Ten Myths about the Relationship

between Taxes and Income Distribution

in ThailandProfessor Medhi

KrongkaewNACC Commissioner

Income Distribution

Income inequality as relative poverty

Theory of income distribution, s ources and causes of income i

nequality Various measures of income dis

tribution

Importance of Income Distribution Problems

• Thailand is one of the most unequal economy among countries of equal level of development

• Academic scholars and policy makers often do not take into consideration inequality issues when discussing development plans and policies

Robert McNamara, former President of the World Bank once said:

“When the highly privileged are few and the desparately poor are many…and when the gap between them is worsening rather than improving…it is onlya question of time before a decisive choice must be made between the political costs of reform and the political risks of rebellion”.

The Role of Taxes in Reducing Income

Inequality• Initial conditions matter most on the

existence and degree of inequality• Effects of taxes on the source

(earning) side vs the use (expenditure) side

• Absolute burden of tax vs. relative burden of tax

• Shifting of tax burden and tax elasticity

Myth no. 1: Income distribution is not

important as long as average income of the people keeps on rising• The truth is the assumption on the immutability of an increasing average income must be made, as well as the ceteris paribus assumption of all other changes;

• The political elements of income inequality are often unpredictable and difficult to control;

• Self interest of policy makers prevails in normal case.

Myth no. 2: Taxes should be as few and as low as possible to allow or enable the

taxpayers to have more freedom in their

participation of the economyThe truth is the existence and extent

of tax burden depends on the economic status or position of the state, and the state’s policy on how it wants to use the transfer of resources from the people.

Myth no. 3: Tax on income is bad as it

reduces work effortsThe truth is that income may not

necessarily or fully derived from work efforts but is influenced by many other extraneous factors such as social positions, and economic or political connections. In other words, the opposite may be true that if the rich income class are made to realise that they have to pay more taxes, they may work harder.

Myth no. 4: As a collerally to Myth no. 3, tax on consumption is

better because it affects the spenders

not the saversThe truth is that the starting income

inequality is so severe that additional tax burden on low income class may worsen the existing inequality even more

The consumption tax movement in developed economies is not a good example because of the difference in initial income distribution conditions

Myth no. 5: Progressive income tax is always

good for reducing income inequalityThe truth is that, in Thailand, progressive

income tax is hardly allowed to exert its full impacts on income sources. On the contrary, the rich in Thailand have often know how to avoid progressive income tax burden through various exemptions and exclusions. The state is often found guilty for supporting such tax avoidance.

What should be better than progressive income tax then?

Myth no. 6: Tax on wealth and property will drive the wealth

and property owners to move their money

elsewhere The truth is that Thailand is at present one of the best wealth and property tax havens in the modern world. No where could these wealth and property owners profitably move their money. Besides the transaction costs of doing so could be large.

Myth no. 7: Inheritance tax is unfair if the inherited money is

earned fairlyThe truth is that inheritance tax is not levied on the one who earns it but on the one who receives it. In a system or society where everyone is fairly equal, inheritance tax may not be necessary because state revenue can be garnered from other sources. However, in a very unequal society, inherited wealth can be a major source of inequality if such wealth is left untaxed.

Myth no. 8: Listed companies should be levied low corporate

income tax in order to stimulate capital market activitiesThe truth is that these listed companies are

owned by rich (or relatively well off) stock holders. These people contribute, in large measure, to the existing income inequality. There is no reason to give special tax preference to these listed companies as long as the average corporate tax rate does not differ much from that in other countries.

Myth no. 9: Capital gains should continue to be tax-free to help

promote capital marketThe truth is that capital gains are one of the most income disequalising factors in the Thai income distribution picture. It is morally indefensible to argue for the exemption of capital gains from tax any longer. Future support of this tax exemption may be subject to investigation of policy corruption.

Myth no. 10: Fiscal decentralisation is the

one of the best development policies in

Thailand at presentThe truth is that local government finance in Thailand at present is one of the most corrupt practices in the current public finance setting. This is a manifestation of the gap between political idealism and economic functionalism.