Taxing times for Prayut

PM’s sudden decision to shelve the controversial land and buildings tax reflects a communications failure about its long-term benefits

The sudden turnaround by Prime Minister Prayut Chan-o-cha on the imposition of the land and buildings tax brought relief to middle-income taxpayers but prompted confusion among economists, policymakers and even the finance minister himself.

For those against the proposed tax, Gen Prayut’s decision on March 12 was sensible, showing his sensitivity to the public outcry. But those who view the tax as essential felt the move showed indecision that reflected the PM’s vulnerability to public pressure.

After the premier’s decision to shelve the controversial tax, Finance Minister Sommai Phasee gave an austere warning: the country was likely to face fiscal woe if it failed to implement the tax. He vowed to carry on his mission as long as he was still in his post.

But in the latest twist, Gen Prayut on Friday asked the Finance Ministry to look at the feasibility of splitting the land tax from the buildings tax. Yet, he is said to have earlier proposed keeping only the land tax and scrapping plans to tax buildings.

Taking buildings out is likely to cut revenue from the tax by more than half of the previous estimate of 200 billion baht.

Tax experts and academics have begun to doubt if the government is losing its ground, particularly when the country is in desperate need of more revenue to carry on its long-term development plans for social welfare and infrastructure in the face of mounting debts and dwindling competitiveness.

Will the flip-flopping in tax policy on almost a daily basis actually help the country in the long term and narrow economic disparity? Or it is another indicator of policymakers’ imprudence and incompetence?

The principles behind the land and buildings tax are decent and agreeable. But it is fair to say that the lack of clarity and consistency reflected in the frequent revisions, poor communication with the public and the imprudence of policymakers have contributed to the failure to push this law forward.

Time to stand firm
Kitipong Urapeepatanapong, a member of the National Reform Council and also of the Finance Ministry’s tax reform committee, disagrees with the idea of an overhaul, saying it is against tax reform principles and prior objectives.

It is still unclear if the government will eventually scrap the existing house and land tax and local development tax. “If it won’t, then it would be double taxation. But if it calls off the existing taxes, then business operators will surely benefit from this new act,” Mr Kitipong says.

He believes the previously proposed rates for land and buildings tax are not high and quite reasonable. And policymakers could make the tax fairer by excluding the poor, first-home owners or inheritors who cannot afford the tax.

The tax for unused land should be at progressive rates so that owners of vast unused plots, presumably the rich, will be subject to higher rates, he says.

“The government must look ahead and do what is best for the country in the long term, not change tack based on public criticism. It should fear producing something illegitimate, but not this tax. It must stand firm,” Mr Kitipong says.

A retreat, not a defeat
Many taxpayers have welcomed Gen Prayut’s decision to revise the controversial tax.

“The move of the premier to defer the tax and revise it all over again is admirable. A retreat doesn’t mean a defeat,” says Voravan Tarapoom, chairwoman of the Federation of Thai Capital Market Organizations and Association of Investment Management Companies.

“This tax is going to have a vast impact across the country, so policymakers need to be more prudent in drafting it.”

Mrs Voravan blames the failure of the government to push the law forward on the lack of a clear and certain goal.

“The objective of this law has kept changing, from reducing the economic gap to boosting state coffers. Policymakers definitely need to be more prudent and goal-oriented,” she says.

She is among many who feel the tax would unfairly target low earners and retirees.

Its timing is also wrong at a time when the public and business operators are still struggling through the economic doldrums. “This is a matter of public emotion and the government definitely does not understand it,” she says.

Testing the water?
The land and buildings tax is long overdue. It has been proposed over the past 20 years by government after government. But nothing has taken shape as elected governments have turned a blind eye to it for fear of losing their popularity and political base.

The Abhisit Vejjajiva government tried to push the issue. Korn Chatikavanij, a deputy Democrat Party leader and finance minister, bravely took the lead by completing a draft amid opposition from many politicians, even within his own party. The draft was eventually killed by the Yingluck Shinawatra government, citing problems with the law’s structure.

That’s why Gen Prayut’s initial vow to reform tax system was admirable. However, the inconsistency of the tax policy and its measures, which have changed on a daily basis, has received strong public opposition.

Mr Sommai recently made an unexpected remark about “testing the water” — announcing measures one day and changing them the next based on the public’s reaction.

A policymaker at the Finance Ministry, who asked not to be named, disagrees with this approach.

“Testing the water is definitely not a way to draft tax bills. The bills must be a result of thorough studies of all aspects and impacts. Policies that are changeable on a daily basis will only create public anxiety and confusion,” the source says.

The source admits the principles behind the tax are right but says the execution is wrong. The source also believes the tax has been used as a political tool because its unpopularity enables politicians and wealthy property owners to use it against the government.

“In this case, low-income earners are being used by politicians and the rich. In fact, the poor will be subject to very low tax. We can even waive it for them if we can collect more from the rich,” the source says.

Communication is key
Many parties insist the government must proceed with its original plan for the country’s fiscal viability.

Thailand needs more money to operate, particularly when so many expensive projects are in the pipeline, so some sacrifice is required.

From 1999 to 2015, there were only two fiscal years, 2005 and 2006, when the country needed not to borrow to offset its budget deficit. Money spent on social welfare and populist policies rose steeply from 2009 to 2014. The figure reached 388 billion baht in 2014, more than double the 174 billion in 2009.

Nipon Poapongsakorn, a distinguished economist at the Thailand Development Research Institute, insists the government needs to press ahead with the tax plan.

The government should put more effort into communicating with the people about the necessity of the tax and how the country is in need of personal sacrifice.

Most importantly, it needs to be able to ensure that tax revenue will be used wisely and transparently to benefit all Thais and lessen income disparity.

The land and buildings tax would boost tax revenue by around 200 billion baht, compared with 25 billion generated by the existing house and land tax and local development tax.

The revenue would be decentralised to invest in provincial areas to improve social welfare, infrastructure, health care and education. That would also reduce reliance on the central budget.

“If the tax is collected locally and spent locally, then local people will become a watchdog of their own communities, guarding against misuse of tax money and corruption. This is a practical way of local budget management,” Mr Nipon says.

“It’s therefore important that the government communicates effectively, telling taxpayers how this tax will improve economic disparity and benefit all Thais.”

He takes value-added tax (VAT) as an example. Before the implementation of VAT, the government spent more than a year educating people about it and telling how it would benefit the overall economy.

Mr Kitipong shares the opinion that the government has failed to communicate key purposes of the tax and its benefits.

“The government just informs the people about it and that’s not effective publicity,” he says.