Study: Use LTF tax credit, not deduction

The Finance Ministry should replace tax deduction on investment in long-term equity funds (LTFs) with a tax credit that aims at reducing inequality and lowering the government’s foregone revenue, says a local professor.

“Personal income tax deductions are often used by the government to support economic activities, but cost-effectiveness and equality should also be considered,” said Athiphat Muthitacharoen, a lecturer at Chulalongkorn University’s economics department.

His study found this year the government will lose 11 billion baht in revenue, or 0.7% of the country’s economic value, on tax deductions, with deductions on savings and investment comprising 45% of the total, or 50 billion baht.

These deductions include investment and savings in the Government Pension Fund, provident funds, retirement mutual funds (RMFs), LTFs, life insurance policies, and interest on mortgages and charity.

The study was done in coordination with the Puey Ungphakorn Institute for Economic Research, the Bank of Thailand’s economic think tank.

Taxpayers are permitted to deduct contributions to LTFs and RMFs worth up to 500,000 baht each, but no more than 15% of annual taxable income, whichever is lower.

Mr Athiphat said the foregone revenue, of which 67% is claimed by the top 20% of individual taxpayers, can be defined as government tax expenditure.

“As richer taxpayers are subjected to a higher tax bracket, the same amount of tax deduction will benefit these people more than those who earn less,” he said.

Mr Athiphat said over 90% of the tax expenditure from investment in RMFs and LTFs is from the top 20% of taxpayers, showing the tax system’s inequality.

“The study shows offering tax credits instead of deductions can help reduce income disparity while still encouraging saving,” he said.

Mr Athiphat said switching to a tax credit could partly reduce incentives for the rich to save through LTFs, but should not have much impact on their wealth as most are already financially secure.

“The middle class is the most important group for the government to encourage to save,” he said.

The study also suggested broad tax reform by lowering the highest tax bracket from 35% to 25%, closer to the corporate income tax of 20%, while capping taxdeductible expenses at 50% of income for business owners and professionals.