Friday, August 19, 2011

Abolish Income Tax 7: Rene Azurin, Peter Wallace, John Mangun

A friend who writes a weekly column in BusinessWorld, Prof. Rene Azurin, wrote yesterday a straightforward article, Just scrap income taxes. He argued,

...For many years now, I have been proposing that our present system for taxing income (basically patterned after the US tax system) should be replaced with a system for taxing consumption. Over time, I have argued in several public forums (as well as in this space) that consumption taxes are intrinsically fairer than income taxes. After all, what is fair about penalizing (via taxes) someone whose only "crime" is to be successful at running a business efficiently enough to be profitable? Isn’t it inherently fairer to penalize (via taxes) someone because he consumes resources and therefore adds to the total burden of both the society and the environment?

An economic rationale for this notion is that taxes on income reduce the incentives for businessmen and entrepreneurs to make money through the production of goods and services. In this way, they act as a drag on the impetus for business expansion and output growth. Income taxes are thus inconsistent with the compelling goal of creating jobs for the many millions of our unemployed and underemployed citizens. In contrast, taxes on consumption logically make those who consume more of society’s resources assume a greater share in the cost of managing the society. The more one consumes, the more taxes one pays.

It should not, moreover, be overlooked that taxes on income -- because they prescribe permissible deductions -- are more complicated, more subject to the revenue collector’s discretion, and therefore more susceptible to corruption. In that respect, the current proposal for a gross taxation scheme -- because it limits the deductions to "direct costs" (though I am not clear yet on what this term includes) -- is an improvement. The tax simplification bill -- now being finalized in the House of Representatives’s Committee on Ways and Means -- proposes to tax corporations at a rate of 18% of their gross income (net of said "direct costs") and is being pushed mainly by committee chairman Hermilando Mandanas. Given the avowed objectives, Representative Mandanas should consider simply eliminating income taxes altogether and replacing these entirely with consumption taxes. Taxes on consumption -- in the form of sales or excise or value-added taxes -- are more straightforward, less subject to discretion, and less susceptible to corruption....

Again, I say AMEN to Rene's arguments.

Last August 25, 2009, I also wrote this:

3 Columnists pushing for zero income tax

I know of at least 3 newspaper columnists who are advocating the abolition of income taxes. One is John Mangun of Business Mirror where he writes in that paper every Monday, Wednesday and Friday. John is an American businessman who has been living here in the Philippines for nearly 3 decades now. He also married a Filipina.

The other two newspaper columnists who have argued and written at least once in their opinion-columns, for the abolition of income taxes, both personal and corporate income, are Peter Wallace of Manila Standard (he writes there every Friday I think), and Rene Azurin of BusinessWorld (he writes there every Wednesday). Peter is an Australian businessman who has been living in the Philippines for more than 3 decades now. He also has a Filipina wife. Rene is also a businessman and an academic at the University of the Philippines (UP) College of Business Administration.

With at least 3 columnists in 3 national newspapers advocating zero income tax, there is a fair chance for this issue to be pushed in the national agenda of the various political parties in the coming May 2010 Presidential and local elections.

Below is a portion of John Mangun’s article today.

New ideas, not just new faces

Written by John Mangun / Outside the Box
MONDAY, 24 AUGUST 2009 21:16

… Traditionally, all candidates have called for stronger enforcement and harsher penalties for corruption. Perhaps then, the ultimate solution is to torture and then burn at the stake anyone involved with income-tax fraud, both in the private sector and with the Bureau of Internal Revenue (BIR). That might get people to respect the rules. Or maybe people are never going to fully obey income-tax rules and maybe there will always be corrupt government tax officials.

Perhaps a more creative and effective solution would be to abolish income taxes completely.

Income taxes are not pro-poor, anti-rich or any of that nonsense. Income taxes are anti-hard working people of all income brackets. The company president and the company messenger both pay income taxes. The drug dealer does not. The working person is penalized for following the rules. The drug dealer is not. Some 2,500 years ago Plato said, “When there is an income tax, the just man will pay more and the unjust less on the same amount of income.”

The same applies to corporations and corporate taxes. If your company employs 100 people and you make a profit, your tax rate is 30 percent or more. But if you run a nice and tidy gambling operation with a 100 people employed, your profit is taxed at zero percent. Now tell me the progressive income tax is fair. To whom?

The creative approach would be to abolish all income taxes. No more tax cheats that do not follow the rules. No more government corruption at the BIR. Everyone, rich and poor, are then treated equally.

The government can easily make up the revenue shortfall with an increase in the sales or VAT tax. Sales tax is the fairest of all taxes. As long as food, medicine, clothing and other essentials are exempted, there is no penalty on the lower-income earners and lower economic groups. The “rich” man and the “poor” man both pay the same amount of tax on their newly purchased washing machine.

Do not say that an increase in the VAT will reduce consumer spending. With the abolition of income taxes, the consumer will have more money to spend. The difference is that the consumer will choose how to spend the money, not the government.

The point of my rant is simply that we need creative solutions to the problems and it does not seem that the politicians have the boldness, the courage to propose something out of the ordinary.

When will come a candidate who offers new ideas and not just the offer of a new face to battle the economic and social problems of the Philippines?


See also Part 6, Income tax and VAT trade-off, February 08, 2010
Part 5: Consumption taxes, other government fees, November 25, 2009

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