Property taxes. Two of the most disturbing words to many (but not all) of Thailand’s property magnate dollar millionaires and billionaires — among them, some MPs.
Cleaners work on windows reflecting the city skyline in Bangkok. Singapore, Vietnam and Indonesia have all introduced forms of property tax, but Thailand has yet to follow suit. EPA/ BARBARA WALTON
Former prime minister Abhisit Vejjajiva first called for a property tax in 2010, only for it to disappear before the 2011 election. Now — with the arrival of the Democrat Party General Assembly — is a good time to revisit it because poverty has been one of the reform topics discussed by the People's Democratic Reform Committee and wider civil society. This is because one simple measure of the welfare of a country is the absence of poverty.
The reduction of poverty from 8% to zero is achievable. Defeating poverty is also the first of the eight Millennium Development Goals and so is one of the most urgent issues.
The problem is that a property tax does not seem fair to those owning land which they have bought as an investment. So, it may not immediately appeal to key swing political parties such as that of former prime minister Banharn Silpa-Archa, who is on record as expressing a logic that equates national economic development with personal financial development — a purely entrepreneurial position. However, my argument is that a property tax would not just benefit the poor but also those like Mr Banharn.
First, we need to briefly revisit the full tax picture. Using OECD figures, Thailand gets approximately 5% from trade taxes, 12% from personal income tax (PIT), 26% from specific indirect taxes, 28% from direct corporate taxes, and 29% from non-specific indirect taxes such value added tax (VAT).
What is wrong with this? The benefit of VAT is that it is easy to collect. But VAT is a "regressive" tax — which means it takes a bigger percentage of money from the poor.
So, should Thailand reduce its VAT? Actually, its VAT is pretty low, as low as that of the nearest developed country, Singapore. And, VAT should not be restructured at a time of fiscal instability because it would have an uncertain affect on the generation of government income.
PIT is a bigger problem. Thailand has quite a high upper band of 35%, but it only gets 12% of its tax income from PIT. The crisis with PIT in Thailand is due to an over-generous exemptions system (cue Thai-IRS audit of my taxes).
Eliminating tax dodges and loopholes can be done relatively quickly by any government determined either to create a more "progressive" tax picture, meaning less impact on the poor, or to raise money for poverty reduction. It is a vote winner. However, adding a higher band to income tax would be seen as negative to entrepreneurs such as Mr Banharn.
So, we turn to property tax. Singapore, Vietnam and Indonesia have all introduced forms of property tax. Although presently these taxes only generate a few percent of their taxation income, they both add an option to a country’s tax structure and can be used for poverty reduction. A certain value of land is normally exempt to protect, for example, poor farmers. And, property taxes already exist in multiple forms globally.
In Singapore, these taxes were introduced to fight increasing wealth inequality from unsustainable property speculation, which can lead to a property bubble such as the one China is currently experiencing. This problem has existed in Bangkok for some time and is increasingly affecting regional urban centres.
Thus, a property tax firstly benefits long-term players such as Mr Banharn who do not want to ride the rollercoaster of property bubbles. Secondly, a property tax promotes entrepreneurial activity. This should be important for Mr Banharn and those like him because their children will soon face increased competition from other players in the Asean Economic Community due to the freer movement of capital.
And in Singapore, the tax has proven so useful to the government that the trend is increasing rates — from a 10% rate prior to Jan 1, 2014 to now 10-19% on both owner-occupied residential properties and industrial, commercial and let-out residential properties, levied on the "annual rent out value" of the property.
As an alternative model, in many US states, the building value and the land value make up the tax components, creating a fair market value which is then taxed at around 0.2-4%.
One problem with property tax is corruption of assessors. This would worry Mr Banharn. He would not want to see his political opponents using their positions to increase taxes on his property while reducing taxes on theirs. The solution is a transparent valuation system with a regularly updated online tax map of values for land and property.
What can be done with the money raised? The United Nations Development Programme and Thailand are currently implementing a five-year action plan. It includes debt reduction schemes, micro-credit schemes, low-cost housing and the universal health care scheme. So it is a mixture of pro-poor policy and pro-poor growth schemes of the kind found to work in a 2011 World Bank study of Brazil, China and India.
The revenues from a property tax could contribute more funding to these projects and finally drive Thailand’s poverty rate down to zero. Any new money injected would re-enter the money supply as the poor spend most of their income. So, Mr Banharn and his peers would see some return on their tax "investment" through increased economic growth.
In terms of overall economic sense, Milton Friedman — perhaps the greatest economist of the late 20th century — adopted the property tax as his favourite "least bad tax", a position later justified by a 2008 OECD analysis which found it to be most growth friendly.
And in South Korea, a model economy for Thailand, property taxes have long been in place. They support welfare, restrain property speculation in the face of low interest rates by, for example, taxing idle land, and serve as part of a long-term political survival strategy of the wealthy.
As land is most sensitive to the Democrats, it would be best if they introduced a property tax again. But, it would benefit both parties to include it in their policy portfolios. And if people like Mr Banharn help get it passed, they would both win hearts and votes and promote a tax that makes sense to them.
John Draper is project officer, Isan Culture Maintenance and Revitalisation Programme College of Local Administration, Khon Kaen University.