Saturday, June 28, 2008

Public health robbery through price control

In both textbook economics course and everyday common sense, people would normally understand that one important reason why the price of a certain commodity is high is due to the scarcity, if not absence, of its supply relative to people’s demand. For instance, the price of tomatoes can fall down to Php5 (about US$0.09) per kilo, even Php2 a kilo, during the summer months of March-April in a number of provinces in the Philippines. During the rainy season, the same quality of tomatoes harvested and sold in the same municipality and province can go as high as Php40 to Php50 (about US$1) a kilo, or even higher. What explains the big jump in price for the same commodity sold in the same locality in a span of just three to four months? Were there “tomato cartels” suddenly formed during the rainy months? Were there massive pest attacks that affect tomatoes every year?

People understand the “seasonality” of certain commodities, and they understand the downward or upward swings in the prices of those commodities. So they do not ask for more government intervention like tomato price control, or new taxes to subsidize tomato farmers during summer months, or the establishment of another bureaucracy like a Tomato Development Authority.

Entrepreneurs, both new and incumbent, would flock to an industry or sub-industry that experiences fast demand growth, or projected to experience fast consumer demand in the near future. When suppliers in the market become plentiful, the price of the supplied commodity or service can go down, the consumers benefit, and some producers will lose money. They will then try to innovate and produce a “hybrid” product or service that will hopefully attract a new set of consumers and buyers.

Government mentality though is often more myopic and conspiratorial than what consumers and producers would normally comprehend. Many people in government cannot appreciate the importance of just leaving the entrepreneurs or producers, and the consumers to interact with each other. That is why governments tax both producers (income tax, business permit tax, franchise tax, etc.) and consumers (value-added tax, import tax, excise tax, etc.). Aside from taxation, governments also impose more sinister forms of regulation like price control.

By imposing price control, governments think the “evils” in society are the producers of innovative and revolutionary goods and services. That is why consumers rush to purchase that new product or service, resulting in higher-than-normal price hike. And governments think these innovative producers should be disallowed from making “extra high profit”, even if these producers paid extra high costs, waited extra long years to develop their product, and endured extra high taxes and regulations.

In the recently-enacted “Cheaper Medicines Law” (Republic Act No. 9052) signed into law early this month, with the implementing rules and regulations (IRR) currently being drafted by concerned government agencies, price control is among the measures that the State – through the President and upon the recommendation of the Secretary of Health – can impose to make effective and safe, yet “expensive” medicines be made more accessible and affordable to the people. As mentioned above, the premise here is that the pharmaceutical companies that produce those medicines sought after by many patients are seen by the State not as innovators and revolutionary inventors of safe and effective medicines, but as “evil” cohorts that are only after big profit at the expense of poor patients.

But is it fair to impose price control after the State itself has imposed uncontrolled taxes and uncontrolled regulations, and devised a scheme (disrespect of patent and intellectual property right through parallel importation) that can pave the way for uncontrolled entry of unsafe and ineffective drugs, a.k.a. counterfeit medicines?

My bet is that people who understand and appreciate the role of profit to embolden entrepreneurs to take high risks, to face and incur huge losses in case they will not succeed in producing an innovative and successful product, will answer ‘NO’ to this question, while bureaucrats, politicians, and people driven by envy and hatred of profit and markets will answer ‘YES’.

Even assuming, for the sake of argument, that the bureaucrats and the envious are correct in saying that the State has the right to impose uncontrolled taxes and uncontrolled regulations then control the price of medicines later, what if the price of raw materials and intermediate goods, not to mention the salaries of research scientists and pharmacologists, have increased to high levels. Is the State still justified in keeping a price cap to the final product, in this case, safe, and effective medicines?

The case of huge spikes in the price of raw materials and intermediate goods for making effective medicines has happened in India. The Indian government has that cute and magic formula to keep medicine prices low: price control through its Drug Price Control Order (DPCO) enacted in 1995. Unfortunately, the prices of raw materials and intermediate products have recently risen very steeply, by up to 100 to 200 percent, due to tight supply of such products from China. And yet the Indian government allows price hikes of active pharmaceutical ingredients (APIs) to only 10 percent. Those chemical inputs constitute up to 80 percent of the total cost of bulk drugs.

The immediate result of this situation is that many bulk drugs manufacturers will be forced to stop producing. This is according to the President of the Bulk Drugs Manufacturers Association (BDMA) of India, Narayan Reddy. So if patients need those bulk drugs and manufacturers will limit, if not stop, producing those drugs due to government price control, who will suffer, the patients or the demonized drug manufacturers? Unfortunately, both will suffer, but more so the patients. Despite this situation, the Indian government is said to be dragging its foot in addressing this issue. Do we need the same thing to happen in the Philippines?

Finally, as I have noted in my recent paper, “Promoting innovation and public health through less government intervention”, price control will allow a corrupt President and/or Secretary of Health to use the measure for extortion. Like going to big pharmaceutical companies and telling them, “Hey, we’re going to issue price controls to your best selling drugs, unless you pay us…” Not that I am saying that the current Health Secretary is corrupt, but a price control measure will encourage an ‘extortionary’ and corrupt behavior to top officials of the Health Department or Office of the President.

I have other arguments in my paper why price control is bad public policy. I just hope that the writers of the IRR of RA 9052 will consider them. Otherwise, the country will be courting future public health risks by putting the interests of the extortionists and interventionists ahead of the interest of the patients.

Friday, June 27, 2008

Abolish Income Tax 1: Low, flat tax and economic growth

While the series of oil, food, and other commodity price hikes have punctured deep into the pockets of many Filipinos and other people around the world, they have also forced the Philippines to undertake what could be unthinkable if those price spikes did not happen: an income tax cut.

Under the Comprehensive Tax Reform Package (CTRP) that became a law in 1997, personal income tax system was among the most confiscatory in the world. Under that scheme, when a person has gross annual income of Php500,000 or more (net of a few deductions), the State will confiscate Php125,000 of the Php500,000 (leaving him/her with only Php375,000 disposable or after-tax income), and any amount above Php500,000, the State will further confiscate 32 percent of it. Perhaps a Php500,000 annual income was a “big” amount in 1997 when legislators made that law. But by mid-2000s, that amount was not that big and the tax system could push a middle income family into poverty level if there are plenty of expenses, like high health care cost for a sickly family member.

The new tax relief law, Republic Act No. 9502, promises to “correct” the confiscatory provisions by, among others, exempting minimum wage earners from paying personal income tax. In Metro Manila, at Php382 a day of basic pay and cost of living allowance, that’s equivalent to Php8,400 per month (22 working days/month) or Php109,200 per year (including 13th month pay). In addition, they increased personal exemption from Php25,000 to Php50,000 for all taxpayers, and additional deduction for qualified dependents from Php8,000 to Php25,000.

I think that the best tax policy that any government can give to its citizens is zero income tax, both personal and corporate, and for government to shift its main revenue source to consumption-based taxes. There are plenty of these types of taxes currently in place: value-added tax (VAT), excise tax, import tax, travel tax, amusement tax, real property tax, vehicle registration tax, and so on. An increase in VAT from the current 12 percent to 14 or 15 percent will not meet strong opposition if there is corresponding abolition, even a drastic cut, of income tax. In addition, there are plenty of business-related taxes currently in place: documentary stamp tax, percentage tax, franchise tax, capital gains tax, withholding tax on transactions with government, business permit tax, and so on.

Income tax is wrong both in theory and practice. Theory, income tax penalizes work and performance by productive people; while rewarding (recipient of tax collections) those in government bureaucracies and political leadership, and some less-industrious, less ambitious, or economically unlucky people. A number of people are poor because of laziness and personal irresponsibility, plus the incentives of various subsidies given by the state if one is poor.

Practice, out of 34 million employed Filipinos, both in public and private sectors, only less than 3 million are filing personal income tax. Well, if those who don't have to file because of automatic deduction are included, the figure could be around 10 million, but still too far from 34 million employed people. So many people are not paying income taxes, both rich and poor; professionals, and those in informal economies. In addition, those who work for multilateral institutions like the United Nations, the World Bank, the International Monetary Fund, the Asian Development Bank, the Organization Economic Cooperation and Development, USAID, the ASEAN Secretariat, and foreign embassies are not subject to automatic personal income tax deduction. If they file and pay income tax later, fine; if they don't, fine too. And people working in these institutions, especially the technical staff and consultants are earning big, many in six-digit monthly income, tax-free!

So a move to abolish personal income tax is simply to give justice to fixed-income earners, especially those in the private sector, and to correct the inefficiency of the tax system and the tax administration. In addition, any money retained in the paychecks of people and not taken in by the State in the form of income tax is money that will be spent on many other commodities and services. A tax cut is de facto "salary increase" and will go back to the economy in the form of higher domestic consumption, say repair or remodel an old house, or buy a new one, buy more hamburger and shoes, more office and school supplies, or hire a nanny for the kids, or more domestic travel. Even more international travels should not be spurned since other foreigners also come and spend their savings here.

In the case of corporate income tax, this is an illusion. This is because corporations do not pay taxes, people do – the firm owners and stockholders in the form of lower profit and investors equity, and the consumers in the form of higher prices. Corporations are just legal entity; they are not people.

Aside from higher domestic consumption, there will be billions of dollars of foreign investments that will come in – companies from high-tax countries in Europe and North America looking for "tax havens" that recognize their hard work. The jobs to be created locally will be enormous.

But a zero income tax is next to impossible to happen in this country. No country has also done it yet. So a low, flat income tax, say 10 percent – both personal and corporate – is the next best alternative which will give respite to many struggling businessmen and employees, as well as give additional revenues for the government. Even at this rate, the potential of big influx of foreign investors wanting to come in and escape the high taxes in Western Europe and North America should be considered. Think of the hundreds of thousands, if not millions, of jobs that will be created. Many Filipinos currently working abroad and endure the pain of being away from their families and relatives will have another employment alternative – right in the country itself.

One country that experienced fast economic growth because of the introduction of low, flat tax, is Slovakia. From being a communist state under the former Soviet Union, it adopted a market economy in 1991, after the Berlin wall collapsed. In 1994, it enacted a flat tax of 19 percent for both personal and corporate income. The effect was quick: in a few years, Slovakia became the "Detroit of Europe" with the entry of plenty of foreign car manufacturers – Western European, American, Japanese, and Korean car producers. GDP grew high and unemployment went down drastically.

Ireland is another "radical" economy: from 48 percent corporate income tax, it was cut down to a mere 12 percent! The volume of economic activity that transpired after this move, all other things being equal, was huge.

One consideration that other people ask if income tax has to come down to say, 10 percent flat rate, is where to get the money for more and better roads and other infrastructure. Simple: get the money from those consumption-based taxes. Better yet, allow more toll roads. Expenditures for these infrastructures will not come from taxes, but from corporate savings and investments that will make money from motorists who will use the road more often. This is very fair. If the toll road expressway is in Luzon, taxpayers from the Visayas and Mindanao will not be burdened in building and maintaining those highways. And even among those in Luzon, those who don't use the roads (say they don't have a car) need not fork out extra taxes for those roads; only those
who frequently use those toll roads.

A citizens’ movement to push a low, flat tax leading to an ultimate zero income tax after a few years transition, is now a big challenge for us.

Monday, June 09, 2008

Pol. Ideology 9: Liberty and Choice, Atlanta and HK Conferences

I attended two international conferences recently. First, the Atlas Liberty Forum in Atlanta, Georgia, USA last  April, and the Pacific Rim Policy Exchange in Hong Kong this week. One article per conference below.

(1) Liberty and Choice vs. Dictation and Extortion

April 30, 2008

The Atlas Economic Research Foundation (, a think tank based in Arlington, Virginia, USA, held its 8th Liberty Forum in Atlanta, Georgia, USA last April 25-26, 2008. Atlas gave me a modest travel grant, so I was able to go there as one of the 300+ participants from many countries.

The Liberty Forum is an annual event organized by Atlas and held in several cities in the US. Its main purpose is to gather many leaders of free market-oriented think tanks and public policy institutes, as well as some scholars and corporate leaders who believe in individual liberty and free market, enable them to meet and network with each other. There are also lectures and fora on selected topics, like this year, one session was “Promoting freedom in difficult countries” and the speakers were from Iran, Ghana, Mongolia and Venezuela.

When we formed our own think tank here in Manila, the Minimal Government Thinkers, Inc., our goal is very clear and well-defined: to advance a society of free, responsible and self-reliant individuals who demand less government, less taxes and less regulations. In short, a society that gives utmost importance to individual liberty and choice, and fights dictation in many facets of our lives, dictation and regulations that often invite extortionary behavior from those who think individuals should be guided upon, even dictated upon, on how they should conduct their lives. Like how much they can keep from their monthly income, who should be over-taxed, who should be over-subsidized, and who should administer those taxation, regulation and subsidization.

That is how I and our think tank got known to fellow free market-oriented institutes in Asia and other continents of the world, like Atlas in the US and the International Policy Network in UK.

Here in the Philippines, the attempts by the state, from local to national government units, as well as from some multilateral institutions, to forcibly collectivize many aspects of our lives, is numerous. Many of which were successful and are simply being implemented, like those high and multiple taxes and fees, trade protectionism, regulations in starting and expanding a business, and so on.

A number of those forced collectivization attempts are still being planned and need institutionalization through legislation. Among these are various price control schemes for rice, petroleum, housing, wages and medicines.

This coming May 1, the President and the top legislative leaders want two new big laws: exempting the minimum wage earners from paying personal income tax, and enactment of the “cheaper medicines” bill. The former is very rationale, it even looks cute, except that the state will also adjust upwards the taxes for those earning above minimum “compensate for revenue losses”. The second is always a populist propaganda, and two schemes the Health Department and the House of Representatives have thought of, are “generics only, no branded drugs” in physicians’ prescription, and medicine price control.

If the latter bill becomes a law, it will have 2 perverse results. One is killing choice – physicians will have no more option to choose and prescribe a certain medicine brand that they think can cure their patients given their particular illness. And two, create an extortionary environment. If the President and/or the Secretary of the Health Department are corrupt, all they have to do is go to the biggest pharmaceutical companies (generics or branded) and tell them, “hey, we will put your best-selling drugs under price control, unless you pay us.”

The price system is always the best indicator of the usefulness and availability of a certain product or service. Cheap ones are always attractive, but there are dangers that those cheap goods are of bad quality and in the case of medicines, could be unsafe and fatal. Expensive products are unattractive, but they often bring with them reliable names or brands for their manufacturers and producers, which translate to effective and safe products.

There are many factors why a product becomes expensive. Among the prominent ones are one, government taxes and fees – they are always inflationary, they always make the taxed products become more expensive. Two, the high cost of product research and development (R&D) and innovation. Copycats are always cheap because their manufacturers did not spend a single amount in product development and innovation. Three, monopolistic or oligopolistic structure of the market; ie, the fewer the sellers, the greater the tendency of the few or lone seller to abuse the market and bleed the consumers.

Note that in 2 or all of the 3 major factors mentioned above, government is involved. R&D and the cost of innovation is always very costly because of strict government health, sanitary and environmental regulations.

And so, if government intervention is costly and make things expensive, why would we seek another set of government intervention – through wage control and higher taxation of skilled laborers, those earning above the minimum wage, and medicine price control, as well as killing choice for physicians and patients?

Not only are we hoodwinked of the excesses and distortions by past government intervention and dictation. We are also hoodwinked to believe that we need more of the same abuses and dictations.

If we value our individual liberty, not their liberty to dictate to us what is supposedly good for us, then let us say NO to their attempts and dangerous legislations.

(2) Individual Liberty in the Pacific Rim

Individual liberty is a subject that is often subsumed, if ever considered at all, under general concepts like collective liberty and national sovereignty. This is wrong because if liberty and freedom are to have serious meanings, they must redound to individual liberty. The collective is composed of individuals. If individuals are considered as plain adjuncts and appendages of the collective, then only the leaders of the collective have liberty and power to selectively choose what rights and liberty the individuals can have, and what rights and liberty they cannot have.

This subject is the theme of the recent “Pacific Rim Policy Exchange” held in Hong Kong on 04-05 June 2008. It was sponsored by four free market-oriented think tanks: the U.S.-based Property Rights Alliance, the Americans for Tax Reforms, U.K.-based International Policy Network, and Hongkong-based Lion Rock Institute.

The HK meeting was the second event after the first “Pacific Rim Conference” held in Honolulu, Hawaii in May 2007. It was jointly sponsored by the same institutes, plus the US State Policy Network and the Asia Forum-Japan. I have attended both conferences, courtesy of IPN sponsorship.

The HK event was composed of six panels or subjects, three per day. These were (1) Real property rights: traditional rights, formal protection and economic growth; (2) Taming the beast: accountability, deregulation and transparency; (3) Free market health care reform: keeping healthy with a healthy market; (4) Intellectual property rights: protecting the engine of innovation; (5) Adaptation or accommodation: energy production and its consequences; and (6) Globalization: trade, regulation and international markets. And the speakers came from China, India, S. Korea, Sri Lanka, Taiwan, Hong Kong, Australia, Canada, US, UK and Peru. Other participants came from other Asian countries.

Among the panels that attracted me most were those on real property rights, intellectual property rights, and taming the beast (the State). It’s very enlightening, or perhaps depressing, to know that many governments around the world are responsible for very complicated, time-consuming and costly procedures in registering property so that many real owners of land, for instance, do not have peace of mind in saying that they indeed have full control of their lands, whether to keep it for whatever use, or sell and exchange it for money or other real properties.

Protecting intellectual property – someone’s song composition, research data and methodology, technological invention, medical innovation, and so on – is also very important. If another singer can just steal a lesser-known musician’s songs and record them and claim them as his own composition, the latter would feel robbed. If other companies, including state enterprises, can just steal the formula of an effective and best-selling pharmaceutical product because they were allowed to do so by the State in the name of “national emergencies”, the company that invented that medical product (and spent many years and several hundred million dollars in R&D) would also feel robbed. And there are many governments, upon the prodding of some activist groups, itching to do this kind of intervention and legalized stealing.

To me, such unnecessary bureaucracies in registering real or physical properties, and disrespect of the IPR of an innovator company, are examples of “government failure”. I firmly believe that protection of the citizens’ right to life, right to dignity, and right to private property, are the State’s main function. Running and operating banks, power plants, pension funds, hospitals, universities, or engaging in rice trading and broadband deals, are secondary or unnecessary State functions because these are better left to the private sector in a deregulated and competitive business environment. There is pressure on private enterprises to perform well and satisfy customers in a competitive and level playing field, while there is complacency, resulting in mediocrity, when a service is under the hands of government. This is because private enterprises depend on revenues from customers who voluntarily come to get their services, while government enterprises depend on subsidies from taxes and fees that are forcibly collected from the people.

And how could one tame the beast? A speaker from Hongkong suggested to “declaw it, one claw at a time, and blind it, if you can”. I agree with this proposal, although achieving it is very difficult because the number of claws, those various regulations, seem to be increasing, not decreasing. And very often, those regulations are not transparent; one would not know them all, including the fees, hidden requirements, and the number of days, weeks, or months to wait, until he/she gets there, in front of the concerned regulatory office. Forcing the government, both national and local, to become more transparent should be a good challenge for citizens since the total cost of (a) taxes and fees + (b) cost of compliance can be high which siphons the people’s energy and resources away from actual productive undertaking.

Aside from the six panels, the conference also featured two luncheon speakers and two dinner speakers during those two days, and all of them were articulate speakers. But the most influential of them all was Jimmy Lai, founder of Next Media communications in HK. He was also the main character in a documentary called “The Call of the Entrepreneur” produced by the Acton Institute. The man had a typical rags-to-riches story due to non-typical character of super-hard work and strict business ethics. He was emotional in the documentary when he related how difficult his and his family’s life was, both in mainland China until he was a teen-age migrant worker in HK, and how his philosophy in life changed after he read Friedrich Hayek’s “The Road to Serfdom”.

Is democracy a political condition? Many people would nod in answering this question. But Jimmy Lai says NO, because for him, democracy is a moral issue. The freedom that people enjoy in a democracy is a deep moral right, something that they will not experience in a dictatorship where the citizens are worth nothing except as adjunct and slaves of the State and State leaders, the dictators. Most importantly, Jimmy Lai says that what matters most is individual responsibility, how individuals should conduct their lives. Yes, individuals have the option whether they can be ambitious and hard-working, or be lazy and dependent on family or State subsidies. So his message to the State, “Leave us alone.” Incidentally, the recently published book by the President of the Americans for Tax Reform foundation, Mr. Grover Norquist, has the same title, “Leave us Alone”.

See also:

Pol. Ideology 5: Have Movements for Liberty Progressed? June 26, 2006
Pol. Ideology 6: Quotes from Adam Smith, February 04, 2007
Pol. Ideology 7: Individualism, Entitlement and Freedom, April 30, 2007
Pol. Ideology 8: Ideas on Liberty, September 15, 2007