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Yes, Corporations are People, Even in Thailand

2 min readBy: William McBride

Yet another country is reducing its corporate rate while the U.S. stands still:

Thailand’s new government has re-confirmed its intention to reduce the rate of corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. in order that businesses would be able to cope with the higher costs arising from its policy of increasing the country’s national daily minimum wage.

In that regard, while the national daily minimum wage is to be raised to THB300 (USD9.82), an increase of some 90% over current levels, it is expected that the current 30% corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate will initially be cut to 23%, possibly from January 1, 2012, and will be further reduced to 20% in 2013.

The Deputy Prime Minister and Commerce Minister, Kittirat Na Ranong, said the move was intended to enable private companies to retain more of their profits to compensate for the minimum wage increases. However, it has been suggested that the measure would also be useful as it could restore international competitiveness to Thailand’s corporate income tax rates.

As is typical, this is billed as a concession to “corporations”, presumably referring to the owners of capital. So the owners of capital get a break in exchange for bearing the cost of a higher minimum wage.

This is wrong on both counts. First, let’s start with what’s right: both the minimum wage and the corporate tax are costs of doing business, in Thailand and most countries. Now, the question is who bears those costs. The answer is primarily labor. The main reason is that capital is more mobile than labor, i.e. if costs such as taxes go up in one country then capital simply flows to other countries, leaving labor behind to bear these country specific costs.

Regarding the corporate tax, the latest economic theory and evidence (here, here, here, and here) finds that the majority, probably 70 percent or more, of the incidence of the corporate tax falls on labor.

So, opposite of the political rhetoric, it appears that Thai laborers, more so than Thai owners of capital, will bear the cost of a higher minimum wage in exchange for the benefit of a lower corporate tax rate.