The New Tax Reforms and New Economic Policy
Updated: 6 days ago
In today's NIDA Poll, the Thai public's opinion on election campaigns by political parties for the upcoming May 14th election has been surveyed. The poll reveals a notable lack of understanding among the Thai population regarding how campaign policies will be financed, with 66.72% unsure of the funding sources and 11.75% expressing indifference. When asked about potential funding sources, the majority of respondents (49.62%) believe that taxes levied on individuals, corporations, and SMEs will be the primary means of support. This finding underscores a concerning gap in policy literacy in the country.
According to reports from the Election Commission of Thailand (ECT), most political parties have not provided comprehensive details on funding sources. While they have submitted the required report to the ECT, which includes an overview of public policy, budget requirements, funding sources, policy merits and benefits, as well as impact and risk, these submissions are often brief and superficial. Among major parties, only the Bhumjaithai Party has included a "policy study paper" (surprisingly, with citations) along with their submission to the ECT. However, even this "policy study paper" is far from being flawless.
While we generally concur with the Thailand Development Research Institute's (TDRI) analysis of political parties' public policies during the election campaign, it is important to note some inconsistencies. The TDRI has analyzed six key parties, including the Phue Thai Party, Bhumjaithai Party, Move Forward Party, Palang Pracharat Party, Democrat Party, and Ruam Thai Srang Chart Party, all of which have a high likelihood of gaining enough votes to nominate their own Prime Minister candidate (with a minimum of 25 votes).
The analysis suggests that these parties may rely on off-budget money not supervised by the parliament or base their projections on overly optimistic GDP growth rates, implying miscalculated tax revenues, or underestimate policy costs. However, we have previously criticized the TDRI for inconsistencies in their stance, such as opposing the rice pledging scheme while supporting the rice mortgage policy, despite both being government subsidies. If the TDRI were to consistently advocate for non-market-distorting mechanisms, they should reject both policies equally. (See our critics over TDRI here and here).
Sankey Diagram on Thai Government Income and Expenses (Budget Year 2022): Source
Among the six major political parties, the "democratic force" group, comprised of the Phue Thai Party and the Move Forward Party, appears dissatisfied with Thailand's de facto economic policy. This policy, largely influenced by Thai bureaucrats from entities such as the Office of the National Economic and Social Development Council (NESDC), the Bank of Thailand (BOT), and the Thailand Development Research Institute (TDRI), focuses on fiscal stability but has failed to adequately address grassroots issues, as evidenced by Thailand's rising inequality. Some policy elites may be aware of these problems, but fiscal policy is often dominated by bureaucratic politics that rely on annual budget increases occurring linearly.
The Phue Thai Party and the Move Forward Party have differing approaches to reform. While the Phue Thai Party prioritizes economic policy to elevate the growing lower-middle class in rural areas and push for more democratic reform, the Move Forward Party, driven by its left-wing faction, emphasizes expansive state welfare policies to build its leftist support base and challenge undemocratic institutions simultaneously.
Which Economic Model?
Both parties face three significant challenges. Firstly, neither appears to have a concrete role model for their ultimate objectives. For example, the Move Forward Party, heavily influenced by left-wing ideology, seems to lean towards a Marxist or socialist direction, as evidenced by their advocacy for radical state welfare policies. On the other hand, the Phue Thai Party focuses on empowering the lower-middle class and grassroots but, during the Thai Rak Thai era, favored a centralized, New Public Management (NPM) style similar to Singapore's People's Action Party (PAP)-led government.
In his book "The Origins of Political Order," Francis Fukuyama suggests adopting the "Go Denmark" approach, advocating for the United States to pursue more social welfare policies in order to create a more equitable society like that found in Nordic countries such as Denmark. This concept may provide valuable insights for both Thai political parties in their quest to address the country's socioeconomic challenges.
However, such luxurious economic and social policies do come at a cost. Denmark has a progressive income tax system, with higher earners paying a larger percentage of their income in taxes. The top tax rate in Denmark can be as high as 55.8% on income exceeding DKK 582,600 (approximately USD 91,000) per year. However, when factoring in additional municipal taxes and other taxes and social contributions, the total top marginal tax rate can range between 61–64%.
On the other hand, Singapore presents an alternative model, boasting an economy and GDP per capita comparable to Denmark's. However, Singapore's economic framework differs significantly from Denmark's. With a highly developed and competitive economy, Singapore emphasizes export-oriented manufacturing, finance, and services. It maintains a business-friendly regulatory environment, low taxes, and a relatively limited welfare state. In contrast, Denmark's economy features a mixed economic model, blending free-market capitalism with a robust welfare state and progressive taxation.
It’s worth to note that Singapore has a highly literate population and English is widely spoken and understood, the government’s strict regulations on the media and freedom of expression can still have an impact on Singaporeans’ mindset.
Secondly, whether emulating Denmark or Singapore, addressing government revenue is crucial. To implement social or state welfare programs and tackle the increasingly pressing issue of an aging society—which will place greater burdens on government expenditure budgets—Thailand must consider systematic tax reforms. Furthermore, instead of relying on periodic populist policies that distribute money to the populace, a more systematic approach to wealth redistribution is needed. This could involve transferring resources from the upper-income class to the lower-income class through social programs such as healthcare and educational subsidies. Implementing such policies would require rigorous fiscal policy research and planning.
Third and, finally, Thailand must consider adopting new modes of economic production. Relying solely on agricultural exports cannot provide the same proportional leverage as capital-intensive production of goods or services found in Western economies. Lessons can be learned from both Taiwan and South Korea, which, although already equipped with heavy industries, have fostered cutting-edge semiconductor industries. The elevation of both countries to upper-income status is not coincidental.
Thailand made the right moves during the 1970s (point B), but after the financial crisis, it seemed to lose momentum. In contrast, Taiwan and South Korea managed to catch up exponentially with their semiconductor industry, not to mention their well-established heavy economies (information from the New Maddison Project Database).
In "Catch-Up Industrialization: The Trajectory and Prospects of East Asian Economies," Japanese economist Akira Suehiro offers a comprehensive analysis of industrialization in East Asia, encompassing Southeast Asia as well. He formulates a theory of East Asian economic transformation based on the concept of "catch-up industrialization"—the ongoing effort by East Asian nations to emulate the trajectory of earlier capitalist industrial countries. The book is organized into two sections, with the first addressing perspectives and methodologies, and the second delving into ideology, government policy, key economic players, and institutional arrangements that facilitate catch-up industrialization. Japan serves as a prime example of catch-up industrialization and a benchmark for analyzing differences in policy and systems among East Asian economies. Suehiro integrates agent-centered and institution-based approaches, exploring state-society relations and development ideology. The book provides an extensive examination of East Asian economic transformation and is well-suited for development economists, business students, and international relations specialists.
In light of our previous discussion, we propose several policy recommendations for the Thai government to consider. These include implementing a new economic policy that focuses on a triple-track economy, encompassing grassroots, conventional, and high-growth sectors. This approach would involve upgrading the self-sufficiency economy to a grassroots economy, concentrating on the upper value chain and high-growth sectors. Additionally, the government should adapt to new tax systems, restructure its economic model towards a social economic system, and explore new geoeconomic opportunities.
The first policy recommendation is to develop a triple-track economy. This can be achieved by upgrading the self-sufficiency economy to a grassroots economy, focusing on village funds and the bottom of the pyramid. The government should also strengthen the conventional economy through global value chain upgrading and "unbundling" the economy. Finally, fostering the high-growth economy by embracing modern digital economy, data-driven industries will help drive economic growth.
The second policy recommendation is to adapt to new tax systems. The government should consider studying AI-based taxation models inspired by Emmanuel Saez's enhanced optimum tax theory. Additionally, exploring universal basic income or enhanced compensation programs to address inequality is essential. Lastly, the Thai government must adjust global tax policies to accommodate the changing digital landscape and implement digital tax policies.
The third policy recommendation is to shift the economic structure from a Thai state-corporatist system to a "social economic system" (i.e., Ordoliberalism). This adjustment will help create a more balanced economy that benefits a wider range of citizens while fostering economic growth.
The fourth policy recommendation is to explore new geoeconomic opportunities. This can be achieved by developing the Thai Kra Canal project (or the Thai Southern Land Bridge Project) and adjusting the Chao Phraya River and Thai Gulf economic models. Additionally, expanding the Eastern Economic Corridor (EEC) and cooperating with Cambodia on Thai Gulf oil exploration and production will create new economic opportunities for Thailand.
The fifth policy recommendation is to embrace CBDC. To do this, the Thai government should establish regulations for monitoring and reporting virtual transactions, such as CBDC transfers. Encouraging the development of CBDC ATMs and related infrastructure will also help integrate digital assets into the economy. Furthermore, investigating alternative payment systems to SWIFT, such as INSTEX and CIPS, etc., can provide greater financial flexibility. Lastly, creating a digital asset custody warehouse to secure and manage cryptocurrencies will ensure the safety and stability of these emerging assets within the Thai economy.
By implementing these policy recommendations, the Thai government can create a more resilient and diverse economy that is better prepared to face the challenges and opportunities of the 21st century.