Government and Taxes: December 2005

(I posted this in the MG yahoogroups in August 2004)

A friend who teaches Economics at Ateneo de Manila U, Cielo Magno, showed her class a copy of Minimal Government Manifesto and the Addendum to the Manifesto. Cielo is teaching Public Economics to undergrad Econ. majors. Cielo sent me a compilation of her students' comments. Man, 21 pages long, single space, from 23 students. (Cielo, thanks a million for this compilation; the comments are both amusing and educational)

Her students agreed that I post their comments, unedited. I am posting here 3 of those 23 comments. The first, from TJ Lumauig, is almost 100% supportive of MG philosophy. The 2nd, from Ferdinand Nokom, is almost 100% critical. the 3rd, from Stephanie Tiu, is somehow neutral.

After these 3 papers, a friend Chi-chi B. gave additional points.
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(1) TJ Lumauig

I have always believed that the biggest and most severe problem of the Philippine economy, though virtually impossible to measure accurately, is corruption. This obviously points to the government. It is no secret that a lot of corruption takes place within the government. How often do we hear of one person embezzling millions from here, and someone else extorting millions from there? It is a disturbing thought to think that a big chunk of tax payers’ money meant for the good of the country is merely going to pockets of government officials. Not only from the elected officials does corruption take place, but even from their family members who should not even have any hold on administrative duties. So in much agreement with the Minimal Government Movement I ask the question, does the country really benefit from the government?

First and foremost, I believe that our government is way too big. A country like the Philippines does not need a government of our size. For example, if the roughly 19 million citizens of the state of New York can be represented by only 2 senators – like every other state in the US – why does the 8 million citizens of the Philippines – less than half the size of NY – need 24 senators? Common sense would tell us that a group of 100 would be easier to lead than a group of 1000. But then why is a small country like the Philippines in such turmoil? The government is just too big. Each added member of the government results into an added salary for citizens to pay for plus the hanging threat of another possible corrupt official. This implies that citizens pay even more taxes that probably will not even be used for the country. And for what? To have someone act like they’re doing something despite having many other officials with almost the same exact duty assigned to them? In this sense, our excessively large government with its overlapping duties does more harm than good for the Filipino people.

I strongly agree with the principles of the Minimal Government Movement. The Philippine government should be minimized to a certain number of specific duties. This way, people would not be held back too much, and would be able to work to their potentials. Also, corporations would be of better quality in the hands of the private sector since they would naturally compete to earn revenues. Another aspect of minimizing the government is that it could better focus on its more important duties rather than spreading itself too thinly, barely implementing its rules and policies. This way, the government would become more efficient instead of adding problems.

In a small country like the Philippines, a large complex government is not needed. What the country needs in order to develop is the proper use of its capabilities that are often held back by the government. By giving markets more freedom, reducing unnecessary taxes on citizens and most importantly reducing the number of possibly corrupt officials, the Philippines can better develop as a country.

(2) Ferdinand C. Nokom Jr.

I think that the Manifesto of Minimal Government has good ideas in mind yet some of the proposals they have in mind are rather questionable. It is good that indeed, the government should cut down on its size, for a large chunk of the government budget is allotted for salaries of inefficient government employees. Bureaus and other government agencies should be merged or shut down, in line that their function often overlaps with other agencies and maintaining them is a waste of manpower and taxpayer’s money. Federalism is also a good idea for the LGU’s as it promotes independence and efficiency for there is no waste of time trying to beg for higher officieals to address the needs of the local governments. But on the other hand, this power for the LGU’s has the threat of corruption in it, for it gives more power to these officials and traces of nepotism can be seen in the long run with this system.

Streamlining the tasks of the government, along with the agencies of National Defense, the Senate and Congress, and decentralizing the power and more importantly the money (as seen with the pork barrel) of the Senate is good, as all the point brought up by the Manifesto in support to their statement of decreasing the size of government is good, for this rids the government of scrupulous elements in office, or those running for office to get a shot at stealing the taxpayer’s money, and promotes capable men into the position for there is less gain for them financially, with the reduction of size in the government and more focus on performance. But, The premise of eliminating income tax and corporate tax is quite questionable. As of now, income tax is the biggest contributor to government revenue. Although setting a flat rate of 10% income tax is promising, would that be enough to fund the nation? What would be good maybe, is to set the 10% flat rate to the low to moderate income families and set harder taxes on those on the higher income bracket of society. I think they should not remove corporate tax, and also the premise of imposing consumption tax is good so that there would be somewhat of “equality” in taxation. Another questionable premise is complete trade liberalization. How can we ensure that our goods can compete in equal footing with imported goods? Would we not run the risk of being flooded with imports and the killing of the local industries with that move? All in all, the premise of a minimal government intervention is quite promising, yet it still has its questionable premises that may not be of good to the country.

(3) Stephanie Rinna Lim Tiu

The concept of the Minimal Government as a whole seems like a very good way to improve the efficiency of the government and, at the same time, reduce the costs incurred by the government. I agree with the Manifesto that the government should only be limited to a few functions and leave the provision of goods and services to the market. I also agree with the government that there should be a streamlining of the tax structure and a curtailing of the intervening and regulating of the government.

However, there are also some points which I do not agree with like the emphasis on greater individual responsibility and making social services like education and health care a parental responsibility, not a state responsibility. I would like to point out that the income distribution in our nation is already very skewed in favor of the citizens who belong to the A and B class. These citizens do not send their children to public schools or public hospitals because of the quality of service that they receive there. These moneyed citizens can afford to pay more in order to get better medical or educational services for them and their families. But from the perspective of the masses (most of who live below minimum wage), what they are earning is barely enough to provide for the survival of their family, how can they even consider sending their children to private schools or go to private hospitals when they are sick? What the government should focus on is improving basic social services such as education and health and view it as an investment for the nation’s future.

The current situation in the Philippine educational and health system is such that there are not enough schools or hospitals to provide for the needs of the Filipinos, what more if we decide to leave the provision of healthcare and education to the individuals instead of the government? It would mean more uneducated citizens because only a minority can afford to pay for the education of their children. It would also mean more deaths and diseases because the masses cannot afford the vaccines and medication that are required when someone is sick. There is a reason why education and health care are considered “public goods”, privatizing these social services would encourage private corporations to find a way to profit from these basic services. Some might argue that the voucher system would be a good replacement for the public elementary and high schools but, realistically speaking, most private schools are also already filled to capacity and using the voucher system would mean compromising the quality of education because of the added demand and limited supply. Privatizing state universities and colleges (SUCs) would indeed raise revenue for the government to help them retire many of their maturing public debts but it will be at the expense of its people because they are the ones who have to suffer the repercussions and find ways to finance their education.

One very good point of the Minimal Government Manifesto is the simplification of the tax structure by adapting a minimum of 10% flat tax for individual income and shifting revenue collection from income tax to consumption tax. The continual increase and introduction of new taxes over the years has eaten up a lot of our disposable income and has had a very negative effect on the economy. The government seems to see raising and introducing taxes as a solution to helping service our national debt. However, they do not seem to see that it just increases the opportunity for corruption in tax collection. It is not the taxes that are the problem, it is the tax collection. While we do need taxes to help finance the projects and programs of the government, it should not be seen as a way to milk the people for revenue to help fund more projects and debt servicing.

What is called for here is a massive shift in the structure of the government and the mindset of the people about the government. The government has its flaws and weaknesses in trying to fulfill its duty: to ensure the welfare of its people. We, as a nation, have constantly had a very negative view of our government and this results in our apathy on anything concerning the government. If we are to be successful in implementing the Minimal Government, it requires the support and faith of the Filipino people in its government. The cooperation of the Filipino people will be a crucial part of the success of the Minimal Government. There is still a long way to go for the implementation of the Minimal Government: reviews and studies of the principles that are advocated, coming up with programs that will test the efficiency and improvement of the new system and improving on errors, and last, but not least, gaining the support of the Filipino people. But I believe in the potential of the Minimal Government because I can see how it can, in the long run, improve the situation of the Filipino people. It might not be smooth sailing, especially when it is first introduced, but I have faith that, given time, the Filipino people will see how it has improved their lives and they will find it easier to adapt to a new system of government.
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Additional comments here from Chichi, she's got good arguments. My addendum after her comments. Posted in the MG yahoogroups in August 2004

Hi Noy,

Here are possibly additional ammunition you may consider to address the issues raised by the Ateneo Econ Class to the Minimal Government Manifesto.

1. Unregulated markets tend to become monopolies/oligopolies, thus, government has to step in to prevent that.

As a "diplomatic" strategy (don't know if you agree though), it may be correct to concede a bit since the theory does support the existence of natural mono/oligopolies in some but not all industries. Thus, government involvement may be required but only in terms of enhancing existing and future contestability of these few markets, instead of direct participation in that market (either through production or trading). For the rest of the "healthy" markets, no "cure" is necessary.

However, government sometimes chooses to create "super" markets by politicizing ("these markets must never, ever be allowed to fail") certain industries like oil and rice that can otherwise be considered healthy. I feel government is also justified in wanting peace of mind in this regard, but again, the appropriate response is just to ensure free entry and exit for private sector players who will work for market equilibrium. We are seeing this in oil.

Sadly, this is not happening in medicines because of imperfections in the distribution side. Thus, instead of actually setting up more public drugstores to correct this, government should probably just have a more vigilant enforcement of the generics law and help in educating sick people of generic options.

2. Profits are bad.

Only permanently, abnormally high profits are bad since they are the fruits of unhampered monopolies/ oligopolies. Government should try to weaken these profits only if the great majority of Filipino consumers (and not necessarily Filipino producers) feel the pinch, and again, not by offering direct competition but by allowing others to offer the competition. Smart and Globe have had a spectacular run with profits, enough to attract Sun Cellular to join the fray, but there's no need for government to lift a finger yet since the intense competition among the three have yielded better services for cellphone users.

3. Abandoning education and health care to parents will worsen inequality.

I agree that the existing wording seems "heartless." If I remember correctly, the public welfare argument that an initial equilibrium assumes equal endowments (or is my memory just too rusty?), and in the absence of that utopia, we can settle for equal opportunities provided by universal education. Why should we penalize future productive citizens for having lazy parents? Pardon if this bias runs contrary to minimal government, but perhaps shrinking the public education sector can just become a long-term goal, to be achieved only once income inquality is reduced to an "acceptable" rate.

Healthcare is a different matter though. There is somehow a moral hazard problem here since there are diseases that can be avoided, lung and liver problems from smoking and drinking, heart problems from having the wrong diet, etc. Perhaps, government can do its part in just stressing disease prevention and health management in schools, and coordinate/help the donor, socio-civic and corporate communities in their healthcare activities. National government could probably just get involved in times of epidemics or disasters. Personally though, this is a tough call for me. Lands have been sold and children sent to Japan for the sake of expensive healthcare for loved ones, despite the existence of public hospitals and Philhealth. I personally believe this sector needs a second look.

4. Further trade lib will gobble up many small and medium industries.

From the other side of the coin, only trade protectionism allowed these industries to thrive in the first place. Government decided to play God by choosing the winners who are assured of the mark-ups in the amount of the tariff protection. These winners are not necessarily small since they have the resources to convince government to pick them - cement, steel, sugar. Livestock and poultry producers have the numbers to make politicians listen, but the majority of these producers do not have the scale to benefit commercially from high tariffs.

In the meantime, what happens to the equally small, if not smaller, banana-que, barbecue and lechon manok vendors who would continue to feel the profit squeeze? What prospective use of these protected products would otherwise have sprouted if their prices had been more affordable? Maybe if these products had been more affordable, many of our fellow Filipinos would not resort to eating instant noodles or plain sauces as ulam and scrimp on nutrition.

Sometimes, we forget the main reason why we want to support certain sectors -- we want to encourage supply so consumers would always have access to these important things in life. But with trade protection, the world is giving us access but we just don't trust them enough to supply us regularly, in the end, making consumers make do with relatively inexpensive goods, a premium for "a more assured" supply. Such assurance is not actually credible since virtually all products can suffer from supply shocks, e.g., pest on our onions, FMD on our pork, etc.

5. On minimal government not being suitable to Philippine conditions.

We have to admit MG principles are ambitious, but our government's complexity warrants a long period of implementation. MG approach should be likened to weaning rather than cold turkey, and such weaning should start now. Otherwise, it will continue to grow and become more complex.

In the meantime, other Filipinos will continue to do their work to improve the economy, produce better prepared graduates, rear future citizens with precious values, etc., a never-ending process. However, MG has chosen this advocacy because of a perceived vacuum in the marketplace of ideas for reduced government intervention. MG principles will hopefully be adopted if the time is right for such principles. But it would never be considered if the issues are not raised, forced or flagged.

Chichi

Hi Chi,

On your points in #1, you're right on natural monopolies. I failed to take note of that phenomenon in my answer. Yes, there is government role there -- to make entry and exit of new players/producers easier and less cumbersome, often through many regulations by the Executive branch, and franchising laws by the Legislative branch.

On the distribution problem in medicines, I think a more effective way to solve this is to allow more drugstores to enter the market, including foreign-owned drugstores and pharmacies. I am not sure if drugstores are among the "no to foreigners" sectors in the Constitution. If so, constitutional change to remove these restrictions in medicines/drugstores and other sectors or industries will be the long-term solution.

On #2, yes, monopoly/oligopoly profits are bad since these are attained through "rent-seeking" activities, sponsored and maintained by the state. I wrote this in my answer to the students' comments: "Many market imperfections (monopolies, oligopolies, cartels, other variants) are actually state-sponsored, state-created and maintained: single or limited franchises through legislation, trade protectionism, cabotage law, bureaucratic red tapes to prevent competition, etc."

On #3, yes, it should be pointed out clearly that leaving basic education and health care to parental responsibility, not state responsibility, is a long-term goal and should not be adopted in the short- and medium-term (ie, not in the next 5-10 years, even longer). On health care, one solution I could think of is to further deregulate medical education. Some schools which offer BS Medicine on 6 years total (vs. the current 8 years, 4 pre-med, 4 proper medicine) should be allowed. Supply of medical students and graduates is rather low because of the expensive and long training period. More physicians, more private clinics and hospitals, more competition among health care professionals, more affordable health care.

Re. disasters and calamities, I observe that private sector initiative in giving aid on these situations is high and widespread. Civic clubs (rotary, jaycees, lions, kiwanis, Knights of Columbus, etc.), the church, village or homeowners associations, media, etc. are often seen in these projects. My sister's rotary club (she's president of one sosyal RC in makati) for instance, will construct 3 elem. school buildings in a remote barangay (no electricity) somewhere in Batangas province within her 1 year term. My brother-in-law's RC also in makati has various livelihood programs and scholarships for several college students for Aeta people in Zambales.

On #4, I don't think foreign traders and investors will be interested to produce banana-que, barbeque, litson manok, etc. These products are better sold in small production and marketing units like a street corner and small stalls.

Finally on #5, yes, MG's philosophies and goals are ambitious. When I consulted with Dr. Noel de Dios around 2 months ago about the MG Manifesto, he encouraged me to pursue it because it's an ideological and philosophical paper. We just have to engage our folks, other people, on the role and limits of government; and hence, government's limits in taxing our income, consumption, savings, investments, etc. No organization in this country has ever attempted to consistently take this challenge. Tayo pa lang. With the current fiscal and debt problems of the country where the government is scrambling where to further tax us, there is great need to challenge the politicians, media, other statist-oriented people, to shrinking government as an alternative to more taxes.

regards.

Nonoy
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See also:

Pol. Ideology 1: Minimal Government Manifesto, October 18, 2005

Pol. Ideology 2: Evolution of Market and State, October 25, 2005

Pol. Ideology 3: Liberal vs. Libertarian, November 06, 2005

Government and Taxes

Pages

Monday, December 12, 2005

Party List 2: Opportunism, 2004 Elections

Monday, December 05, 2005

Pol. Ideology 4: Comments to Minimal Government Manifesto

Thursday, December 01, 2005

FIGS 1: World's highly indebted countries