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NIT: In search of an alternative to populist policy

Milton Friedman// Photo credit: The Gary Becker Milton Friedman Institute for Research in Economics.

Milton Friedman// Photo credit: The Gary Becker Milton Friedman Institute for Research in Economics.

Members of the think-tank at the Finance Ministry have been thinking aloud about how to find an alternative to controversial and expensive populist policy. Their mission is to identify the "real poor", engage them and make them part of the income tax data system. In other words, the technocrats are embarking on a new assignment to prevent corrupt politicians from exploiting the downtrodden, once and for all.

Planners at the Finance Ministry's Economic Fiscal Policy Office have stumbled on what is known as the "Negative Income Tax" (NIT) formula, which they believe could provide the answer in the search for a new way to help the poor that prevents them falling prey to political parties offering them political largesse in an apparent exchange for votes at the polling booths when elections come around.

NIT was developed by British politician Juliet Rhys-Williams in the 1940s and later fine-tuned by economist Milton Friedman. NIT has been described as a "progressive income tax system where people earning below a certain amount receive supplemental pay from the government instead of paying taxes to the government".

Advocates of the system claim that with NIT, the need for minimum wage, food stamps, welfare, social security programmes and other government assistance projects can be eliminated. Doing so should reduce the administrative cost and efforts to a fraction of the current system.

They also argue that NIT does not need large bureaucracies to run taxation and welfare systems, and that all the complicated rules and regulations could be wiped out. As a result, resources currently devoted to the present system could instead be spent on more productive government activities - or returned to the people through tax cuts.

The flip side, of course, is the possibility that NIT could reduce the incentive to work because recipients get a guaranteed minimum wage from the government in the absence of employment.

Proponents of the scheme at the Finance Ministry are well aware of the "negative side of the negative income tax" concept.

The first draft of the idea specifies that if implemented, the plan will cover only those with no more than Bt30,000 income per year - aged 15-60 - and they must be employed.

"To prevent the scheme from creating a disincentive to work, our plan stipulates that for every Bt1 of a recipient's earnings, the government will add 20 per cent to personal income. The reason we don't want to offer government tax assistance at a fixed rate is because we want to use NIT as a tool to encourage poor people to work harder and to earn more. Once their personal income rises to Bt80,000 per year, the supplemental tax assistance will stop."

The most important proviso is that every recipient must submit their tax returns - which will give the government, for the first time, a full list of all income earners in the country. The initial study shows that more than 18 million Thais will benefit from this scheme. The government budget required to launch the project may come to around Bt55,600 million.

Crucial to the success of this formula would be the political will of the powers-that-be to jettison populist projects to pave the way for NIT - otherwise the financial burden on the government would be too heavy.

As part of the package, the Finance Ministry says it is submitting a master plan covering the management of revenue, expenses, debts and assets to put a stop to populist policies that have dragged the country's fiscal discipline down the drain.

It's early days and once the issue is raised among the leadership of the National Council for Peace and Order (NCPO), there is bound to be a lengthy debate on its pros and cons. But one thing is clear: The effort to replace populist policy with a more transparent, accountable and effective platform to help the country's poor is irreversible.


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