Personal income taxes are soon to be altered to leave a bit more cash in taxpayers' pockets.
The cabinet has approved the proposed tax tweak, and the bill is now pending parliament's go-ahead. Coming at a time when consumer spending appears to be running out of steam, the tax change is likely to provide a moderate but welcome boost to the economy. It will also generate opportunities for businesses in sectors like retailing and financial services.
The income tax cut will cover not only 2014 and later years, but all of 2013 as well. For taxpayers, the upshot is two-fold: higher monthly take-home pay next year, with a significant windfall in the second quarter from unexpectedly higher refunds on excess taxes that employers have withheld during 2013 based on old rates.
The proposed revamp cuts personal income taxes for every tax bracket, from top to bottom, with the biggest impact in the middle. SCB's Economic Intelligence Centre (EIC) estimates that middle-income taxpayers, namely those having a monthly salary between 20,000 baht and 32,000 baht, will see their tax liability decline by half. The cut is progressively less for higher brackets. Taxes on individuals with monthly salaries exceeding 350,000 baht _ a group that includes less than 1% of all Thai taxpayers _ will fall by merely 6%. The revamp also adds two new tax brackets, for a more gradual tax curve.
Bear in mind, however, that the cut will only directly affect the 2.8 million people who have monthly incomes high enough to be required to pay taxes. They are mostly salaried workers paid above 20,000 baht per month. (Some 10 million people file personal income tax returns each year, but over 70% have no tax liability.)
The proposed cut would make Thailand's income tax regime more progressive. Income tax would fall for all. Yet a share of tax paid by the top 2% of taxpayers would increase to 54%, up from 49% under the current law.
What is the impact on Thailand's fiscal outlook? Because each year's tax revenue reduction would be equivalent to only about 0.2% of current GDP, it should not have a major effect on fiscal sustainability.
So, what will people do with the extra money in their pockets? Slightly more than half will be saved. Nevertheless the spending will still be sizeable.
This is because the cut favours middle-income groups the most _ those earning less than 32,000 baht per month. This amounts to half of all taxpayers, or about 1.4 million people.
Compared with high earners, middle- and low-income consumers tend to spend a greater share of their additional income on consumption. One reason is that these households are more likely to be short on cash, and so have a greater need to spend it.
The EIC estimates that taxpayers earning between 20,000 baht and 32,000 baht per month tend to spend 41 satang of every baht of any extra income. In contrast, high earners with salaries above 350,000 baht spend only about 6 satang.
The windfall from unexpectedly higher refunds on excess taxes withheld during 2013 will be significant.
The increase in tax refund cheques will range from about 4,000 baht to more than 200,000 baht, depending on the bracket. In aggregate, the increase in the tax refund is about 26 billion baht. This figure is similar to 2014's total increase in monthly take-home pay resulting from the cut. But it will be lumped into the second quarter, when most taxpayers get their refunds. The EIC estimates that the income boost from the tax refund will account for about 40% of private consumption growth in the second quarter; while it will be negligible in other quarters.
Retailers should study this coming tide of cash. The average increase in the tax refund will be about 6,500 baht for the bottom 88% of all taxpayers and slightly above 50,000 baht for the top 12%. International evidence shows that taxpayers spend a significant portion _ say, 30% or more _ of an unexpected tax rebate within three months of receiving it. It's not clear what they spend it on, but it would not be surprising to see an uptick in sales of clothing, electronics and food and beverages.
This increase in income tax refunds will probably have a larger impact on consumption than the rather muted consumer spending boost that resulted from the excise tax refunds under the recent first-car purchase scheme. The impact will be larger because it is a windfall, whereas first-time buyers of new cars fully counted on their excise tax refunds. And the car buyers soon found themselves burdened with loan payments and auto-related expenses. No strings are attached to the income tax refunds, making this money easier to spend.
Regarding higher take-home pay for each month of next year, this side of the tax cut will not translate into a major impact on household consumption in 2014. The increase in monthly pay will range from about 300 baht to about 20,000 baht, depending on a taxpayer's income bracket. In aggregate, this will add 27 billion baht to consumers' pockets in 2014, although this is only about 0.4% of annual household consumption.
As for personal savings, the tax change will produce a substantial impact in the second quarter of 2014. The EIC estimates that about 70% of the increase in income will go toward savings. The total increase in savings for 2014 will be around 38 billion baht, with most of the new savings made during the second quarter. This gives banks and other providers of financial services an opportunity to collect higher deposits and win new customers having predictable income streams. About half of the increase in savings will be made by people with a monthly salary above 90,000 baht. Members of this affluent segment put two-thirds of their savings into bank deposits and the rest into investments.
Sutapa Amornvivat, PhD, is chief economist and executive vice-president at Economic Intelligence Center, Siam Commercial Bank. She has international work experience at IMF, ING Group and Booz, Allen, Hamilton. She received a BA from Harvard and a PhD from MIT.
firstname.lastname@example.org EIC Online: www.scbeic.com
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