Faculty of Economics, Thammasat University
THAMMASAT REVIEW OF ECONOMIC AND SOCIAL POLICY Volume 2, Number 1, January - June 2016 ISSN 2465 -390X (Print) ISSN 2465 -4167 (Online)
Invited Article: Commentary Note on Thailand’s Current Inequality Situation and its Prospects Pasuk Phongpaichit
Practitioner's Perspectives: Thailand’s Current Socio -Politco -Economy: Perspectives and Prospects Prasittidesh Vichitsorasatra
Property Tax in Thailand: An Assessment and Policy Implica- tions Duangmanee Laovakul
Market Expansion, Political Relationship and Geographical Inequality in the Early Rattanakosin Siam: A Theoretical Per- spective Pornthep Benyaapikul
Income Elasticity for Medical Care Services: An Empirical Study in Thailand Kaewkwan Tangtipongkul
How can Promoting “Desirable” Elderly Employment Opportu- nities Alleviate the Shortfalls of Thailand’s Ageing Society? Euamporn Phijaisanit
THAMMASAT REVIEW OF ECONOMIC AND SOCIAL POLICY Volume 2, Number 1, January – June 2016 ISSN 2465-390X (Print) ISSN 2465-4167 (Online)
Thammasat Review of Economic and Social Policy
Thammasat Review of Economic and Social Policy (TRESP) is a double- blind peer reviewed biannual international journal published in June and December. The journal is managed by the Research Committee under the supervision of the Academic Affairs Division of the Faculty of Economics, Thammasat University. Our editorial board and review panel comprise of academicians and practitioners across various areas of economic and social policies. The goal of the journal is to provide up-to-date practical and policy-oriented analysis and assessment of economic and social issues, with particular focus on Asia and the Pacific region. However, research findings from other parts of the world that are relevant to the theme of the journal may be considered.
Aims & Scope
Our journal is dedicated to serve as a platform for debate and critical discussion pertaining to the current issues of public policy. The outcome of such research is expected to yield concrete policy implications. Some of the targeted issues include urban and regional socio-economic disparities, ageing society, healthcare, education and welfare policies, environmental and natural resources, local communities, labor migration, productivity, economic and political integration, political economy, macroeconomic instability, trade and investment, fiscal imbalances, decentralization, gender issues, behavioral economics and regulations; and law and economics. The journal makes its best effort to cater a wide range of audience, including policymakers, practitioners in the public and business sectors, researchers as well as graduate students.
Articles should identify any particular issue concisely, address the problems of the research explicitly and supply sufficient empirical data or strong evidence and substantial argument to support the discussion of policy initiatives asserted by the author(s). Theoretical and applied papers are equally welcome provided their contributions are policy-relevant.
Advisory Board Sakon Varanyuwatana, Thammasat University, Thailand Medhi Krongkaew, National Institute of Development Administration, Thailand Arayah Preechametta, Thammasat University, Thailand Duangmanee Laovakul, Thammasat University, Thailand
Editor-in-Chief Euamporn Phijaisanit, Thammasat University, Thailand
Associate Editors Pornthep Benyaapikul, Thammasat University, Thailand Phatta Kirdruang, Thammasat University, Thailand
Editorial Board Kirida Bhaophichitr, Thailand Development Research Institute, Thailand Brahma Chellaney, Center for Policy Research, New Delhi, India Aekapol Chongvilaivan, Asian Development Bank, Manila, Philippines Ian Coxhead, University of Wisconsin-Madison, United States Tran Van Hoa, Centre for Strategic Economic Studies, Victoria University, Australia Emma Jackson, Bank of England, UK Prajak Kongkirati, Faculty of Political Science, Thammasat University, Thailand Somprawin Manprasert, Faculty of Economics, Chulalongkorn University, Thailand Gareth D. Myles, Tax Administration Research Centre, University of Exeter, UK Songtham Pinto, Bank of Thailand, Thailand Pathomdanai Ponjan, Fiscal Policy Office, Ministry of Finance, Thailand Nattapong Puttanapong, Faculty of Economics, Thammasat University, Thailand Sasatra Sudsawasd, National Institute of Development Administration, Thailand Maria-Angeles Tobarra-Gomez, University of Castilla-La Mancha, Spain Soraphol Tulayasathien, Fiscal Policy Office, Ministry of Finance, Thailand
Editorial Assistants Darawan Raksuntikul Sorravich Kingsuwankul Panit Buranawijarn
Editorial and Managerial Contact c/o Mrs. Darawan Raksuntikul Thammasat Review of Economic and Social Policy (TRESP) Faculty of Economics, Thammasat University 2 Prachan Road, Bangkok 10200, Thailand Tel. +66 2 696 5979 Fax. +66 2 696 5987 E-mail: [email protected]
Thammasat Review of Economic and Social Policy Volume 2, Number 1, January – June 2016 Editorial Introduction 1 ARTICLES
Commentary Note on Thailand’s Current Inequality Situation and Its Prospects 4 Pasuk Phongpaichit Thailand’s Current Socio-Politico-Economy: Perspectives and Prospects 18 Prasittidesh Vichitsorasatra Property Tax in Thailand: An Assessment and Policy Implications 24 Duangmanee Laovakul Market Expansion, Political Relationship and Geographical Inequality in the Early Rattanakosin Siam: A Theoretical Perspective 54 Pornthep Benyaapikul Income Elasticity for Medical Care Services: An Empirical Study in Thailand 76 Kaewkwan Tangtipongkul How can Promoting “Desirable” Elderly Employment Opportunities Alleviate the Shortfalls of Thailand’s Ageing Society? 124 Euamporn Phijaisanit
Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Editorial Introduction Following the success of our inaugural issue in December last year, this special issue focuses on the theme concerning inequality and welfare issues in Thailand. Particularly, the disparities, for instance, in income and wealth distribution, healthcare access, development and work opportunities that trouble our society are the problems that we have long made efforts to solve. In this issue, our journal is very honoured to have Professor Pasuk Pongphaichit accepting our invitation to produce a very insightful article, “Commentary Note on Thailand’s Current Inequality Situation and Its Prospects”. The article explores the trends and reasons for the rise in multiple dimensions of inequality in Thailand. It also provides an outline of possible policies and discussion for future prospects, focusing on the key and obvious factors, namely; rights, representation, education, public goods and fair tax system. In addition to the research articles, this issue also reflects some practitioner’s perspective via the article, “Thailand’s Current Socio-Politico-Economy: Perspectives and Prospects” by Prasittidesh Vichitsorasatra, former Consul-General to the Royal Thai Consulate-General in Kolkata, India. Southeast Asia has seen much change over the past few decades. The article describes how the shocks and aftershocks of the global turbulence have been amplified by a precarious and fragile political situation in Thailand. Ultimately, however, Thailand’s future and developmental outcomes will depend on the engagement and cooperation of the Thai people. The first research article of this issue, “Property Tax in Thailand: an Assessment and Policy Implications,” by Duangmanee Laovakul portrays how inequality in all its dimensions remains a large issue in Thailand. This article 1 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 focuses on tax policies, in particular taxes on property in Thailand, as a means to use fiscal policy to address inequality. Currently, property taxes remain very low, and many exemptions exist resulting in low tax revenues. Furthermore, poor enforcement and monitoring exacerbate collection issues. In the case of the local development tax, the tax base is assessed according to the value of land during the period 1978- 1981 resulting in undervaluation. The article suggests that urgent reformation of these bills is required which is currently taking place. The second article, “Market Expansion, Political Relationship and Geographical Inequality in the Early Rattanakorn Siam: a Theoretical Perspective” by Pornthep Benyaapikul displays the dominance of the social structure and geographical location in the economy during Rattanakosin Siam (1782-1855). Coercive relationship existed between the aristocrats ( munnai ) and the commoners ( phrai ). The elite class had power over commoners through forced employment and restricted movement of labor which consequently resulted in concentration of trading activities, income and wealth among the nobles. This study provides a game-theoretical perspective to explain a mechanism for which market economy proliferates through geographical locations and its implications on locational inequality. This can hint to the policy implications for the present-day situation. The third article “Income Elasticity of Demand for Outpatient and Inpatient Services: an Empirical Study in Thailand,” by Kaewkwan Tangtipongkul investigates the potential household income effect on public and private healthcare choices for outpatient and inpatient services by combining data from the Health and Welfare Survey 2006 with information on hospitals and doctors in each province. It also seeks to provide information for policymakers to improve policy decisions. For example, the article suggests that the
2 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 government can improve the level of service provided at district level hospitals in order to reduce the referral process and transportation costs incurred by Universal Coverage beneficiaries (which mainly consists of low income persons). Moreover, improving the prevention and promotional care program will also increase awareness of how to prevent common diseases in households. The forth article, “How can Promoting “Desirable” Elderly Employment Opportunities Alleviate the Shortfalls of Thailand’s Ageing Society?” by Euamporn Phijaisanit examines the implications of Thailand’s ageing population on economic growth in the light of existing social structures and policy infrastructures. The article proposes policy options, which seeks to bring about a more desired ageing society through greater elderly labor participation, improved elderly welfare structures, and fiscally sustainable public finance. Thammasat Review of Economic and Social Policy (TRESP) is our newly constructed biannual double-blind peer reviewed international journal published in June and December. The Faculty of Economics, Thammasat University and the Editorial Team of TRESP seek to provide an effective platform for reflecting policy-oriented perspectives that links the academic and policymaking community. Having devoted to our ‘knowledge-for-all’ philosophy so as to drive our society forward, the Faculty decided that TRESP published under an open access model. For further information and updates on this journal, or to submit an article, please visit our website at www.tresp.econ.tu.ac.th.
Euamporn Phijaisanit Editor-in-Chief
3 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Invited Article
Commentary Note on Thailand’s Current Inequality Situation and Its Prospects
Pasuk Phongpaichit Professor Faculty of Economics Chulalongkorn University Bangkok, Thailand
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I became interested in economic aspects of inequality because economic inequalities underlie inequality of power, social position, and access to resources of all kinds, including good education, a fair trial and a decent chance in life of individuals and their children. In this commentary note I first give a sketch of the international debate on the impact of inequality on economic growth and democracy. I then outline the trends of inequality of income and wealth in Thailand and explain the reasons for the steep rise in inequalities. Next I briefly discuss findings about the impact of inequality on social division and political conflict. This is followed by an outline of policies and actions that can lead to a reduction of inequality in Thailand today. Last is a brief concluding remark on the future prospects.
1. The debate on the effect of inequality on economic growth and democracy There is no consensus on the impact of inequality on economic growth 1, but mechanisms through which inequality
1 Traditionally many economists have held the view that inequality is good for growth because of a higher saving rate by the rich, sunk cost and investment indivisibilities, and higher incentives to work (Aghion et al., 1999). Alesina and Rodrik (1994) add that in countries with high inequality a majority votes in favor of redistributive policies, resulting in higher taxes and lower growth (see also, Person & Tabellini, 1994). In a context of credit constraint, however, redistribution may be good for growth because it helps entrepreneurs who lack resources to start up new businesses. Redistribution can also promote growth in the long term because it enables children of poor household to have education. A recent study finds a large and statistically significant association between income inequality and growth duration; a one percentage point higher Gini decreases the expected length of a growth spell by 11 to 15 percent (Berg & Ostry, 2011). Berg et al. (2008) also ranks 5 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 may be harmful to growth have been identified: in particular, when inequality is coupled with credit market imperfections resulting in under-investment in human capital and credit restraints on entrepreneurs without collateral; and when large inequalities foster social and political instability as more people engage in crime and violent protests, which deter investment (Perotti, 1996). Acemoglu’s analysis of oligarchy postulates, on the basis of historical evidence, that extreme inequality in the command over resources is prejudicial to economic growth (Acemoglu, 2008). In the US, a thorough study for the period 1979-2007 found that although inequality did not reduce the overall growth rate or contribute to economic crisis, there is strong evidence that it reduced the rate of growth of middle class income, increased disparities in education, health, family structure and happiness and heightened residential segregation (Epstein et al., 2003). In Thailand, economic inequalities lead to other forms of economic and social inequality, such as in access to tertiary education (Lathapipat, 2016), which is prejudicial for growth in the long term. On the impact of inequality on democracy, there is also no consensus but an inclination to see the impact as negative. In his monumental work, Capital in the Twenty-First Century , Piketty finds a relationship between inequality and anti- democratic forces (Piketty, 2014:517). The new institutional economist, Acemoglu and his co-authors have produced a game theory analysis using two actors, rich elites and poor masses. They show how, as the masses press for democracy to gain from redistributive policies, the elites are likely to resist,
income distribution as the most influential and robust factor for growth sustainability followed by trade openness, political institutions, foreign direct investment, exchange rate competitiveness and external debt. 6 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 especially where inequality is high, as they fear they will be forced to pay higher taxes to finance redistribution. Acemoglu et al. also show that the higher is the proportion of the rich elites that is dependent on land for their income, the stronger is the resistance to democracy because land is vulnerable to tax and difficult to conceal (Acemoglu & Robinson, 2006; Acemoglu et al., 2010). The model has been criticized, 2 but it fits contemporary Thailand rather well (Phongpaichit, 2016). From the 1960s to the early 90s, Thailand achieved rather high economic growth rates. This period came to an end in the financial crisis of 1997. Over this period of rapid growth, inequality shifted from a relatively moderate level to a very high level, comparable to some Latin American countries. Proposals for land tax reforms have been stalled. The power structure has become more ossified and the movement towards democratization in the 1980s and 90s, following the fall of the military regime in the early 70s, has not been consolidated. For the last decade a battle has been waged between those who want elected parliamentary democracy, and those who want a “managed democracy”, believing that it is necessary to curb the power and authority of corrupt elected politicians. The conflict has been played out in street protests by both sides, causing confusion and instability. Coups to topple the elected governments staged by the military junta of the same camp in 2006 and 2014, which were supported by non-democratic forces, have moved Thailand back to a military dominated political regime.
2 By those who disagree with their assumption about the rational self-interested motivations of actors in their model, and doubt if their hypothesis that distributional conflict is at the heart of political transition of all counties is always true. See American Political Science Association (2013). 7 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
2. Inequality has come down but not fast enough Inequality in income and wealth rose fast following the economic boom of the 1980s. Since the mid-1990s a declining trend is noticeable, but the level is still rather high and higher than other Asian neighbors. The Gini Index on household income rose from 0.413 in the early 1960s to 0.536 in 1992. Over the boom era from 1981 to 1992, the top 10 percent of the population increased their share of total income by 8 percentage point from 34 to 42 percent. Inequality has tended to decline over the past two decades, but slowly and fitfully. By 2011, the Gini of household income was 0.484, which is still the highest in ASEAN (Phongpaichit & Baker, 2016: Introduction; Phongpaichit, 2016). Kobsak Pootrakul has made a detailed study of the trends in inequality over the period from 1988 to 2011. He found that the income of the top 1 percent grew spectacularly fast, around 2.8 times the average rate. So while the trend towards better income distribution now seems well established, Kobsak Pootrakul has shown Thailand has a “1 percent problem,” just like the US and many advanced economies. He estimates that the top 1 percent group includes around 600,000 people in families headed by business people, property owners, professional and managers (Pootrakul, 2013). On wealth inequality, recently available data on household assets, bank deposits and land ownership, have shown extreme inequality. Laovakul (2016) found a highly skewed distribution of titled land, with a Gini Index as high as 0.88. There are many reasons behind the high inequality in Thailand in the 1990s. Among the most prominent are the development strategy that favored capital, coupled with repressive policies on labor organizations; the urban bias in development with investment being concentrated around 8 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Bangkok; the rise of prices, profits and salaries in the modern sector to assimilate to international levels; a boom in urban property prices that especially benefited prime land in certain areas; falling agricultural prices from the mid-1970s onwards; and a lack of political interest or will to combat growing inequality. As a result, Thailand does not have progressive property or wealth taxes, nor really progressive personal income tax, although the official rates may appear so. 3 Because of the revenue constraint, overall expenditure on public goods has been low, with a distinct pro-rich and pro- urban bias, leading to great inequality in access to public services including education. Combining these wealth data with other information on the trends in corporate wealth in the aftermath of the financial crisis of 1997, including the recent Forbes lists of wealthy families, two recent trends can be noted (Phongpaichit, 2016). The first is that wealth has become more concentrated at the high end of the business community. The second is the growing importance of non-wage income from profits, rents, and financial assets. These findings corroborate Pootrakul’s (2013) finding that income from rents and financial assets is very highly concentrated at the upper end of the income scale in the period from 1988 to 2011. With the distribution of wealth, especially land and savings, being highly skewed, and with no tax policy to moderate this situation, a very few at the top earn much from rent, dividends, interests and other investment income while the majority have very limited assets or negative savings. From his study of many countries over the 18 th and 19 th centuries,
3 A preliminary look by the author’s research team on the effective personal income tax rates in Thailand for the period 2006-2009 found that the tax is regressive at the highest end of the income band because of a large number of exemptions and allowances which counteract the nominally progressive tax rates. 9 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Piketty (2014) shows that investment income always grows faster than GDP, and hence the trend towards inequality of wealth is self-sustaining. An additional factor is the political system, in which power is concentrated in the hands of the few, and little attention is paid to social justice or redistributive policies. 4
3. Inequality, social division and political conflicts The effects of inequality on social cleavages and political conflict has become a prominent topic of debate around the world. A widening income gap among people in the same society can cause deterioration in the sense of community and a decline in mutual trust. Many societies have experienced a decay in social cohesion and a rise of protest and conflict. Stiglitz, the Nobel Laureate expresses this worry, “It’s easier to act together where most people are in similar situations”. Researchers in the UK found that unequal societies have more crime, less trust, more anxiety, more mental and physical health problems, poorer education performance, more violence and less mobility (Wilkinson & Pickett, 2009) A recent study on the US shows that growing income inequality results in increased political influence among the top wealthy, with potential harmful effects on policies concerning health, education expenditure, taxation, and climate change (Mayer, 2016).
4 Technocrats in the Ministry of Finance have proposed a reform of the existing regressive land development tax for some time, but have not succeeded. The first inheritance tax was approved in 2016, but the original proposal was so watered down that it is not effective as a measure to reduce wealth inequality, as originally intended. On the impact of rule by the few, Winters (2011) has argued that the wealthy in all societies strive to control or influence politics to protect or promote their wealth. 10 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
In Thailand, researchers have drawn attention to the impact of inequality on crime, teen pregnancy, prostitution, insecurity in life, and access to education, as well as the political conflicts of the last decade. Concern over the relationship between inequality and Thailand’s political conflict is shared across the political spectrum. The National Council for Peace and Order, the military junta which seized power from the elected government by a coup in 2014, made solving inequality one of its priorities. The prime minister and head of the NCPO, General Prayut Chan-ocha, said, “The disparity is a big challenge to the government. We have to create jobs and income for people and solve the corruption problem.”5 In his address to the UN in September 2015, he stated that “to reduce inequality” was among “the first priorities of my administration.” 6 Borwornnsak Uwanno, the chairperson of the first Constitutional Drafting Committee in 2015 stated that “disparity in income, wealth distribution, and access to opportunities constitutes the underlying root cause of the social and economic ills of the Nation,” and claimed his draft was designed to cure this problem. 7
5 “Prayut declares battle against inequality,” The Nation , 5 Oct 2014 6 “The Royal Thai Government attaches importance to creating equal opportunities and access to natural resources because we do not wish to leave anyone behind. We cannot allow the abuse of power for political gains at the expense of the majority, which led in the past to social discord and exploitation, injustice and corruption, still causing divisions in society.” http://www.mfa.go.th/main/en/media-center/14/60612- Statement-by-Prime-Minister-of-Thailand---Interact.html 7 Borwornsak Uwanno and Navin Damrigan, “Constitutional drafting in Thailand,” distributed by the authos at the presentation at the Foreign Correspondence Club of Thailand on April 8, 2015. Subsequently, Bavornsak’s draft constitution was rejected by the National Legislative Assembly under the junta. A new drafting committee headed by Meechai Ruchuphan was later appointed and a new draft, known as the Meechai Draft was unveiled in March 2016. The new draft has been promoted as an 11 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
4. What policies and actions are needed? There is a large debate on policies to mitigate inequality, with a large spectrum of different views. However, the basic policies needed, especially in a situation of rather extreme inequality such as Thailand today, are rather simple and obvious. The key factors are: rights, representation, education, and public goods. 8 Ensuring equal access to quality education is one of the most important measures, not to mention the fair access to other quality public goods and services in general. Most important of all, a country should have a political system that adequately guarantees rights and representation to enable citizens to defend their rights, their property, and their opportunities against injustice, unfairness and exploitation. In Thailand, apart from the universal health care scheme, public goods and services are highly unevenly distributed and the rich and powerful have greater access to them, including good quality public education. The only way to improve fairness in access to public goods and services is to increase the quantity and improve the quality. This will require not only better management of existing government spending, but also an increase of tax revenues. The demand for public goods and services, required both for economic growth and for social provision, has far outstripped the rate of increase in
anti-corruption constitution, but critics called it undemocratic, as it does not give adequate guarantee of rights and representation, and it contains provisions which perpetuate the junta’s control over elected government. Educationists pointed out that it reduces the years of free education for Thai citizens, among other weaknesses. 8 Others include macro policies to support full employment, finance regulations that ensure directing investment to productive activities, well- designed institutions that govern work contracts, other public and social policies that support the working and non-working population in the same way (Berg, 2015). 12 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 government revenue from taxation, which lags behind the rate of growth in GDP (Cripps, 2016). Therefore, a reform in the taxation system is imperative, both to increase the flow of revenue, and to increase the fairness within the tax system itself. Given the very skewed distribution of land and other assets, wealth taxes should be part of the tax reform agenda.
5. A concluding remark “Reform” has been the clarion call of the military government and its supporters. How have the reforms completed or promised so far including the current draft constitution (Meechai version), contributed to its declared aim of reducing inequality? Popular representation has been cut back, and the constitution aims to continue that trend. The discourse of rights has been discouraged, community rights has been undercut significantly by cancelling planning regulations and provisions for environmental protection. The draft constitution reduces the provision of free education by two years. Both corporate and income tax rates have been reduced, and new provisions for wealth tax will not provide significant revenues. There seems little chance that inequality will be further reduced under this policy regime. Acemoglu and Robinson have argued in Why Nations Fail that only countries with inclusive political and economic institutions can blossom to modern prosperity (Acemoglu & Robinson, 2012). Political elites that refuse to cede power to inclusive institutions are in fact working against their own interests in the long term.
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References Acemoglu, D. (2008). Oligarchic versus democratic societies. Journal of the European Economic Association , 6(1), 1-44. Acemoglu, D., & Robinson, J. A. (2006). Economic origins of dictatorship and democracy . Cambridge University Press. Acemoglu, D., Ticchi, D., & Vindigni, A. (2008). A theory of military dictatorships (No. w13915). National Bureau of Economic Research, 1-42. Acemoglu, D., & Robinson, J. (2012). Why nations fail: the origins of power, prosperity, and poverty . Crown Business. Aghion, P., Caroli, E., & Garcia-Penalosa, C. (1999). Inequality and economic growth: the perspective of the new growth theories. Journal of Economic literature , 37 (4), 1615-1660. Alesina, A., & Rodrik, D. (1994). Distributive politics and economic growth (No. w3668). Quarterly Journal of Economics , 109, 465-490. American Political Science Association (2013). Inequality and Democratization: What Do We Know ?. Comparative Democratization 11 (3), 1-42. Berg, A., Ostry, J. D., & Zettelmeyer, J. (2008). What makes growth sustained?. (No. 08/59). International Monetary Fund Berg, J. (Ed.). (2015). Labour Markets, Institutions and Inequality: Building Just Societies in the 21st Century . Geneva:International Labour Office.
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Cripps, Francis. (2016). “A National Accounting Perspective on Thai Government Income and Expenditure, 1990- 2013. A note prepared for the project “Guidelines for Reform of the Personal Income Tax (PIT) for Effective Implementation and Analysis of Income Distribution at the Upper End of the Income Scale in Thailand”, a research funded by the Thailand Research Fund, 2016- 2017. Epstein D, L., Robert B., Jack G., Ida K., and Sharyn O’ H. (2003). Democratic Transition, Draft of April 2, 2003, from http://politics.as.nyu.edu/docs/IO/4753/epstein.pdf Lathapipat, D. (2016). Inequality in Education and Wages, In Unequal Thailand: Aspects of Income, Wealth, and Power [edited by Pasuk Phongpaichit and Chris Baker], 32–42. Singapore: NUS Press Laovakul, D. (2016). Concentration of Land and Other Wealth in Thailand [Edited by Pasuk Phongpaichit and Chris Baker], Unequal Thailand: Aspects of Income, Wealth, and Power , 32–42. Singapore: NUS Press. Li, H., & Zou, H. F. (1998). Income inequality is not harmful for growth: theory and evidence. Review of development economics , 2(3), 318-334. Ostry, J. D., & Berg, A. (2011). Inequality and unsustainable growth: two sides of the same coin? (No. 11/08). International Monetary Fund. Mayer, J. (2016). Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right. New York: Doubleday. Phongpaichit, P. & Baker, C. eds. (2016). Unequal Thailand: Aspects of Income, Wealth and Power , Singapore: NUS Press. 15 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Phongpaichit, P. (2016). Inequality, Wealth and Thailand’s Politics, Journal of Contemporary Asia , Special Issue, 2016. On line available, February 2016. Hard copy end of 2016. Perotti, R. (1996). Growth, income distribution, and democracy: what the data say. Journal of Economic growth , 1(2), 149-187. Persson, T., & Tabellini, G. (1994). Is inequality harmful for growth?. The American Economic Review , 600-621. Piketty, T. (2014). Capital in the twenty-first century . Harvard University Press. Pootrakul, K. (2013). Khunaphap kan charoen toepto jak miti khong kan krajai raidai panha lae thang ook , [The quality of growth from the perspective of income distribution: problems and solutions]. Paper presented at the Bank of Thailand annual seminar, 19 September. Wilkinson, R., Pickett, K., & Cato, M. S. (2009). The spirit level. Why more equal societies almost always do better. Allen Lane and Democracy. Winters, J. A. (2011). Oligarchy . Cambridge University
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17 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Practitioner’s Perspectives
Thailand’s Current Socio-Politico-Economy: Perspectives and Prospects *
Prasittidesh Vichitsorasatra Freelance Columnist and Former Consul-General (2011-2014) Royal Thai Consulate-General Kolkata, India
* Contents of the article are the full responsibility of the author and do not necessarily reflect views of the author’s affiliations. 18 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
For almost two years, Thailand has become a country characterized by a relatively modest democratic system amidst the rapid political and economic development in the Indo- Chinese peninsula; Myanmar, Cambodia, Laos, and Vietnam. Additionally, the island nations in the Southeast Asian region, namely, Indonesia, the Philippines, East Timor and Brunei, far from the core interest of Thai businesses, have gradually continued to develop. Meanwhile, countries with economic stability and credibility, including Singapore, Malaysia, and Thailand, have been consistently affected by both internal and external influences such as deflation and continuously decreasing agricultural products price. Exports have also deteriorated. The value of the local currency decreased by over ten percent while the value of gold increased to a close proportion or more. Southeast Asia region consists of variation of religions, beliefs and governing systems. Although there have been long attempts to integrate the economy, politics, and security of the region for more than half a century, the intentions were partially succeeded due to the multi-dimensional differences. Besides, the similarity of the economic background of this region, which emphasizes on producing and exporting labor- intensive agricultural products, resulted in a competition that lowers the integrative potential of the countries. Most countries in the region depend heavily on foreign influences for the development of high technology, while their research and development (R&D) expenditure remains relatively low compared to those of the developed nations. The outcomes of the development of material products in the world, including modern transportation systems, such as high speed trains, underground trains, super highways; the mass production of automobiles and the rapid development of other technologies; mobile phones, computers, do not yield much long-term self- capacity-improvement benefits to local residents. 19 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Multinational companies accessed the full benefits from the sales of products and services, while the local residents in most countries receive labor wages, salaries and humble affordability to live their daily lives and to pay for their rents and household utilities each month. The by-products of the “Tom Yum Kung” financial crisis in 1997 and the recent global financial crisis in 2009 have a role in influencing the perspectives of the middle class and elites in Thailand. The rise in conservative anti-government and anti-capitalism movements reflects the belief that the capitalism is the culprit of the political monopolization and/or the vice versa. This resulted in a nation-wide confrontation among the different groups, which continued to reoccur at least over past ten years since before the coup d’etat of 2006 until the present time. Since 2005 when the Thai Rak Thai political party won the general elections, with the large majority of supporting votes in the parliament, there has been an increasing fear that the country will be led to destruction. There were major coups in 2006 and 2014, bringing back Thailand to the basics of the traditional ways of governing and managing the country. This can be observed from the drafting of the new constitution, which reflects the preservation of the conservative administration for at least five or six years until 2021. How Thailand’s socio-politico economic climate will turn out in the future depends much on a few remaining factors, namely the maintenance and the exercise of the strength and authority of the current leaders, the economic and business sentiment of the country and its ability to adapt to the “New Normal” settings; and last but not least, the tolerance of the general public. In simplicity, the survival of the Thai people, similar to all human beings in the world, is subject to the four basic needs: food, pills and medical facilities, clothing and shelter. The rising costs of these factors, while the general 20 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 income of the majority of the population does not catch up with the rising costs, inevitably causes hardship in everyday living. To put it simply in layman’s observation, houses lower than five million Baht is harder to find in Bangkok these days; even a small townhouse costs two to four million Baht. Small sized studios of twenty to thirty square meters in the outskirts of Bangkok cost over 1 million Baht. The price of food, beverages, and medicine has doubled within the past ten years, in spite to the officially announced low inflation rate. To this end, there are at least two key factors that determine the success and survival of the current administration. The first factor is the ability to reform the political system. Certainly, most of the Thais have not read the constitution. They also have no knowledge of the complicated legal system that seems irrelevant to their lives. Their more urgent concern is about daily living, wishing and praying to have a better life with enough food to eat, being able to send their children for good education, being able to take care of themselves and family in times of illness. All in all, they dream of a more dignified life in the future, whether being realistic or not. Reformers must take into account these basic factors into their constitutional drafting, and minimize all the other factors that are irrelevant to the beneficial causes of the people and the country. The second factor is the speeding of the development of the nation’s infrastructure. Thailand must accelerate its communication and transportation infrastructure projects. In fact, Thailand has initiated these types of projects several times before, such as the deep-sea port in Chabang district, petrochemical factories, oil refineries, or the mass transit system, and Suvarnabhumi airport. Thailand has large foreign currency reserve, a strong monetary system, and skilled labor force with the potential to develop further. Financial and economic advisors can provide appropriate guidance and 21 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 recommendations to the administration so that they can command the rapid acceleration of these development projects, which on the whole, will benefit the Thai population. Given the existing situation, the current administration should utilize this opportunity to hasten the progress of these infrastructure projects as in the reigning period of General Prem Tinsulanond three decades ago. If we consider Thailand as a state under the current type of administration and situation, the country is not without an experience. Thailand had undergone this similar situation for about 84 years, almost a century, after moving from absolute to constitutional monarchy. We already have had 19 constitutions and dozens of coup d’états. Nevertheless, Thailand has been able to develop considerably in the Southeast Asia region. The success of Thailand’s progress and development owes to the visionary leaders, strong and tolerant citizens, and assistance from ally countries. Whatever the governing system is, with less self-interested administration, if the citizens were able to unite in solidarity, Thailand will be able to steadily and sustainably progress in the future. It all depends on the Thai people to choose their path.
22 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
23 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Property Tax in Thailand: An Assessment and Policy Implications ∗
Duangmanee Laovakul Assistant Professor Faculty of Economics Thammasat University Bangkok, Thailand [email protected]
∗ Some findings of this article were publicly released in the presentation (and subsequent work) titled “Land and Inheritance taxes: Who own, who pay and who get benefit?” given by the author during the Thammasat Economic Focus No.2 held at the Faculty of Economics, Thammasat University, Bangkok, on December 1, 2014. 24 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
ABSTRACT This paper explores the ways in which the proposed new Land and Building Tax bill could be used to increase local government revenue and reduce wealth inequality in Thailand while rationalizing the current system of land taxes. After comparing the current system to the new proposed system, it finds that the new bill would be fairer, as it would be a more reasonable tax rate, and more broadly (and fairly) collected, and would do so based on current land values, not the values calculated in 1981. Additionally, by having the tax collected and used at a local level, it would promote fiscal decentralization and local governmental accountability.
Keywords: Land and Building Tax, inequality, fiscal decentralization, local government
JEL Classification: H20, H41, H70
25 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
1. Introduction Even though Thailand’s economy and society have been developing for many decades, Thailand still faces inequality problems, including economic, societal and political inequalities. Fiscal policy is one of the tools for alleviating such inequality. The government can implement fiscal policies using both tax and expenditure policies. This article focuses on tax policies in the context of property taxes (i.e. Land and building taxes). Normally, there are 3 types of tax bases; income base, consumption base and property base. Generally, both developed and developing countries impose a mix of taxes on these 3 tax bases. In the case of Thailand, the government primarily imposes taxes mainly on the income base (such as personal income tax and corporate income tax ( and consumption base (such as value added tax and excise tax). We do not really cover our property base. Currently, the only significant property taxes are the Inheritance tax (which was recently introduced in February 2016), the Local development tax and the Building and land taxes which have a lot of problems and tax loopholes. The Local development tax and the Building and land tax are revenues which are collected by the local governments as their own source of revenue. The share of locally levied taxes is very low (around 10% of all local government revenue) since 1999 (see Figure 1). The Local development tax and the Building and land tax do not significantly contribute to local government revenue. This has strong implications for inequality measures, as the study of land distribution in Thailand shows that Thailand’s distribution of land holdings is highly concentrated (Laovakul, 2013).
26 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
2016 -
the the Local Government Organization Committee Figure 1: Structure of Local Government Revenue: 1999 Revenue: Government of Local 1: Structure Figure Office of the Decentralization to Source:
27 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Property taxes can be one of the important instruments to alleviate the inequality in the society, as well as being a good source of local revenue. Thus, any reforms in Thailand’s tax system should include reforms to property tax. This article emphasizes on a proposal of Land and building tax bill which will be able to increase local government tax revenue and can be an instrument to reduce the inequality in Thailand.
2. Theories of property taxes In constructing a theory of property taxes, it is important to distinguish between residential property taxes, which economists generally consider to be a useful form of taxation for certain purposes, and non-residential (commercial) property taxes, which are more complex. In both cases, the advantages and disadvantages of each tax are dependent on several factors, such as income levels and inequality levels, the uses of the tax, the existence of competing jurisdictions that respond to taxpayers by tailoring spending and tax levels to local residents, who are free to move to other areas with a differing mix 1 . Put simply, while a properly designed and administered property tax can bring in revenue at low administrative cost with minimal evasion, the context matters. A residential property tax has several advantages over other taxes. The primary benefit is that the level of this tax can be easily linked to the quantity and quality of the public goods and services being provided by the local government. So taxes paid on the residential property to fund something local, such as a school, are clearly connected to the service being provided. If the local school operates well, property values go up – which benefit the property owners far more than the 1- 5% increase in their taxes. And they get a better school, with
1 See details in Slack (2010), 1-4. 28 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 the obvious benefits that entail. Conversely, if taxes go up and schools deteriorate in quality, local voters know whom to blame. Finally, residential property taxes are very hard to avoid, as long as the assessed value of the property is defined consistently across the district, it is clear and fair, and it is extremely difficult for people to hide their land or houses. Thus, they are administratively easy to implement. For these benefits to happen, three conditions must be met. Firstly, the property tax must be assessed at a local level, and the money must be administered and spent at the local level. Secondly, the local governments must be responsive to their local citizens. Higher taxes will only be tolerated to the extent that they are linked to better services. This, of course, implies that the local government must not only have the responsibility to provide the goods, but it must also have the power to do so. Finally, it is important that each local government be given the discretion not just to administer the programs, but also to do so in different ways. Therefore, different localities can offer different packages of goods to citizens, at different overall price levels, and the citizens in turn can either collectively reject the deals through voting when they do not like the package, or they can individually reject (or approve) of the deal by moving out of (or into) those localities that they feel strongly about. Even if all of the above are true, there are still some unavoidable costs associated with a personal property tax. One is that the tax incidence may be such that much of the costs are pushed onto others. A second consideration is that local residents may not be very sensitive to property taxes and service benefits, and thus will tolerate bad outcomes for long periods of time. A third issue is that local property taxes are highly visible. They are typically collected once a year, and there is no withholding on them, you cannot hide them from the voters. Finally, no matter how small a property tax is, at 29 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 the margin it will distort the housing market in such a way that smaller houses, fewer land improvements, and lesser value- enhancing renovation will occur. While the above considerations suggest some difficulties with residential property taxes, when they are properly administered they are still, on balance, the best option and seem to offer real advantages over other taxes that could be levied. Local government, funded by local taxes will be much more accountable to local taxpayers than would be the case if they paid a higher national valued added tax (VAT), which went to the central government, which then got distributed back to the locality which is now accountable to the central government, as opposed to the local voters. Local services are much clearer to local communities than what is going on far away, and a reliance on a very visible tax serves as a natural check on politicians. Higher taxes can be collected if and only if the local government can show they are delivering services worth the money. And taxpayers will recoup at least some of the taxes, if their property values go up. All taxes create distortions, administrative and political costs, and opportunities for mismanagement and corruption, but local property taxes strongly coupled to independent local governments seem to be a good way to minimize these problems while still delivering effective local services. A tax on non-residential property , (hereafter referred to as a ‘ commercial property tax’ ), while superficially similar to a residential property tax, is much less clear cut of an effective system, for several reasons. Businesses are usually more mobile than residents, and thus are more sensitive to taxes than consumers. Therefore, we would expect them to quickly move as the taxes go up, unless they can simply pass the tax on to the consumer. Hence, business taxes are much more likely to either not be paid, or to be paid indirectly by residents in their role as local consumers. Secondly, commercial property 30 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 generally consumes less public goods than local residents do, especially in developed countries where they often provide their own garbage services, security, and sewage, and they do not consume welfare services, healthcare or schooling. As such, the link between who pays for the services and who benefits from them is not clear cut. This problem is magnified by the fact that there are almost always fewer commercial enterprises in a given locality than residential properties, so the commercial properties may be under-represented in the political process. It will always be tempting for local politicians to try and tax the local commercial properties to pay for public services. If the tax can be shifted to local consumers or out of district holders of the capital or consumers of the good, then local goods are being paid for by non-local people, or indirectly by locals who do not know they are paying it. If the tax burden cannot be paid, the business leaves, and taxes are not paid 2. In other words, the tight link between who pays tax, and who benefits from the goods it produces is much less tight when talking about commercial property taxes than when talking about residential property taxes. This is not to say that commercial property taxes cannot be or should not be assessed. But the economic argument for doing so is somewhat weaker, especially when one adds in that local businesses generally consume less of the public services that the local government provides. 3. Current Property Taxes in Thailand Besides the recently implemented inheritance tax, the current property taxes in Thailand are the Building and land
2 Valuable public goods (such as parking services in the mall or private security) provided by the commercial enterprise are also discontinued. 31 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 tax and the Local development tax. These 2 types of taxes have a lot of tax loopholes and cannot create revenue for the local governments as they should. Currently, the Local development tax is collected based on assessed values of the land that is far below the actual market value of the land and with many exemptions. Thus, the cost of holding land and buildings, even if they are being used unproductively or not used at all, is very low. This leads to inefficient land and building usage, a lot of vacant land and high concentration of land holding (see details in section 4). The draft of the Land and building tax bill is an important bill which will create a real property tax bill in Thailand. This new tax will benefit citizens, the state as well as the local governments. 3.1 The Main Contents of the Building and Land Tax Bill and the Local Development Tax Bill The Building and land tax bill was issued in 1932, which levies a tax on buildings or construction and the land adjacent to those buildings or construction. The Local development tax bill was issued in 1965, which levies taxes on land owned by the individuals or groups who have possessory right over state land. The main contents of the Building and land tax bill and the Local development tax bill are shown in Table 1. Table 1 The Main Contents of the Building and Land Tax Bill and the Local Development Tax Bill Building and land Local development tax tax 1. Property • Building used for • Land for rental, commercial agricultural and and industrial residential purposes. purposes.
32 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
2. Tax base • Rental value of • The assessed value buildings and land of land during including the value 1978 – 1981 of machine. 3. Tax rate • 12.5% of the rental • Progressive tax value rate for lower assessed value of land and then regressive for high assessed value of land. 4. Exemption • Exemption for • Tax deduction /Deduction residential buildings based on land area resided by owners (50 square wahs – and vacant 5 rais) which are buildings. determined by each jurisdiction. • Land used for Herbaceous plants grown by owner: 5 baht per rai. • Land used for herbaceous plants grown by renter: half rate Source: Fiscal Policy Office 3.2 Problems and Tax Loopholes of the Building and Land Tax and the Local Development Tax Problems and tax loopholes of the Building and land tax are as follows 3 (see Table 2).
3 Laovakul (2012); Summary and Analysis of Draft Land and Building Tax Bill, 5. 33 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
1. The tax base is the annual rental value and this rental income is also counted in personal income tax base. Thus, Building and land tax will duplicate the personal income tax. In other words, citizens have to pay double taxes. In general, the property tax base should be the assessment or the market value of land and buildings. 2. The local governments receive a tiny amount of the Building and land tax revenue due to the following reasons. • The tax exemption on land and buildings which the owners use as their own residence. This leads to a narrow tax base and also creates difficulties in trying to separate between the usage of land and buildings for residential purpose or commercial purpose (i.e. for rent). • There is no standard “annual rental value” for tax base. Thus, the tax base depends on the reported rental value from the owners. In the case of using their own buildings for commercial purposes, there is no market rental value to calculate taxes. The tax base is then judged based on the discretion of the officers with opportunities for corruption that entails. • The government does not have the monitoring and enforcement measures it needs to scrutinize the real tax payers. Moreover, the fees and penalty assessed for tax evasion are also low, and do not serve as a meaningful deterrent. 3. There is a cost to prove that the buildings are really vacant as reported or not. 4. The tax rate of the Building and land tax is high (12.5%) which creates high tax burden on entrepreneurs. This will be an incentive for tax evasion.
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Problems and tax loopholes of the Local development tax are as follows 4 (see Table 2).
1. Residential buildings are exempted from Local development tax which benefits the wealthier who own big piece of land and houses. 2. The current tax base is the assessed value of land during 1978 – 1981 which is very obsolete and has never been updated since then. The land is undervalued, and local governments will get less tax revenue. With low tax cost, rich people tend to buy more land for speculation. 3. The tax base is narrow because of varieties of tax exemptions and deductions as mentioned in Table 1. 4. Local development tax has a regressive tax structure. The tax burden falls disproportionally on lower value of land. Moreover, the tax rate is low when compared to that of aboard. Table 2 Tax Loopholes and Problems of the Building and land tax and the Local development tax Building and land tax Local development tax 1. Tax base • The duplication • Tax base covers only between the Building value of land not and land tax and building. personal income tax • The assessed value of which both imposed land is from the year on the same tax base. 1978 – 1981 and has • Corruption is easy to not been updated since happen because the then. The local annual rental value governments get less depends on the tax revenue because officers’ discretion. the assessed value of • For industrial land is less than its purpose, the value of actual value. People the machine on that have an incentive to
4 ibid., 6. 35 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
piece of land is also buy land for included in the tax speculation because of base. the low cost of land holding. 2. Tax rate • The entrepreneurs • The regressive tax rate have an incentive to ∑ When the assessed evade taxes because value of land is less of the high tax rate. than 30,000 baht per rai, the average tax rate is 0.5%. ∑ When the assessed value of land is more than 30,000 baht per rai, the tax rate is 0.25%. • The tax rate is very low compared to that in foreign countries. 3. Tax • No tax on residential • Tax base is narrow exemption land and buildings because of tax and tax which the owners exemptions and deduction reside in. Thus, the tax deductions and varies base is narrow. This across locality. exemption is a loophole for tax avoidance. • There is cost of determining which land and buildings are really vacant and subject to tax exemption. Source: Fiscal Policy Office
36 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
4. Land Holding Concentration in Thailand The total area of Thailand is 320.70 million rai (51.2 million hectare) 5 which composes of 130.74 6 million rai (40.88%) under the Department of lands, 34.76 million rai (10.87%) under Agricultural land reform office, 144.51 million rai (45.19%) as natural forest reserve, and 9.78 million rai (3.06%) as state lands (see Table 3). The regular land title, known as ‘ chanot ’ (meaning titled land ) covers 95 million rai (14.4 million hectare). Based on Laovakul (2013), there were 15,900,047 people who own titled land in 2012. The average owner holds 5 rais 3 ngans and 87 square wahs of land. There are 15,687,551 individuals )98.7%) who own land under personal ownership. The average individual owner holds 5 rais 2 ngans and 76 square wahs. There are 212,496 juristic persons (1.3%) own land under corporate ownership. The average corporate owner holds 26 rais 1 ngan and 85 square wahs. Land holding concentration in Thai society is very high. The Gini coefficients are 0.886, 0.881 and 0.953 for overall land holding, individual personal land holding and juristic personal land holding respectively (see Table 4) 7. The largest area which is held by an individual land owner is 631,263 rais.
5 1 rai = 0.16 hectare, 1 ngan = 0.04 hectare and 1 square wah = 0.0004 hectare 6 Regular land titles and temporary or special titles. 7 The calculation does not include people who do not own any land. 37 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
38 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
When classifying land holding in Thailand into deciles (see Figure 2), the result shows that the tenth decile (the largest holders) holds more than 60 percent of the total titled land, the remaining 90 percent of land owners holds less than 40 percent of the total titled land. Moreover, the top 50 titled land owners hold 6.4 percent of the total. The top one percent (the largest holders) holds 23.74 percent of the total titled land or one fourth of the total titled land (see Table 5). This data reflects the high concentration of land holding in Thailand.
Figure 2: Titled Land Holding in Thailand by Deciles: 2012 70 61.5 60
50
40
30 18.4 20 Percent ofTotal 10.0 10 5.4 0.1 0.2 0.3 0.6 1.1 2.4 0 1 2 3 4 5 6 7 8 910 Decile Source: Laovakul (2013)
39 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Table 5 Top One Percent Titled Land Holding in Thailand: 2012 Number of Land Area Owners Square Rai Ngan Wah Top 1% 159,007 22,522,047 3 53 Percent 1 23.74 Total 15,900,047 94,868,613 2 39 Source: Laovakul (2014 )
Around 50 percent of titled land owners (7,979,128 owners) hold no more than 1 rai. Moreover, 72.08 percent of titled land owners (1,461,334 owners( hold no more than 5 rais, which means most people in Thailand, who own land, hold 5 or lesser rai of land.
5. The Main Contents of the Draft Land and Building Tax Bill The Building and land tax bill and the Local development tax bill will be terminated after implementing the Land and building tax bill. The Land and building tax should benefit taxpayers who will get benefits from the public services which are provided by local governments (benefit principle). The justification of the new Land and building tax bill are as follows:
1. It is a fair tax with a reasonable rate. Local governments can use this tax revenue to locally develop their jurisdictions. 2. It should enhance effective land usage.
40 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
3. The local government should have enough revenue to provide good quality public services. 4. It links local revenue to local expenditures, which will create accountability with the local administrators.
The main contents of the draft Land and building tax bill can be summarized as follows 8: 1. Tax payers are the owners of land and building and people who have possessory right over state land and building. 2. The local governments are the tax collectors and tax revenue belongs to the local governments. 3. The tax base is the assessed value of land, buildings and apartments. 4. There are 3 ceiling tax rates categorized by land and building usage (agricultural purposes, residential purposes and other purposes such as for commercial endeavors). Agricultural land gets the lowest rate while the other purposes are taxed at a higher rate. The examples of the proposed ceiling tax rates are shown in Table 6. 5. The vacant or underutilized land will be taxed at a higher rate and the rate will be increased according to the number of years the land is not utilized. The examples of the proposed ceiling tax rates shown in Table 6.
8 The main contents from draft Land and building tax bill was passed the office of the council of state, No. 194/2554 and the revised versions after that. The main contents in different versions of the bill are the same but there are some changes in details. Since it is still a draft bill, we can see the new revised version after one another. 41 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Table 6 Examples of the Proposed Ceiling Tax Rates Agricultural Residential Other Vacant Purpose Purpose Purposes Land 0.05 0.1 0.5 2 1 0.1 2 2 0.5 1 4 4 0.25 0.5 2 2 0.2 0.5 2 5 Source: Draft Land and building tax bill (2011), Matichon Online (2012), Leenothai (2014), Bangkokbiznews (2015) and the Ministry of Finance (2016).
6. Home owners and farmers may get tax deductions or exemptions. Examples of the proposals for tax burden relief on home owners and farmers are as follows. • Allowing tax exemption for home owners by area such as those whose land is not more than 50 square wahs or those apartment owners with an area less than 50 square meters are exempted from the tax. • Home owners get tax exemption by the value of land and buildings as follows: 1. The owners of the property with less than some certain amount such as 3 million baht do not have to pay tax. 2. If the property value is less than 2 million baht, the owners pay 25% of their tax burden. If the property value is between 2 – 4 million baht, the owners pay 50% of their tax burden. If the property value is
42 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
more than 4 million baht, there is no tax deduction 9. 3. 50% tax deduction from its tax base (maximum 1 million baht). • The tax base of agricultural and residential purposes in the first 3 years counts only the land value (excluding building value). • For agricultural purpose, if the land value is less than 1.5 million baht, the owners will be exempted from tax. • Allow tax exemption for property used for agricultural and residential purposes (applicable only to owner-occupied residences) with a value of less than 50 million baht. 7. The local governments have the authority to increase their tax rates up to the ceiling rates and will be able to reduce the amount of tax exemptions and tax deductions lower than the criteria which are stated in the bill 10 . 8. From the most recent draft Land and building tax bill which the cabinet approved on June 7, 2016, the actual tax rates for each categories are shown in Table 7.
9 Retrieved from http://www.bangkokbiznews.com/news/detail/660180. 10 In order to do so, that means the local governments need to get the approval of the citizens in their jurisdictions. 43 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
44 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Table 8 The Main Contents of the Draft Land and Building Tax Bill Tax Payer • The owners of land and buildings. • The citizens with possessory right over state owned land and buildings. Tax Base • The value of property (land, buildings and apartments) calculated from the assessed value of land, buildings and apartments. • For industrial purpose, exclude the value of the machines in the tax base. Ceiling Tax Agricultural purpose < Residential purpose < Rate Other purposes Vacant Land The tax rate is higher than other categories and or will be increased according to the number of Underutilized years for which land is not utilized. Land The Actual Determined by a committee and revised every Tax Rate 4 years. Source: Summarized from the draft Land and building tax bill (2011) and its proposals thereafter.
6. Why the Land and Building Tax Should Be Imposed in Thailand? If the Land and building tax is imposed, there are some advantages over the earlier bills, such as:
1. Imposing Land and building tax is an important tax reform which can reduce the inequality in the society since the tax base is based on wealth. This type of tax follows “the ability to pay principle” which implies that citizens who own a higher value of property will pay more taxes than those who own a lesser value of property.
45 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
2. The assessed value of the property is the tax base so the officers do not have to use their discretionary decision making. This should reduce corruption and the use of tax loopholes. 3. The Land and building tax has a wide tax base which covers most property owners resulting in an increase in local tax revenue. The local tax revenue should be increased by at least 30,000 – 40,000 million baht. The actual tax revenue will increase depending on the final size of tax exemptions and tax deductions. Recently, the locally levied tax (the Building and land tax and the Local development tax) contributed less than 10% of the local government’s revenue (see Table 9). The proportion of Thai property tax to gross domestic product is just 0.2%, which is very small compared to the other countries in the world (see Figure 3). 4. The tax rate is flat, so it will not be a regressive rate the way Local development tax is. 5. Locally levied taxes such as the Land and building tax supports fiscal decentralization. The local governments will have their own source of revenue to provide social services to meet the needs of citizens in their jurisdictions. 6. The Land and building tax will promote accountability in the jurisdictions. The citizens have to pay taxes each year so they will monitor their local government’s administrative performance to make sure that it is worth their money.
46 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
47 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Compared to Thailand to Compared The Proportion of Property Tax The Gross Abroadto ofProduct Proportion Domestic Property 3 Figure
Source: Norregaard (2013). (2013). Norregaard Source: 48 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
7. Local governments can impose a higher tax rate on a vacant and underutilized land. This will increase the cost of holding land to owners who do not use their land productively. Thus, they will need to either utilize their land to earn some income, or sell it to somebody who can fruitfully utilize it. Land should be used more efficiently. 8. Land holding cost to land speculators is also increased from imposing Land and building tax. Land speculation will decrease depending on how close are the tax rate and the percentage change in land price each year. Table 10 shows that the land price in 2016- 2019 will increase by an estimated 7% over 2012- 2015 prices. If the maximum Land and building tax rate is 3%, it is still lower than past increases in land price. The Land and building tax will probably not cause significant reduction in the concentration of land holding in the near future, but this is a good start.
Table 10 The Comparison of Percentage Change in the Assessed Value of Land between 2012 – 2015 and 2016 - 2019 The Percentage Change in the Area Assessed Land Value per Year (%/year) Whole country 6.93 Bangkok 3.95 The other provinces 6.97 Surrounding Bangkok 4.74 Central 5.70 North 9.33 East 5.75 Northeast 8.38 South 5.26 West 9.90 Source: The Treasury Department 49 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
7. Recommendation for Property Tax Reform in Thailand Based on the above information about Thailand’s current property tax and the concentration of land holding, my recommendations for property tax reform are as follows 11 :
1. The government and the legislative branch should pay more attention to property tax reform proposal and pass the tax bill. 2. Tax exemptions and tax deductions should be as small as possible, to protect only the truly poor, in order to broaden the base as much as possible and to avoid tax loopholes in the future. 3. One way to reduce tax burden for home owners or farmers would be for the government to allow tax payers to deduct property taxes that they pay from their personal income tax. There should be a ceiling amount for tax deductions. For instance, not more than 20,000 baht per year. 4. Vacant land possessed by government offices should be returned to the state so that such land can be distributed or leased to the needy who have no land for cultivation or shelter. 5. Even though some pieces of property are exempted from tax payment, taxes should still be estimated and shown to the public. It is only fair that all know the magnitude of tax exemption. 6. The local government should have some measures to monitor the usage of land. Otherwise, tax evasion will become an issue.
11 Laovakul (2014), Laovakul (2016a) and Laovakul (2016b). 50 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
7. The central government should support the assessed land value by pieces which will be an important factor to calculate tax base for Land and Building Tax. 8. The local governments need to communicate with their citizens and explain to them how important Land and building tax is and what benefits they can get by paying taxes. 9. If we would like to reduce the inequality of land holding, the flat tax rate may not be sufficient as a tool to alleviate land concentration in Thailand. The government may have to implement one additional tool which is a progressive tax rate.
51 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
References Laovakul, D. (2012). Summary and Analysis of Draft Land and Building Tax Bill. Supported by Legislative Process Development for Supporting People Participation in Thailand Project, in Thai. Laovakul, D. (2013). The Concentration of Wealth in Thai Society. In Towards a More Equitable Thailand: A Study of Wealth, Power and Reform Project. Supported by Thailand Research Fund, Office of the Higher Education Commission and Chulalongkorn University, conducted by Pasuk Phongpaichit, in Thai. Laovakul, D. (2014). Land and Inheritance taxes: Who own, who pay and who benefit? Thammasat Economic Focus, No. 2, available at http://www.tef.econ.tu.ac.th/wp- content/uploads/2015/03/02_TEF-Final-paper.pdf, in Thai. Laovakul, D. (2016a). Concentration of Land and Other Wealth in Thailand. in Unequal Thailand: Aspects of Wealth and Power. Chapter 2. Pasuk Phongpaichit and Chris Baker (Eds), National University of Singapore Press. Laovakul, D. (2016b). The Model for Improving Land Tax to Promote Land Distribution in Thailand. Supported by the Thailand Research Fund, in Thai. Leenothai, S. (2014). Summary of the Main Contents of the Draft Land and Building Tax Bill or the Property Tax. Presented at a Seminar on “The Land and Building Tax or the Property Tax for Fairness and Reducing the Inequality” at Khonkaen University,December 12, 2014, in Thai.
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Norregaard, J. (2013). Taxing Immovable Property Revenue Potential and Implementation Challenges. IMF Working Paper. Office of the Council of State. Draft Land and Building Tax Bill, No. 194/2554, in Thai. Slack, E. (2010). The Property Tax … in Theory and Practice. IMFG Working Paper 02. Bangkokbiznews Online (2015). The Minister of Finance Prepares to Submit the Draft Land and Building Tax Bill to the Cabinet. (2015, August 9). Retrieved from http://www.bangkokbiznews.com/news/detail/660180, in Thai. Matichon Online (2012). The Ministry of Finance Pushes Forward the Draft Land and Building Tax Bill, Revises 4 Issues and Increases the Tax Ceiling Rates. (2012, September 11). Retrieved from http://www.matichon.co.th/news_detail.php?newsid=13 47341486, in Thai. Ministry of Finance (2016). Draft Land and Building Tax B.E…… The Ministry of Finance Press Release. (2016, June 7). Retrieved from http://www.fpo.go.th/FPO/index2.php?mod=Content&f ile=contentview&contentID=CNT0015818&categoryI D=CAT0000153, in Thai.
53 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Market Expansion, Political Relationship and Geographical Inequality in the Early Rattanakosin Siam: A Theoretical Perspective *
Pornthep Benyaapikul Assistant Professor Faculty of Economics Thammasat University Bangkok, Thailand [email protected]
* This research was supported by the Thailand Research Fund (TRF) as a part of TRF Senior Research Scholar project: “Spatial Dynamics and the Persistence of Inequality in Thailand”, grant no. RT558005. This paper benefited greatly from conversations with Professor Arayah Preechametta, the project leader. Valuable comments and suggestions from Professor Pasuk Phongpaichit, Professor Mingsarn Kaosa-ard, Thorn Pitidol and workshop participants at the faculty of Economics, Thammasat University are gratefully acknowledged. 54 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
ABSTRACT This paper provides a simple theoretical model that explains a mechanism for which market economy might proliferate through various geographical locations in the early Rattanakosin Siam and its implication on locational inequality. The proliferation of market economy is often facilitated by a widespread network of merchants and the elite’s profit- maximisation trade incentives. The degree of market expansion in each city depends on elite’s benefits from the market and geographical location of the city. The results suggest four factors that contribute to the level of inequality both within and between cities: social structure, geographical location, individual’s connection with powerful elites and worker’s ability.
Keywords: Geography, inequality, market structure, institutional development, Thailand
JEL Classification: D4, D63, N25, R3
55 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
1. Introduction Exchange is universal. People have traded things for thousands of years: evidence of exchanged artefacts such as shells and other goods over long distances dates back to before any written history (Pomeranz & Topik, 2006). As argued by Adam Smith in 1776, the “ propensity to truck, barter, and exchange ” was inherent in human nature. One of the central questions about the foundation of market economy in the pre-modern era concerns the role of social structure and geographical location in the transition process from subsistence economy. Historical evidence suggests that social structure played an important role in trade expansion in the economy. The literature identified the protection of property rights and contract enforceability as two important institutional foundations necessary for the evolution of market economy. 1 In the context of pre-modern societies, much of economic transaction is based on coercive relationship between workers/merchants and a ruler/elite who controls specific territory or trade routes and is the monopoly supplier of legitimate coercion. Institutional arrangements that align the interests of the two groups are needed to capture larger benefits from trade (Bates, 2001; Greif, 2008). For example, in Medieval Europe, before a trading centre was established trade and commerce was obstructed by little security on trade routes and the system of fines and tolls which each landowner collected before letting merchandise pass through his domains. Itinerant traders, or merchant guilds in the “Commercial Revolution of the Middle Ages Europe” from the tenth to the eighteenth centuries, that dominated long-
1 The commitment problem occurred when the ruler, after pledging their protection for traders, have an incentive to renege on his promise by using coercive power to abuse their property rights once trade was established. See Greif (2006) for a survey of this literature. 56 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 distance commerce was the most important institution that facilitated the expansion of trade. Merchant guilds emerged as an efficient institution to allow rulers of trade centres to commit to the security of alien merchants (Greif et al., 1994; Hicks, 1969) contributing to the growth of long-distance trade (Ogilvie, 2011). 2 There have been theoretical explanations on the function of merchant networks in the market economy transition. For example, Greif et al. (1994) highlights that the merchant network as an institution for communication and coordination was important for trade expansion as its helped solve the problem of commercial insecurity. More recent literature focuses on a key function of the merchant network (or guilds) in facilitating collusion between merchants and city rulers in order to restrict trade and maximise joint rent (Dessi & Ogilvie, 2004; Dessi & Piccolo, 2015). In early Rattanakosin Siam (1782-1855), the patron-client relationship between the princes or the noble aristocrat class (munnai ) and the commoner ( phrai ) class was the important institutional foundation of legitimate coercive power. 3 There are two basic kinds of phrai : the phrai som belonged to the nobles or the prince and free from government corvée labour, the phrai luang belonged to the king and were subject to government corvée labour for 4 months every year.
2 For an extensive survey and discussion of the role of guilds as an economic institution, see Ogilvie (2014). 3 Scott (1972) defines patron-client relationship as an exchange relationship between roles . . . involving a largely instrumental friendship in which an individual of higher socioeconomic status (patron) uses his own influence and resources to provide protection or benefits, or both, for a person of lower status (client) who, for his part, reciprocates by offering general support and assistance, including personal services, to the patron. 57 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
Commoners must be registered under a prince or an aristocrat, from whom they are provided with aid, protection from government exaction (Rabibhadana, 1969) and social insurance of a powerful leader (Scott &Kerkvliet, 1973). A noble and prince had certain power over his commoners in the form of corvée labour and movement restriction; they were not allowed to migrate between towns or leaders. This was because of the shortage of labour during this period, thus controlling labour was an essential key to power. Territorial control was not important. Corvée labour service and movement restriction limit workers market access. Trading and commerce between towns in the kingdom were operated by the widespread network of Chinese merchants that established patron-client relationships with the nobles and princes of small towns (Eoseewong, 2012). Trading activities were concentrated among these elites and Chinese merchants while foreign trade, which drove domestic trade, was monopolised by the king. Even though an elite can force his commoners to work for him, corvée labour suffers from the moral hazard problem and is productively inefficient. Workers have no incentive to exert effort and are likely to slack (Nartsupha & Manarangsarn,1984; Preechametta, 2014). As trading activities increase, workers have better work opportunity and return from the market. It became more profitable for the elites to allow commoners to avoid corvée by paying an exemption fee. 4 However, granting workers market access was implemented in a limited and controlled manner. The phrai system was not entirely abolished as corvée labour still benefits the elites (Eoseewong, 2012).
4 Historical evidence shows that during the King Rama III period, more and more workers would want to pay fee to avoid corvée burden (Hong, 1981 cited in Eoseewong, 2012) 58 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016
This study aims to provide game-theoretical foundation that explains a mechanism for which market economy can proliferate through various geographical locations within a state and how factors such as social structure, geographical location and labour productivity gave rise to inequality in a pre-modern society like early Rattanakosin Siam. To formulate a simple model, it is assumed that allocation of resources is controlled by the elites. Workers’ participation in the market is jointly determined by elite’s decision to grant market access and the network connection with the elite that the workers are invested in. The paper is organised as follows: Section 2 sets up and describes the basic model. Section 3 characterises equilibrium of the model and discusses comparative static results. Finally, Section 4 concludes.
2. The Model In this section, we describe the environment. We start with the social structure that is characterised by the coercive relationship between an elite and workers in each city. We then describe the structure of the game before analysing equilibrium in the next section.
2.1 Social Structure A kingdom is populated by localities or cities. The cities are indexed by > 0which also represents a rank of a city’s distance ∈from {1,2,..., } the capital in an ascending order. In each city, there is a continuum of identical workers of mass equal one with Von-Neumann-Morgenstern-type utility function. Workers’ output can be high or low depending on the effort they put on work. Each worker has potential productivity of per unit of time. It is assumed that is privately 1 known + ≥ only 1 by worker but it is common 59 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 knowledge that is drawn uniformly from interval . When a worker chooses effort level at private[0,1] cost , output is realised with probability ∈ [0,1] and with ( )probability 1 + . We assume that and that1 is strictly increasing,1 − strictly convex (0) and twice = 0 differentiable, (·) with derivative denoted by that also satisfies lim ( ) = .5 In any given period, all workers are forced to → spend a part of∞ their time working for the elite and, depending upon being selected (see Section 2.2 below), participate in the market. Each city is overseen by an elite whose powers have been delegated by the king. The elite can force workers to devote a fraction α of their time working for him. For now, we assume that is exogenously set by the king and, therefore, fixed. In return, workers receive constant wage . We assume that the elite can sell these output at price . It is straightforward to see that forced workers maximise their utility by choosing effort when working for the elite. = 0 2.2 Market economy Apart from coercive relationship between the elite and the workers, the cities may benefit from trade by visiting merchants. We assume that market activities are controlled by the elite. Workers can participate in the market only if the elite opens up the city for merchants to trade and allows workers to access the market. We also assume that merchants’ valuations for the product in city j are identical and can be given by where is the aggregate output = available ( , ) for trade, = ∑ is strictly + positive, decreasing in both and , and continuously (·) differentiable (in ) demand
5 This assumption follows Acemoglu and Wolitzky (2011) while Chwe (1990) assumed the effort cost to have form ( ) = (− log(1 − )). 60 Thammasat Review of Economic and Social Policy Volume 2, Number 1, January - June 2016 schedule. This captures the idea that greater output will reduce price and demand for trade is lower in a more remote city. If no worker in city is allowed to participate in the market, the elite becomes a monopolist in which he sells his output at price