Money for the poor

Money for the poor

Analysis: Negative income tax hopes to succeed where other social aid schemes have failed

Developing countries by definition face a constant struggle against the problems of poverty and income inequality. Thailand is no exception.

Over the past few decades, despite steady economic growth and industrialisation, inequality has remained a persistent and divisive factor within Thai society and politics.

In absolute terms, poverty has indeed fallen. In 2012, 8.4 million people or 12.6% of the population earned below the poverty line of 30,000 baht per year, compared with 20 million people or 35.4% of the population counted below the poverty line a decade earlier.

But economic inequality has hardly budged. One study noted that in 2011, the Gini coefficient for Thailand stood at 0.484, compared with 0.487 in 1988. The coefficient is a commonly used measure for inequality, with zero representing complete equality and 1 complete inequality.

Why has inequality remained almost unchanged despite economic growth? The answer is that policies aimed at income redistribution and poverty alleviation have simply failed to deliver sustained change. Hundreds of billions of baht in state funds are spent each year on development programmes and social aid. All too often, such policies have failed to address the problems of the truly impoverished, but rather simply represented ill-disguised vote-buying schemes, whether it be campaigns such as the rice-pledging programme or tax incentives for first-time car and homebuyers, which plainly have benefited entrepreneurs and the middle-class more than the poor.

Such populist policies have not only failed to reach out to the poor but also caused massive loss to the country in terms of money, economic, society, ethical and cultural values as well as its reputation. They have also prompted large-scale state corruption which has entirely neglected fiscal discipline and betrayed taxpayers.

Economists with the Fiscal Policy Office (FPO) have spent years studying different ways of addressing the issue while finding a method to prevent making the same mistakes. One possible resolution that has recently been proposed is the use of negative income tax (NIT).

What is NIT?

The NIT scheme offers to transfer cash to the poor, aged between 15-60, who are employed in all kinds of occupations, be they workers, farmers, vendors and the like. The scheme will transfer 20% of annual income to those earning 30,000 baht a year, the poverty line, or less. For those making 30,001 to 80,000 baht a year, the scheme will transfer cash at a declining rate of -12%.

Kritsada Jinavijarana, director-general of the Finance Ministry’s FPO, said the scheme is now under a thorough study to find the most prudent implementation process that will leave the fewest loopholes and errors. If completed in time, the scheme will then be proposed to the National Legislative Assembly.

There are more than 10 countries around the globe using NIT or something similar. Most are developed countries including the US, Britain, New Zealand, Australia, South Korea, Canada, Sweden and Singapore.

Locate the needy

The key objective of NIT is to better target state assistance at the needy, since most schemes and campaigns have failed to achieve this objective. To do so, it is essential to initially locate the poor.

Those eligible for NIT cash transfers will have to return a tax form to the Revenue Department disclosing their personal and revenue information. This will help the state gather all required data of the needy: addresses, occupations, annual earnings and such.

“For the first time in history we’re seriously locating the poor as we’ve failed to do so all along,” said Somchai Jitsuchon, a research director of the Thailand Development Research Institute (TDRI).

“One of the key problems we’ve long faced is that we can’t really find the poor,” said Pan Ananapibut, head of the FPO’s Tax Structure Development subdivision. “Through this method, we’ll be able to include members of the informal workforce in the system.”

Thailand’s informal workforce is enormous, accounting for 57.2% of GDP, said Mr Pan.

He stressed that the cash transfer is seen as an incentive granted to those in need who file their tax forms. Mr Pan is also the head of the economic team studying the NIT.

Nipon Poapongsakorn, an economist at the TDRI, agreed with the concept, saying “it’s a good start”.

“This scheme will develop a database on the poor so we can really separate them from those who aren’t in need. Then we can tailor welfare that actually suits them,” said Mr Nipon.

Tailor aid and assistance

When the needy have been identified and located, the state will be able to provide assistance accordingly, including the use of the NIT scheme. As earlier mentioned, many prior schemes and campaigns failed to tap the needy.

According to statistics gathered during 2010-12 from the state’s welfare and aid programmes — universal health welfare, education loans, state scholarships and farmers’ subsidies — 90% of those who benefited from these programmes were not the poor.

“When we have accurate data on the poor, then we can design the right assistance to ease their problems, unlike those universal schemes that have been implemented and failed to answer the needs and meet targeted people. This way we can reduce the state budget and help spend taxpayers’ money more effectively,” explained Mr Pan.

Replace populist policies

Another key objective of the NIT scheme is for it to replace populist programmes.

According to Mr Pan, in 2014, the state spent around 144 billion baht in populist policies involving raising people’s income and reducing their expenditure.

“The budget is massive and the state’s fiscal status doesn’t allow it to continue on this road,” said Mr Pan.

Mr Nipon agreed that most populist policies have damaged the country economically and socially while not really helping the poor. However, NIT is not considered a populist policy as it is not linked to any particular party and is responsible for taxpayers’ money. It must also be passed to the Congress and issued as a law before being enforced.

“Populist policies are ‘democracy without accountability’. They mostly lack transparency and fiscal discipline, induce corruption and have no responsibility to taxpayers,” Mr Nipon said.

Narrow income disparity

If successfully implemented, NIT is meant to reduce economic inequality.

From studies, 10% of the richest in the country possess 40% of the country’s total income while those below poverty line contribute only 1.6% of overall income.

According to Mr Somchai, one key advantage of NIT is that it does not intervene with the market or limit assistance to particular groups such as the rice-pledging scheme that interfered with market mechanisms and targeted just rice growers.

“So this scheme will surely help redistribute income to the poor and narrow inequality regardless of occupation or sector,” Mr Somchai noted.

The NIT scheme is forecast to spend around 55.6 billion baht to help 18.5 million poor people — 27.5% of the country. “That is far less than other populist policies,” added Mr Somchai.

Encourage people to work

Added to all the other pros, NIT is said to encourage the poor to work as only those employed are eligible for the programme.

“It is actually ‘workfare’ not ‘welfare’ as only working people will be entitled to it,” Mr Pan explained.

However, some academics and economists have expressed concern that it could have an adverse effect by discouraging people from working.

“It might discourage the poor from working hard. Examples have been seen in many developed countries that have implemented this scheme,” said Mr Somchai.

There it is important that the right amount of cash transfer is given.

“The amount must not be too much as it may make people lazy and it must not be too little as people may overlook its value and not bother to enter the scheme,” said Mr Nipon.

Since it is a long-term policy, state coffers must also be taken into account.

Verify data

A key obstacle to the NIT scheme seems to be data verification to prove that the information filed by the people entering the scheme is true and valid. For instance, unlike employees in the workforce whose payslips can be used as evidence of their monthly income, small vendors, daily workers, junk collectors and farmers, to name a few, usually do not have proof of their earnings.

Mr Pan admitted that setting up a data-checking process and system is essential.

“It will need coordination from various organisations and parties such as local administrations, financial institutions, the National Statistical Office, the Interior Ministry and other agencies to cross-check facts submitted by the people.

“It will therefore require increasing the budget and number of people working for such investigation and setting up a proper IT system,” Mr Pan explained.

He added that it could take a few years before the country is ready for such a scheme.

One limitation is that the NIT does not cover the poor who are not employed such as the disabled or sick. However, they may be eligible for other state assistance.

Make it easy and accessible

Wilaiwan Sae Tia, vice-president of the Thai Labour Solidarity Committee, said the NIT scheme will be beneficial and useful for the poor if successfully implemented.

She suggested that the scheme’s process and documentation be made simple and publicised so the poor are aware of it and understand it well.

“The scheme must be promoted and made known to grassroots people who are the target. That means the state must promote the scheme by penetrating villages and districts or through local networks and groups so they understand their rights,” Ms Wilaiwan said.

If the state wishes to encourage the poor to enter the formal database, she said the tax form must be simplified.

“If it is too complicated, the poor won’t be able to access it,” she said.

Mr Nipon also suggested the policy undergo a trial run before it is implemented.

“Some experiments should be done to find the right process, the optimum amount of money and the best system before it is actually implemented. That’s because the scheme can have side effects if it is not thoroughly designed.

"A proper IT system and more manpower will definitely be needed to carry this project through,” he said.

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