How drastic cuts in corporate tax and vat could pump life into the economy
The Nation – 12 November 2008
As governments around the world introduce drastic measures to stimulate their economies, Tisco Securities comes up with a study to show how private-sector investment and consumption could react if Thailand's corporate income tax and value-added tax rates were cut.
Tisco Securities' assumption is that Thailand would slice five percentage points off the corporate tax rate, bringing it down from 30 per cent to 25 per cent, and two points off the VAT rate, dropping it from 7 per cent to 5 per cent.
In its cost-benefit analysis, the securities house focused on four main issues:
lFiscal stimulus: how would reductions in corporate tax and VAT affect the government's budget balance and public debt over the next five years?
lCorporate tax cut: what would be the impact on private investment?
lValue-added tax cut: could a lower VAT rate stimulate consumption, and by how much?
lGDP growth: what would be the potential upside for the economy if such policies were adopted?
Tisco said in a research note that the tax cuts would lead to government revenue declining by Bt250 billion in fiscal 2009 before rising to Bt440 billion in fiscal 2013. This implies a widening of the budget deficit to about Bt370 billion in fiscal 2009 and as much as Bt480 billion in fiscal 2013.
Total government debt would increase by about 11 per cent per year in nominal terms compared to debt under the current tax rates.
Tax cuts would also push the ratio of public debt to gross domestic product up by a range of five to 20 percentage points above normal levels, but this level of public debt could be accommodated if the economy grew as expected. Tisco's base-case scenario is that a tax-cutting policy would boost confidence and improve the economic outlook.
"Our model suggests that it would result in private-sector investment growing by an additional 6.5 per cent year on year on average in nominal terms. We would also expect a positive impact on consumer demand with private consumption rising by an extra 3.7 per cent year on year," the brokerage said.
Based on these projections, private fixed-capital formation could rise by Bt68 billion with private consumption increasing by Bt105 billion on an annual basis.
The "net" effect of this hypothetical tax stimulus package should be to boost real GDP growth by 3.2 percentage points, of which 1.2 points would come from higher private investment and two points from higher consumption.
"We would expect the additional growth to be 'spread out' over the next few years after the policy is implemented."
An across-the-board cut in the corporate tax rate from 30 per cent to 25 per cent would also boost listed companies' net profit as well as investor appetite for Thai stocks.
At present, listed companies are eligible for a 25-per-cent tax rate for the first Bt300 million of taxable profits. The across-the-board cut would then lift their net profits for 2009 by 3.7 per cent on average.
The effective tax rate would then decline to 23 per cent from the current assumption of 25.9 per cent.
"We further assumed that the resulting boost to corporate earnings would benefit SET-listed companies, with banking stocks as the main beneficiaries."
Somchai Sajjapongse, director-general of the Fiscal Policy Office, earlier said it was possible for Thailand to cut the corporate tax rate to 25 per cent.
However, that measure should be part of the long-term taxation-restructuring plan to boost Thailand's competitiveness, not to stimulate the economy in the short term, he said.
Meanwhile, there is no talk on a possible VAT cut.
Just the opposite, several governments have tried to raise the rate back to 10 per cent.
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