Wealth gap remains under Thai junta rule
PM Prayut Chan-ocha vowed to tackle the kingdom's politicized income inequality but has failed to pass a redistributive land tax that would hit elite holdings
In theory, Thailand’s coup-installed military regime should be better placed than elected governments to push through unpopular legislation such as tax hikes without the democratic pressure of needing to please voting constituencies.
In practice, Prime Minister Prayut Chan-ocha has failed to implement any serious redistributive tax reforms after four years in power. With new polls looming in 2019, his junta government is running out of time to significantly address the kingdom’s yawning wealth gap.
When Prayut seized power in a May 2014 coup, one of his professed priorities was to implement tax reforms that guide Thailand towards a more equitable society. That vow was partly a response to mass “Red Shirt” demonstrations that rallied against the huge income gap between urban and rural areas.
The “Red Shirts” were mobilized by self-exiled, ex-premier Thaksin Shinawatra, the billionaire businessman-turned-politician whose populist policies delivered by three of his led or backed governments earned him strong support both among the urban and rural poor.
Prayut’s first finance minister, Sommai Phasee, whose last name ironically sounds like the Thai word for “tax”, was tasked with drafting tax legislation that would redress the rich-poor divide.
Prior to being removed in a 2015 Cabinet reshuffle, Sommai pushed through a watered-down inheritance tax, but was pressed by Prayut to postpone a more onerous land and building tax that would have more squarely hit Thai elites, the key backers of his coup-installed regime.
“[Prayut] delayed it because it drew so much criticism,” Sommai said in an interview with this writer on his last day in office.
Sommai’s successor, Finance Minister Apisak Tantivoraong, picked up the so-called Land and Building Tax Bill and after reducing the marginal rates managed to get it approved by Prayut’s Cabinet. It passed a first hearing in the military-appointed, rubber stamp National Assembly in March 2017.
It has since stalled, however, with the standing committee vetting the bill asking for eight extensions to finish its work. The last extension ends on September 30, but most observers doubt the bill will ever be passed, particularly now as Prayut appears to be angling to retain the premiership at the ballot box.
Three readings are required for a draft bill to be passed into law in Thailand’s legislative process.
“It is common understanding that this tax will not go through the legislative process,” said Somchai Jitsuchon, research director on inclusive development at the Thailand Development and Research Institute (TDRI), a Bangkok-based think tank.
“It’s been put on hold at the moment and I have not seen any signs that they would try to push it through,” concurred Kiat Sittheeamorn, deputy leader of the sidelined Democrat Party.
When the Democrats were last in power from 2008-2011, then Finance Minister Korn Chatikavanij, another deputy party leader, tried to push through a similar property tax law, but could not even get it approved by the Democrat-led Cabinet.
Even if the junta’s Land and Building Tax is passed before year-end, its redistributive impact will have been blunted. Under the original version of the bill drafted by Sommai, the new tax was designed to raise about 100 billion baht (US$3.1 billion) in additional annual revenue.
The revenues envisioned under the original decentralizing tax scheme would have been collected and redistributed to rural areas through provincial administrations.
Under Apisak’s revised version, approved by Prayut’s Cabinet, targeted collections were closer to 60 billion baht (US$1.9 billion). With the latest version, after a year of vetting, the tax would probably only collect 20 billion baht (US$625 million), sources familiar with the current draft of the legislation said.
Thailand’s tax revenue target in 2018 is about 2.4 trillion baht (US$75 billion), most of which comes from income and consumption taxes, particularly the Value Added Tax (VAT). Under the draft bill, single home owners will only be taxed if their property is worth more than 50 million baht (US$1.6 million), and 2nd home owners would face tax rates of only 0.02% to 0.1% of their value.
It is estimated that the tax would impact only 1% of all house-owners in Thailand, and that 1% are likely to be among the wealthiest. Thailand, despite the recent emergence of a large middle class, is still a land of great inequality, particularly in regard to property ownership.
The top 10% of Thailand’s 66 million population are estimated to own 61% of all titled lands, while the bottom 10% own 0.1%, says “Unequal Thailand,” a book published earlier this year edited by scholars Chris Baker and Pasuk Phongpaichit. There are an estimated 4.5 million households who don’t own a house, according to the book.
Higher taxes on property, especially in Bangkok where land values in the central business district have soared an estimated 1,000% over the past 30 years, would be one way to reduce the gap between rich and poor.
Under the existing property tax regime, there is a land tax and a land utilization tax. The latter has a higher rate of 12.5%, but is determined at the discretion of a tax appraiser, which is often a formula for corruption through kickbacks for appraised lower land values.
Thailand actually ranks below some other Southeast Asian countries, such as Indonesia and Malaysia, on the Gini Index, which measures income inequality. Thailand’s Gini Coefficient (the higher it is, the more unequal society) has declined from a peak of 0.536 in 1992 to 0.465 in 2013, according to World Bank data.
Where Thailand is statistically unusual, however, is in the number of people still classified as “poor.”
As of 2014, 7.1 million Thais still lived in poverty, meaning they earned less than US$1.90 per day, while 6.7 million were in danger of falling back into poverty, according to World Bank figures. Combined, that is almost 20% of Thailand’s 66 million population.
Thailand is also unique for its relatively high number of farmers, with some 40% of total employment still in agriculture, a high percentage for a middle-income country. Dragging Thailand’s farmers out of poverty is no easy task, to be sure.
That process was aided between 2001 to 2011 through rising global commodity prices, which rose 70% for agricultural related products over the period. But global prices have fallen by 27% between 2011 to 2016, pulling down Thai famers with them.
Previous elected governments under the Peua Thai Party (2011-2014) and Democrat Party (2008-2011) devised schemes to bolster the earnings of farmers, but they proved costly and unsustainable.
The so-called rice paddy pledging scheme of former Prime Minister Yingluck Shinawatra (Thaksin’s sister) which ended up paying rice farmers 50% above market prices proved a costly boondoggle and was one of the reasons cited by the military for staging the coup that ousted her elected government.
While Thailand’s farmers have suffered from declining agricultural prices, wealthy Thai families have gotten a whole lot richer.
Thailand’s top ten business families had a net worth of US$32.05 billion in Forbes magazine’s 2011 ranking. That figure more than tripled to US$111.5 billion in its most recent 2018 ranking. By comparison, Indonesia’s top ten were worth US$79.95 billion and Singapore’s US$66.75 billion in the magazine’s same 2018 ranking.
Yet neither the Democrats nor the Peua Thai parties raised taxes on the rich while in power. Peua Thai, for all its pro-poor posturing, actually lowered corporate income tax rates from 30% to 20% in 2013, in the name of spurring growth. “For the past 15 years, every change in the tax has always benefitted the capitalists.” said TDRI’s Somchai.
One reason for that is the close nexus between Thailand’s business and political elite comprised of both politicians and military officers, experts say.
That nexus has arguably been strengthened under Prayut, whose “Pracharat” economic policies have actually encouraged closer collaboration between Thailand’s big business conglomerates and his military government by allowing well-known business tycoons to influence policymaking.
“This government has been much more focused on working with the really, really big guys,” academic Baker said.
Such collaboration between business elites and governments is hardly unique to Prayut; it’s a nexus that has grown tighter across the region since the 1997-98 Asian financial crisis that erupted in Bangkok and decimated many Thai business groups.
“Since 1997 most of them have hung on to governments. Whether they are hanging on to Thaksin or the generals, they hang on as tight as they can,” said Baker.