Financing Social Protection through General Tax Revenues, Social Security Contributions and Formalisation in Thailand

Thailand has made significant progress in expanding its social protection system in recent years, but there is scope to further expand coverage and increase benefit levels. Through policies that further develop the social protection system, Thailand’s 20-year National Strategy (2018-2037) aims to strengthen social cohesion within the country. Significant progress has been made since the National Strategy was adopted. While Thailand has achieved near-universal healthcare coverage, there remains significant scope to expand other areas of social protection and improve benefit levels. Some 61% of the population in Thailand is covered by at least one social protection programme other than healthcare, with women benefiting from greater coverage (63%) than men (58%). However, spending on social protection (excluding healthcare) is only 2.1% of gross domestic product (GDP), which remains low in international comparison (the regional average for Asia and the Pacific reaches 8%). Moreover, non-contributory cash transfer programmes for children, people with a disability, and low-income households do not reach all eligible households. This is partly due to challenges in means-testing the eligibility of cash transfers. Cash transfers are also low, and their value has eroded over time due to a lack of indexation for inflation.

The high prevalence of informal work poses significant challenges to financing social protection. Around half of the labour force works in the informal economy – women being slightly less exposed than men (50% vs 53%) – and has no access to social insurance, with most informal workers being self-employed. Uninsured workers depend on social assistance programmes to reach minimum levels of social protection, but these programmes fail to prevent people from falling into poverty or allow growing out of it. However, not all uninsured self-employed workers are poor, and they may have the financial capacity to pay taxes and contribute to the social protection system. The self-employed can participate voluntarily in saving schemes (Article 40 and the National Savings Fund) that provide social protection, but participation in these schemes remains low. Further, the schemes provide low levels of social protection. These low participation rates can be attributed to a combination of factors, including individuals’ myopia, unappealing benefits and a lack of trust in the government’s management of long-term savings.

The ageing of the population will require higher levels of social assistance spending. In the coming decades, Thailand is expected to experience a sharp increase in age-related public expenditure on pensions and related cash benefits, as well as healthcare, due to the rapid ageing of the population.

Additional public spending requires increasing Thailand’s tax-to-GDP ratio, which could be reached by reinforcing the link between economic growth and tax revenues. In 2023, Thailand’s tax-to-GDP ratio was 17.1% of GDP, which is low by international comparison. Tax revenue growth has lagged behind GDP growth, contributing to a downward trend in the tax-to-GDP ratio over the past decade. This low “buoyancy” of the tax system is caused by various factors, such as the presence of generous profit-based tax incentives, economic growth that occurs in sectors that pay little tax, and weak tax enforcement. By strengthening the link between economic growth and the growth in tax revenues, Thailand could raise more tax revenues without drastically increasing its statutory tax rates. This could be an important strategy to finance public spending in the future, including social assistance spending.

Raising more tax revenues will require reform across a wide range of direct and indirect taxes. There is scope to increase the standard value added tax (VAT) rate (currently at 7%) and to broaden the VAT base. Low-income households could be compensated for their additional VAT liability through the expansion of social assistance programmes. In addition, the VAT registration threshold could be lowered once the VAT administration has the capacity to audit an increasing number of firms, and measures could be introduced to increase VAT compliance leading to increased revenue. Publishing a detailed tax expenditure report and assessing the cost-effectiveness of tax expenditures and tax incentives would reveal the scope for broadening the tax base. The role of the personal income tax could be strengthened by reforming generous tax allowances that narrow the tax base. Further, the dividend withholding tax rate could be increased. Although Thailand generates substantial revenue from excise taxes, there is scope to improve the design of health excise taxes, which would also encourage individuals to adopt a healthier lifestyle. In addition, fossil fuel subsidies could be reduced, and the recently introduced carbon tax could be increased over time.

Revenues from social insurance contributions are low and compromise the financial sustainability of the Social Security Fund. Social security contributions account for only 0.9% of GDP, which is low by international standards. In the short term, the ceiling on social security contributions under Article 33 could be raised to increase the contributions from higher incomes. To reduce the government subsidy to the fund, the government contribution (2.75% rate) for the top quintile of private sector employees under Article 33 could be replaced by an increased employer contribution for these workers. In addition, the parameters of the pension system may need to be revised to enhance benefit adequacy and maintain financial sustainability. Over time, economic growth and the formalisation of a larger share of the economy are preconditions to increase social protection spending.

Introducing a presumptive tax regime that incentivises the formalisation of unincorporated micro-enterprises and their workers could increase social insurance coverage. Given the limited effectiveness of voluntary contributory schemes (e.g. Article 40) in expanding the coverage of social protection to the self-employed, Thailand could introduce a simplified tax regime that is compulsory and includes a presumptive payment for social protection. Such a presumptive tax regime targeted at unincorporated small businesses would simplify tax compliance compared to the tax system, reduce tax liabilities and provide more attractive social protection benefits than under the current system. This regime would enable uncovered self-employed workers and their employees to access social insurance. The presumptive tax regime could be designed as a single tax levied on business turnover that substitutes for VAT, income tax and social security contributions. While registration would be compulsory for most companies, registration could remain voluntary for the micro-businesses that could also opt to contribute under Article 40. Over time, when the tax administration’s enforcement capacity increases, social insurance contributions could also become compulsory for these micro-businesses. The presumptive tax regime would not be accessible to higher income earners, e.g. among lawyers, doctors, architects and information technology experts, that are able to pay tax under the standard tax system.