Economic stimulus package :
Tax cuts, populism ,or Negative Tax?
Professor Dr Kriengsak Chareonwongsak
Senior Fellow,
Harvard University’s Center for Business and Government
There is one political truth that a
government may have many macroeconomic goals to monitor, yet will still wish as
rapid economic growth to take place as possible.
Recently, the new Thai government
declared an economic stimulus package. After its adoption, individuals with taxable income of less than
150,000 Baht will be exempt from income tax, up from the last threshold of
100,000 Baht. In addition, the maximum deductible limit for different kinds of
savings has been raised, and individuals whose spouse, children, or parents,
are physically impaired can deduct expenses of up to 30,000 Baht per year.
Furthermore, the government has prepared
a second economic stimulus package that will soon stimulate the grassroots
economy; and will include SMLs, and megaproject investment. Hopefully, the
government expects this year’s economic growth rate to be six percent.
This
article will analyze the strengths, weaknesses and effectiveness of the government’s
economic stimulus measures. I will also propose a very new idea about “negative
tax,” which, to my point of view is the most efficient economic stimulus
measure.
This article aims to analyze the
effect of the stimulus package on Thailand’s macroeconomy in terms of economic
growth only, omitting a stability analysis due to the compact nature of this write-up.
First of all, the tax cut policy is
good in principle. A tax cut or tax refund will increase the disposable income
of the people, which will then become an additional expenditure on goods and
services, and, eventually, stimulate the production sector. The classical
school of thought even states that tax cuts are the best stimulus to an economy
since a tax cut policy will lead to an increase in the economy’s aggregate
supply, thus making the economy grow without any trade-off against price
stability.
However, policy effectiveness in practice will
depend on the target group into which the expenditure is injected. Policy
effectiveness is good when the money goes to the poor who have a greater value
of average propensity to consume (APC) than those of the richer group.
In other words, when they receive money, the poor are inclined to spend almost
all of their money, while the rich are inclined to save more.
Unfortunately, since Thailand’s poor
have already all had a tax exemption, they will gain no additional benefit from
the tax cut measure, but the beneficiaries will be the middle class who paid
tax before this measure was announced.
Another category aims to encourage
private savings as part of the economic stimulus package, which is a good
policy in principle. However, this kind of measure will adversely affect
economic stimulation in the short-run because it will make the private sector
save more, instead of purchasing goods and services. Some may argue that
private savings will be transformed into investment, which can also increase
the economy’s GDP. But for now, Thailand’s savings rate is high, so that
incremental saving may not stimulate the Thai economy significantly.
To integrate both categories into
one picture, the effectiveness of the government’s economic stimulus package
may not be as high as expected, because middle-class people who gain tax
exemptions are inclined to save, rather than spend on goods and services.
Let’s examine the second approach to
economic stimulation; an increase in government expenditure, a populist concept
duplicated from the former cabinet of Thaksin, through such projects as SMLs
and megaprojects.
Most measures of this kind are
injected into the grassroots economy in which people have a high propensity to
consume, and encourages them to invest rather than consume. In the mocro level,
megaprojects will be followed by a gigantic expenditure on capital goods and in
huge employment. Therefore, in principle, it is likely to be effective in
stimulating the Thai economy.
Nevertheless, populist projects such as SMLs, will inject
money into individuals[1] unequally, and although all villages in Thailand receive it;
the distribution will depend on the “criteria” of the power elite in the
village. Moreover, bureaucratic procedures have a sluggish effect on expenditure
and make it easy to use corruption along the way where the money goes.
Therefore, the effectiveness of the government’s
expenditure approach may not be impressive. Though the money goes straight to
the grassroots, there are many managerial problems in practice.
In my opinion, as an economic
stimulus, negative tax is better than the two previous approaches, since it not
only injects money to the poor directly, but also corrects the managerial
problems.
The concept of negative tax is supported by many well-known
economists, including two nobel laureates, Milton Friedman and Joseph Stiglitz.
To adopt this concept, the finance ministry must create the negative tax
system, a system in which the government subsidizes taxpayers; besides the positive
tax system, which is the current tax system. Since every taxpayer is in both
tax systems, for the poor, the tax value will be offset or outweighed by the
subsidy. The subsidy will be in the form of tax refunds from the negative tax
system, so that the beneficiaries must register in both tax systems by having
taxpayer ID.
There are many benefits to negative
tax. First, negative tax is effective in stimulating the economy; the money
goes straight to the poor; and corruption is weeded out due to fewer procedural
steps. Also, since the tax refund covers almost all of the labor force, the
negative tax will encourage income equality in Thailand. Finally, negative tax can
be considered as an incentive for underground laborers to participate in the
tax system, causing a positive spillover into the government’s provision of social
security for them.
However, the negative tax has some shortcomings.
The negative tax system cannot be initiated very soon. The managerial problem
is that the actual income of laborers in the underground economy is not
revealed. According to the philanthropic view, the negative tax system does not
cover those who are out of the labor force, who can be helped by social
security measures.
In conclusion, I think that the current
government’s economic stimulus package, both with tax cuts and populist policy,
is acceptable, but not excellent. I propose that, in the short-run, the
government continue its declared measures to show consistency in government
policymaking and, consequently, to earn confidence from both household units
and business units, which is necessary for macroeconomy management. Then the
government needs to study the feasibility and the implementation of the
negative tax system, which is an effective economic stimulus.
[1]
The money goes to persons directly, not enterprises. I apoligize for missing
“s” after individual so the word “individual” looks like adjective rather than
noun.
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