found guilty
for supporting such tax avoidance.
What should be better than progressive income tax then?
Myth no. 6: Tax on wealth and property will
drive the wealth and property owners to move
their money elsewhere
The truth is that Thailand is at present one of the best
wealth and property tax havens in the modern world.
No where could these wealth and property owners
profitably move their money. Besides the transaction
costs of doing so could be large.
Myth no. 7: Inheritance tax is unfair if the
inherited money is earned fairly
The truth is that inheritance tax is not levied on the one who
earns it but on the one who receives it. In a system or
society where everyone is fairly equal, inheritance tax may
not be necessary because state revenue can be garnered
from other sources. However, in a very unequal society,
inherited wealth can be a major source of inequality if such
wealth is left untaxed.
Myth no. 8: Listed companies should be levied
low corporate income tax in order to stimulate
capital market activities
The truth is that these listed companies are owned by rich (or
relatively well off) stock holders. These people contribute,
in large measure, to the existing income inequality. There
is no reason to give special tax preference to these listed
companies as long as the average corporate tax rate does
not differ much from that in other countries.
Myth no. 9: Capital gains should continue to be
tax-free to help promote capital market
The truth is that capital gains are one of the most
income disequalising factors in the Thai income
distribution picture. It is morally indefensible to
argue for the exemption of capital gains from tax any
longer. Future support of this tax exemption may be
subject to investigation of policy corruption.
Myth no. 10: Fiscal decentralisation is the one
of the best development policies in Thailand at
present
The truth is that local government finance in Thailand
at present is one of the most corrupt practices in the
current public finance setting. This is a manifestation
of the gap between political idealism and economic
functionalism.