Tax Incidence and Poverty Reduction: Assessing the Effects of Taxes on Income Distribution in Thailand
Table of Contents
1. General Overview
2. Research Questions
2.1 Research Objectives
3. Methods for Calculating Tax Incidence
4. Empirical Results
4.1 Incomes Distribution by Income Classes
4.2 Expenditure by each income class in proportion
4.3 Distributional Effects of Taxes by income classes
4.4 Effective Tax Rate
4.5 Post-Tax Income Distribution
5. Policy Recommendations
This paper looks at the effects of taxes on income distribution in Thailand making use of the 2005 data from the Bureau of the Budget and other sources. We attempt to figure out if Thai tax system is pro poor or rich (i.e. progressive or regressive) among the various tax types on the five quintile income groups. This paper is used to ascertain which income group tend to pay more of their incomes as taxes. The paper also explores the relationship between tax incidence and poverty reduction on the one hand and indicators of access to education and health services and social outcomes on the other using simple measures of association. We conclude that based on the results of the tax system, the income distribution of Thai households became more equal on individual income tax, implying a gradual effort to bridge the income gap between the rich and the poor in Thailand. A pre-tax Gini coefficient of 0.3056 saw a marginal improvement, leading to a post-tax Gini coefficient of 0.2862 on post-tax (IIT), implying the situation on post-tax individual income shows an attempt by Thai government to have equality in individual incomes, and thereby bridging the income gaps. In general, the total post-tax coefficient ended at 0.3085 indicating, though efforts are being put in place by government to enhance the income situation of the poor, the effort according to our empirical results is marginal and have even worsened the income disparity situation by increasing income inequality to another level. The result confirms the distribution of income of Thai households became more unequal, and an indicative of a tax regime which is regressive at the end. We therefore make a number of policy recommendations on the ensuing situation.
Keywords : Tax System; Thailand; Progressivity; Regressive; Corporate Income tax; VAT; Individual income tax.
I am very grateful to Prof. Pornlapat Buracom, the lecturer for Fiscal and Monetary Policy Analysis and Management (DA 841), at the National Institute of Development Administration (NIDA). This research program would not have been possible without the well taught lectures and materials provided by Prof. Pornlapat Buracom, who doubles as the Director of International program at GSPA. The same appreciation goes to Prof. Suchitra, and Prof. Nuttakrit co-lecturers of Quantitative Analysis for the expert work done in exposing students to the intricacies of doing a good quantitative research with SPSS and Excel spreadsheet. This research program would not have also been possible without the contribution of my colleagues in class. To the Teaching Assistant, Mr. Rodwell Mzondi from Malawi, I say big thank you for the information and additional insight shed on the course. I also wish to acknowledge the endless efforts of the PhD administrative staffs of GSPA for their excellent administrative contributions to making this course a success.
1. General Overview
Every year, government prepares annual budget outlining governments’ plan with respect to how much it intends spending, where and how the revenue is to be generated from. However, the increasing welfare needs couple with the rising demand of employment, infrastructure provision among others have intensified governments’ responsibilities in the economy. Taxation is undoubtedly the most effective means of revenue generation. Tax revenue accounts for more than two-thirds of government annual revenue in most economies. To enhance balance of payment position of an economy, governments are encouraged to run a budget that is surplus rather than deficit, implying revenue should exceed expenditure. This is where taxation plays a critical role. Government has to devise several approaches in levying out the right tax to the right taxable group. Conversely, taxation or tax system in an economy at the same time has the clout to cause social instability, depending on the exact type of tax deployed by government. Some tax types will continue to worsen the plight of the poor and increase income inequality whereas others will otherwise try to bridge this gap, all depending on the right mixed of taxation used by government and what the intensions are.
Taxes can generally be classified into two: direct and indirect taxes. These classifications have been arrived at based on the ability of the tax payer to shift the tax burden to other people. If the burden of tax is more difficult to be shifted, it is called direct tax. On the other hand if the burden of tax can easily be shifted, it is called indirect tax. Two major steps are involved in the estimation of tax incidence. The first is to determine who is the bearer of the burden (burden shifting assumptions) and secondly, the allocation of the burden to households in different income classes.
Thailand, like most developing tend to collect only a few direct taxes to facilitate government’s expenditure. Individual income tax and corporate income tax are the most common direct taxes deployed. Thai government tends to rely heavily on indirect tax such as VAT, import-export tax and excise tax which causes inequality in income distribution. Tax accounts for over 14% of the gross domestic product in Thailand. Earlier research by Medhi Krongkaew (1979) and others on Thailand have shown this. In this assignment, we are capitalizing on the passage of time to re-determine the orientation of Thai tax system and its aftermath effect it has had on the income distribution between the poor and the rich and assess the nature and extent of income inequality.
 See Chalongphob et al (1988)