Forging grand societal compromise: Social Democrat case for reducing wealth inequality

With a new inheritance tax introduced last year and the Land and Building Tax Law coming into effect on January 1st, 2019, Thailand is taking steps towards addressing its reputation as the third worst country globally for wealth inequality. Still, the amount of additional income that is being raised is small, and the government’s position is that expanding the amount of state income obtained via more progressive taxation should be the task of the next parliament. Future higher taxation should be introduced based on a sound scientific basis for the ideal economy, with the social democrat model the leading contender.

According to Credit Suisse, Thailand has the third highest wealth inequality globally, after Russia and India. One reason is Thailand’s tax profile. Thailand’s tax revenue as a percentage of GDP is remarkably low, the 117th highest globally, at approximately 17%. This is far below the EU-28 rate of 40%, the OECD 2016 average of 34%, and the approximately 26% for middle income countries. It means that, compared to the majority of the world’s countries, Thailand has relatively little discretionary spending power as a nation to invest in regional infrastructure projects that could stimulate growth, such as the development of municipal ‘smart cities’, as well as little ability to use taxation for social programs.

One middle class fear preventing higher taxation is that higher tax revenues would be expended on government projects, which have a minimum corruption rate of around 25% according to the Thai Chamber of Commerce. Partly for this reason, also exists a strong culture of tax evasion, with one estimate being that better administration of existing taxes could add another five percent to tax revenue as a percentage of GDP.

One major argument in favour of redistribution of wealth via infrastructure projects and transfers is fairness. Thomas Piketty’s argument that the rate of return to capital is always higher than the overall rate of growth, contributing to greater wealth inequality, is patently visible in the case of Thailand, with its Gini coefficient for wealth inequality being .70. Such disparity and unfairness is visible to the lower and middle classes, affecting social cohesion and causing socio-political cleavages, exacerbating the ‘Red’ versus ‘Yellow’ conflict.

Yet, the Thai establishment is very aware of this problem and of the solutions. Recent research overseen by Chulalongkorn University’s renowned academic duo, Chris Baker and Pasuk Phongpaichit, via the ‘Towards a More Equal Thailand: A Study of Wealth, Power, and Reform’ project, underlines the fact that Thailand’s economic progress can be improved by a raft of means to reduce inequality.

A first step was the inheritance tax, introduced on February 1, 2016. It was the first such tax in 72 years and is projected to reap approximately 930 million to 1.9 billion each year. The tax is being imposed on inheritances over 100 million baht in value. Lineal descendants and ascendants have to pay 5% of what they inherit, while other heirs are assessed 10%. However, fewer than 10,000 individuals are likely to be impacted from the law, which will mainly affect members of the upper middle-class who do not have access to financial planners. This is because numerous loopholes apply. One example is transforming wealth into very high value non-taxed assets, such as high-end jewellery. Also, the overall amount raised is a paltry sum, and the threshold should be reduced to 50 million baht and tax rate raised to 10% if the tax is to have any weight.

The government is also considering a draft Land and Property Tax, to replace the current Building and Land Tax Act B.E. 2475 (BLTA) and the Local Development Tax B.E. 2508 (LDT), which generates approximately 25.9 billion baht. Currently, these property taxes contribute less than 10% of total tax revenue. The new tax is forecast to generate 64.2 billion baht for local administration organizations by levying the tax on first-home owners and farmland worth more than 50 million baht.

A tax rate of 0.05% will apply to first homes and agricultural land worth from 50 million to 100 million baht, and a 0.1% rate for homes above 100 million. People owning second homes will be taxed in a range of 0.03-0.1% of the appraisal price. The tax on vacant land will rise by 0.5 percentage points every three years, up to a cap of 5%, while land for commercial and industrial use will be levied at 0.3-1.5%.

The new tax aims to reduce income disparity, expand the national taxpayer base, increase tax revenue for local administrations, and improve land use by reducing land banking. However, the draft bill is a weakened form of an earlier draft which sought to raise 200 billion baht. Moreover, the Chulalongkorn University research project revealed that in Thailand, land distribution has a staggeringly high Gini coefficient of 0.88, with the top 10% of Thai people owning 61% of all land and the bottom 10% owning 0.1%.

Turning to other taxes, Thailand’s VAT tax rate of 7% should be maintained, as should the income tax top rate of 35%. However, income tax should be better administered, meaning better scrutiny and investigation of tax evasion, together with the reduction of personal income tax exemptions. The Chulalongkorn University project recommends a cap on the total amount claimable of 700,000 baht. It also recommends cancelling the long-term equity fund allowance, a holdover from Thailand’s IMF program intervention to boost the stock market. This state subsidy no longer has a philosophical basis as Thailand’s stock market is thriving and no other major government globally subsidizes rich people playing the stock market.

Reducing wealth inequality is important for promoting democracy. Even in utopian visions of democracy, the rich will likely hold more political power. The danger is that political power is used to promote policies that promote the economic power of the rich. The higher the inequality, the more likely Thailand is to maintain an oligarchy and avoid democracy. The Chulalongkorn University project data demonstrates that Thailand is run by an oligarchy or even a plutocracy, i.e., the top 0.001%, mainly to benefit that oligarchy. However, plutocracies are short-sighted. They avoid taxation being levied on themselves despite the fact it could help the economy grow through wealth transfers to lower socio-economic classes being more likely to be spent, for example on soft drinks manufactured by companies the plutocracy owns.

Higher taxation directly benefits the middle class through better services. To illustrate but one example, education, higher salaries would attract better-qualified teachers. Well-equipped science laboratories could be established in every school. Multiple choice exams could be phased out in favour of more intensive open-ended exams. Classroom sizes could be reduced. This would reduce inequality of opportunity, improve Thailand scores on international standardized tests, such as the OECD PISA, and improve inwards foreign direct investment.

As a mid-term target, taxation in Thailand should aim for a tax revenue of 26% of GDP, the average for middle income countries. This is, in fact, still very low. In the long term, Venkat Venkatasubramanian of Columbia University has suggested that Norway comes very close to an ‘ideal’ income distribution in terms of economic market efficiency of, for Norway, 90% of the population obtaining 77% of the income. Social democrat Nordic bloc countries with close to ideal wealth and income distributions also rank highly for democracy and fundamental freedoms and have very sound socio-political foundations.

Thailand’s task is to emerge from the upper middle-income trap and provide better educational and health services for its middle classes to enjoy, as well as banish poverty, currently around 8-9%. Higher taxation must be the linchpin for these aspirations by providing the means for the state to care for its most vulnerable while investing in educational and health services for the lower and middle classes as well as in regional infrastructure in order to provide opportunities for all. A Nordic bloc-style societal grand compromise between the state and the market to promote social democracy will be necessary to achieve these aims, as advocated for by the Project for a Social Democracy (