Tax system utilised for more targeted benefits for the poor

The Finance Ministry is expediting its review of welfare reforms to ensure the benefits target those most in need, minimise duplication across programmes, and promote greater participation in the labour force.

This approach is based on the concept of a negative income tax (NIT) system.

According to a ministry source who requested anonymity, NIT differs fundamentally from the existing personal income tax (PIT) system, which is a positive income tax.

Under the PIT, individuals whose income exceeds a specified threshold are required to pay taxes. NIT operates in the opposite manner: when an individual's income falls below a specified threshold, that person receives a cash transfer from the government.

Key conditions include recipients of the transfer payments must be employed and must file a PIT return.

Under the NIT system, transfer payments are divided into three stages. The first is the phase-in stage, when an individual's income is below the threshold set by the government. The government provides a welfare payment, and the amount of the transfer increases as the individual works more and earns a higher income, provided that the income remains below the specified threshold.

The second stage is called a plateau, as the individual's income reaches a level specified by the government. The government then provides transfer payments at a fixed rate.

The final stage is phase-out, as the transfer payment is gradually reduced as the individual's income increases. As earnings rise, the amount of government support declines progressively until the individual's income reaches a level at which no transfer payment is received from the government.

According to former deputy finance minister Paopoom Rojanasakul, previous studies suggested the following income ranges are appropriate: phase-in for annual income of 32,000 baht or less; plateau for annual income of 32,000-36,000 baht; and phase-out for annual income of 36,000-60,000 baht.

Under this model, eligible individuals would receive government transfers of up to 12,000 baht per year.

Mr Paopoom said the NIT system would make it easier to accurately identify individuals who should receive welfare benefits, while also creating incentives for low-income individuals to seek and engage in more work.

The system is described as "workfare", with the government providing financial support only to those who are working. This differs from unemployment benefits, which may create negative incentives by encouraging people to wait for government assistance rather than seek employment.

The administrative cost of implementing NIT is lower than the current welfare system because it operates through the PIT filing process, with the government transferring payments directly to eligible individuals.

NIT also provides an incentive for workers in the informal sector to enter the tax system.

Thailand has the world's seventh-largest informal economy, accounting for 57.2% of GDP, according to a Finance Ministry study.

In addition, NIT does not distort market mechanisms, unlike other approaches to addressing income inequality, such as imposing minimum wage requirements or providing crop subsidies, noted the ministry.