Uncertainty and Economic Activity: Does it Matter for Thailand?
This paper investigates the role of domestic and foreign uncertainty shocks for macroeconomic dynamics in Thailand. We construct and compare various indicators of economic and policy uncertainty, including macroeconomic and financial uncertainty, as well as monetary policy, fiscal policy, and political uncertainty. We find that while all uncertainty measures display countercyclical behavior, they generate heterogenous effects on real GDP and its components depending on the type of shock. In general, the magnitude of real activity decline in response to economic and policy uncertainty shocks are on the scale of 1-2 percent, with most of the transmission occurring through investment and trade flows rather than consumption demand. In terms of persistence, Thai macroeconomic uncertainty shocks generate sudden impacts, while the effect of other shocks on the economy are more gradual. Despite being a small open economy, we find that domestic uncertainty shocks can be as prominent as uncertainty shocks that spillover from abroad. Thai monetary policy shocks generate declines in real activity that are as large and persistent as US financial uncertainty shocks, whereas the impact of both Thai fiscal policy uncertainty and US economic policy are both rather short-lived. Furthermore, we find that uncertainty is a key driver of fluctuations in domestic output, with certain types of uncertainty being able to explain up to 40 percent of the variation in real activity, even in the long run. Finally, we observe asymmetry in the effects of downside versus upside economic uncertainty shocks, but no difference between uncertainty of short versus long horizons.
Assessing Tax Burden Differential Between Foreign Multinationals and Local Firms: Implications for FDI Tax Incentives
This study uses firm-level data from ASEAN5 to examine whether there are systemic differences in how reported profit is taxed between foreign multinational and comparable local firms. Using propensity score matching, it finds that the effective tax rate (ETR: tax expense divided by pre-tax profit) of foreign MNEs is 1.8 percentage point lower than that of local firms. It also shows that the preferential tax treatment is responsible for 95% of the ETR differential. Under the baseline scenario, the associated revenue loss is 2.6% of total corporate income revenue.
Tax Rate Cut and Firm Investment: Evidence from Thailand
How do firms’ investment respond to a large corporate tax rate cut in developing countries? This study uses a matched difference-in-difference approach to estimate the investment responses of Thailand’s 2012-13 corporate income tax cut. It finds that the tax cut has significantly boosted investment. The findings also underline the heterogeneity of the investment responses between local and foreign firms as well as the potential roles of policy uncertainty and market competition on investment response.
Does Democracy Affect Cyclical Fiscal Policy? Evidence From Developing Countries
Macroeconomics usually prescribes counter-cyclical fiscal policies to stabilise the economy: government spending should increase above trend in the economic downturns, and decrease below trend during booms. Yet, empirical research has documented pro-cyclical fiscal policy in several democratic developing countries. This article uses updated data to analyse 63 developing countries from 1980 to 2013 and robustly shows that pro-cyclical fiscal policy does exist in both democratic and non-democratic developing countries. The essence of this paper is controlling endogeneity issue by the instrumental variable method and investigating the interaction between democracy, its maturity and quality of institutions in affecting fiscal policy cyclical.We provide 3 main findings. Firstly, an improvement in the level of institutions quality plays an important role to restrain pro-cyclical fiscal policy and these effects are larger in democratic countries than non-democratic ones. Additionally, more mature and stable democratic countries tend to implement less pro-cyclical fiscal policy.
Multinational Tax Avoidance and Anti-Avoidance Enforcement: Firm-level Evidence from Developing ASEAN Countries
We use firm-level data from ASEAN5 to examine the significance of tax-motivated profit shifting by multinational enterprises and to analyze how anti-avoidance measures mitigate the profit shifting. We show that (1) tax-motivated profit shifting is statistically and economically significant, especially for manufacturing firms, (2) auditing and transfer-pricing scrutiny is more effective in reducing profit shifting than documentation requirement alone, and (3) tax-motivated profit shifting is prominent for large firms, while anti-tax avoidance measures result in the absence of profit shifting detected from small manufacturing firms. The findings have important implications for developing countries with weak governance but dependent on MNEs.
Thailand’s Car Tax Rebate Scheme and Consumption Responses: the Role of Durable Goods with Adjustment Costs
In 2011, Thailand faced the largest ood in seventy years. In response to the unexpected crisis the Thai government rolled out Thailand’s car tax rebate scheme in an attempt to prevent the economy from slipping into a deep recession. This study investigates consumption responses to changes in vehicle prices induced by the car tax rebate scheme presented in the framework of a life-cycle model. The model features durable goods with adjustment costs and non-homothetic preference. The key features match the fact that car purchases are lumpy and infrequent and that cars are luxury goods in Thailand. Additionally, liquidity constraints and adjustment costs are also important features for the evaluation of shorter-run consumption responses. Key parameters are estimated to match household-level data. Then partial equilibrium responses, which are key inputs to inform the aggregate outcome of the policy, are simulated given a distribution of the population wealth, income,and age in the economy. Findings show that Thai households have large elasticity of intertemporal substitution (EIS), hence large responses to the scal stimulus. Furthermore, non-homotheticity in the preference generates heterogeneous policy responses varied by household income and wealth. The model predicts that the temporary price shock will lead to a large cutback in future consumption and saving, consistent with the evidence shown by aggregate data. A number of alternative policy experiments are also conducted.
Location choice and tax responsiveness of foreign multinationals: Evidence from ASEAN countries
This study uses a firm-level dataset to examine the impacts of taxation on multinationals’ decisions to set up new foreign subsidiaries in developing ASEAN countries. It finds that taxes play a critical role in MNEs’ location choice decision, with tax incentives being instrumental for maintaining location choice probabilities associated with each host country. The findings also indicate important heterogeneity in the tax responsiveness. First, the tax sensitivity for high-tech firms is significantly lower than that for low-tech firms. Second, having a prior presence in the respective host country is associated with substantially lower tax responsiveness. Finally, in accordance with international tax-avoidance considerations, the tax responsiveness is significantly diminished for affiliates with a connection to tax-haven countries. These provide important policy implications for developing-country governments that consider employing tax incentives to attract MNEs.
Uncovering Productivity Puzzles in Thailand: Lessons from Microdata
The Asian financial crisis in 1997 has an impact on Thailand’s productivity both in the short run and in the long run. The post-crisis productivity growth rate dropped to merely 1% per year in comparison to the pre-crisis level at 2% per year. Thus, a better understanding about the factors determining Thailand’s aggregate productivity is a key to raising Thailand’s output in the long run. Recent literature has identified resource misallocation as an important factor to explain the difference in the productivity levels between developed and developing economies. This paper uses the plant-level data to estimate the allocative efficiency and to identify the source of resource misallocation in the Thai manufacturing sector. The results suggest that the size-dependent policies could contribute to the factor misallocation and that market concentration, foreign investment, and financial deepening could help alleviate the misallocation problem at the sector level. However, R&D activities intensifies resource misallocation that calls for well-defined policies to promote knowledge spillover within industry and to reduce the frontier-laggard gap. Dynamic resource reallocation helps shore up TFP growth over the business cycle that emphasizing a set of policy to reinforce the mechanism of creative destruction.
Assessing the Importance of Taxation on FDI: Evidence from South-East Asian Developing Countries
This study examines the influence of taxation on FDI using data from South-East Asia. It employs the quantile regression approach with fixed effects that provides a comprehensive view of the tax sensitivity across the FDI distribution. Estimates confirm the significantly negative impact of the bilateral effective average tax rate but its effect is heterogeneous across the distribution. This stresses the importance of understanding the effect of taxation across the distribution rather than only at the mean. Also, the economic significance of the tax is relatively smaller than that of other fundamental factors such as labor quality and governance.
Fiscal Stimulus and Household Debt: Evidence from Thailand’s First-Car Buyer Tax Rebate
This paper studies the impacts of Thailand’s 2011-2012 first-car tax rebate scheme on household debt using the account-level loan data from National Credit Bureau. While the literature mostly concentrates on the macroeconomic effects of such stimulus, this study focuses on the effects on individuals who borrow to finance their durable-goods purchases. We show that the program led to higher delinquency on loans and crowded out other loan originations. Our findings are consistent with the demand-shifting mechanism—the rebates encouraged participants to purchase their cars very prematurely. The results were more adverse for passenger car buyers than for truck buyers. We also find local spillover effects of the program on non-auto loans and on individuals not participating in the program.