Wednesday, September 19, 2007

Tax Cut 6: Retreat of High Income Tax Philosophy

One important indicator of how socialist or (forced) collectivist leaning a country is, is the level of tax rate that citizens are forced to surrender their income to the state. Economies that emphasize forced collectivism and coerced contribution to social welfare have high income tax rates, say more than 40 percent. At this rate, the hard-working, high-earning, and performance-driven citizens are left with less than 60 percent of the fruits of their hard work, unless they learn to cheat their income tax payment and the tax system is easy to be manipulated, or the tax administrators and collectors are corrupt and easy to bribe.

The decades after WW2 saw many countries, especially their politicians, hugging socialist thinking. That is, in order to hasten the development of their societies, a big portion of the income and savings of the rich and high-earning people should be confiscated through high income tax rates, and the money be distributed to the poor and the weak, including the lazy and irresponsible, so that there will be more equality and more social progress. This thinking has pervaded until the early 80s, so that by 1980, the vast majority of countries have top marginal income tax rate of 50 percent or more. Exceptions were HK in Asia, Switzerland in Europe, and Argentina in South America, among others. A lot of tax cheating also happened in many countries where income tax rates are very high, resulting in lower tax collection by governments.

The wave of globalization in the 80s made many politicians and their respective technocrats realize that they need to relax a bit their level of income confiscation as there was an emerging “income tax competition” among countries. A number of their people and businesses are moving elsewhere where income taxes are lower or easier to comply. So that by 1990, more than half of Asia-Pacific countries have top marginal income tax rate of less than 50 percent. The same pattern was observable in South and North America. Europe remained enamored with social democratic and other variants of “limited socialism” ideology, except Switzerland and the UK. For African countries, there was tax rate reduction but still high, except in Jamaica.

The continued wave of globalization, especially the formation of GATT-WTO in the mid-90s, compelled more governments to further slash their income tax rates. By 2000, until 2005, only Japan and some European countries, have marginal income tax rate of 50 percent or higher. The philosophy and practice of high income tax rates, for both personal and corporate incomes, have retreated.

In addition, the new trend now for some countries in income taxation, is low, flat (or single rate) tax. This is particularly true for many formerly Eastern European countries. Russia is one of those countries that have recently embraced the flat tax philosophy and subsequently implemented it. This is after a realization by many governments that high income taxes not only push many of their productive and entrepreneurial citizens to migrate to other countries, but high and multiple-rate taxes encourage cheating, of lowering the declared income so that the corresponding tax rate will also be lower.

The tax burden for the citizens can be computed as:

Tax burden = tax rate + cost of compliance.

Regulations on tax exemptions for dependents, expenditures that are tax-deductible, plus the multiple tax rates or tax brackets, can be confusing, so that people have to spend extra time studying these things, or have to hire tax consultants to make their compliance easier. Hence, the attractiveness of low, single rate income tax.

But while it is true that many governments were compelled by new circumstances to reduce their income tax rates, this did not mean that they have fully abandoned socialist-leaning philosophy. Almost coinciding with the reduction of income tax rates, they introduced new, or hiked the existing, consumption-based tax rates, like value-added tax (VAT), sales tax, excise tax, vehicle tax, property tax, amusement or entertainment tax, travel tax. In addition, they also introduced new or hiked existing government fees and charges, like passport fee, visa fee, driver’s license fee, airport/seaport terminal fee, business permit fee, mining/quarrying fee, and so on.

This is a new ballgame for the citizens aspiring to have bigger leeway and freedom how they should spend their earning and savings given their household-specific needs and priorities. Meanwhile, the fight for even lower income tax rates compared to existing levels, if not the abolition of income tax, is a pressing challenge for the citizens, the free market-oriented NGOs and research institutes in particular. A zero income tax with high consumption-based taxes like those mentioned above, should be a good compromise and advocacy.

On another note, a friend with MGM, James Miraflow, wrote a short paper, "Debt and Taxes". It was a good paper, short and focused, and lots of good and updated data. In his closing paragraph, James asked, "Will this go forever (debt & taxes)? Will the public forever pay for debt of an ill-managed government?"

Sadly, I think the answer to his questions are YES to both. Government indebtedness started with Marcos government in mid-60s, perhaps even with earlier Presidents, and it's been the trend until now, until 2 or more Presidents from now. Government, especially big government, is a system of treachery and lies. Promise people of "subsidy here, welfare there". But just keep silent on "taxes here, fees & charges there, borrowings over there."

In order to break the cycle of debt and taxes, some people propose the abolition of the Automatic appropriation law (PD 1177) for public debts, agrarian reform, and a few other areas. I think that law is correct. If I lend someone money and I have no guarantee that he will pay me back, say automatic deduction from his monthly salary, or automatic forfeiture of his car or appliance/s, why would I lend him in the first place?

What is wrong is the need to perpetually borrow in the first place. If one cannot raise this income and revenue, why spend that much so that he will go on borrowing endlessly?

Increasing revenue through more or higher taxation is definitely a No-No. One reason, look at the WB and IFC's "Doing Business" annual studies. Number of business-related taxes for medium-size companies around the world, the Philippines has among the most number of taxes in the whole of Asia, even beating socialist China and Vietnam in having the most number of business-related taxes.

Increasing revenue through privatization, this I fully support. Large-scale privatization, even at a big bargain, get the money, and use it mainly if not entirely, to retire public debts, both domestic and foreign debts. Don't use privatization proceeds to increase budget for public education, military modernization, agri modernization, etc. Let the savings from lower interest payment and principal amortization be used for public basic education, etc.

Privatization without deregulation is bad, of course. It only transfers state monopoly corporation to private monopoly corporation. The economy should be deregulated, with or without existing government enterprise/s in certain sectors.

Government corporation always live on unfair playing field. First, they use tax money (money we could have used to buy additional milk for our babies, additional room for our house for our expanding family, additional food, etc.) for their capitalization. Second, they use tax money for their continued existence as they often live off on continued subsidies. Third, they almost always occupy monopoly position in whatever sector they were situated. So the twin evils of over-regulation and monopolization is the hallmark of most govt. enterprises.

Liberalization, deregulation and privatization ("LDP"). These are among the important policy tools if we want an economy that can harness unlimited entrepreneurial energy from the citizens. Liberalize, have 1,000+ hotels/food chains/pharma companies, etc. doing business in the country. Have 10 or more telecomms companies do business here. Singapore has only 4 M people, but has 5 or more competing telecomms companies. The Philippines has 88 M people, about 26M subscribers, being served by only 3 telecomms players.

Deregulate and abolish (at least downgrade) many regulatory government bodies. These bureaucracies decide who can enter bus line business and who cannot. They decide who can put up new airlines or shipping lines or telecomms or cable tv operators, etc., and who cannot. The amount of arbitary powers in their hands are big, so that if they decide to limit the number of players per sector to only 2 or 3, then us consumers have to endure the lack of choices and options.

See also: 

Saturday, September 15, 2007

Pol. Ideology 8: Ideas on Liberty

Three years ago, I attended my second international conference about free market, the 1st Asian Resource Bank Meeting in Hong Kong, September 15, 2004. It was jointly sponsored by the Atlas Economic Research Foundation (USA), Unirule Institute of Economics (China) and the Friedrich Naumann Foundation (Germany).

Below are some papers discussed there.

(1) Lunch Speaker, Dr. James Dorn, the China specialist of Cato Institute ( He talked about "Why Freedom Matters". In his presentation, he showed graphs, charts, tables, showing that stronger property rights enforcement and greater economic freedom results in greater wealth and faster poverty alleviation. Also the pattern of China's economic liberalization and growth. Below are the 5 Lessons/summary of his presentation. Also a quote from Havel...

Five Lessons
1. Private property, freedom, and justice are inseparable.
2. Justice requires limiting government to the protection of persons and property.
3. Minimizing the use of force to defend life, liberty, and property will maximize freedom and create a spontaneous market-liberal order.
4. Private free markets are not only moral; they create wealth by providing incentives to discover new ways of doing things and increase the range of alternatives.
5. Governments rule best when they follow the rule of law and the principle of non-interference (wu wei).
The market economy is "the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself."
-- Vaclav Havel
"Summer Meditations"

(2) Speech by Joe Lehman, Executive VP of the Mackinac Center for Public Policy in Midlands, Michigan, USA. April 2004, I attended the Mackinac Leadership Conference in their office, I have met Joe there, as well as Mackinac President Larry Reed.

Translating Ideas Into Success
(On Sept. 15 in Hong Kong, Joseph Lehman delivered the following speech to open the inaugural Asian Resource Bank, a meeting of Asian free-market think tank leaders sponsored by the Virginia-based Atlas Economic Research Foundation and the Beijing-based Unirule Institute of Economics. The remarks are a condensation of ideas presented at the Mackinac Center’s semiannual Leadership Conference, which has trained more than 300 national and international think tank executives in management, communications and fundraising. Contact Kendra Shrode for information on the next Leadership Conference.)
It’s a great privilege to address the very first Asian Resource Bank meeting this morning, make new friends, and reunite with familiar ones. Mackinac Center President Larry Reed asked me to express his warmest greetings to you. He told me he was so grateful that I could stand in for him today that he doesn’t mind if I borrow liberally from his material!
If you’ve been around think tank people very long, you’ve probably realized that not many of us can tell a good joke. In a lot of professions, that would be a real setback, but it doesn’t hold us back. We don’t have to come up with our own funny stories: We’ve got the whole government doing ridiculous things all the time for us to talk about.
We can even retell other people’s jokes; Will Rogers told that one more than 70 years ago. Telling jokes about the government helped make Will Rogers the best-known American humorist of his time. But government is not just funny – it’s a deadly serious enterprise. Some of you doubtless can testify first-hand to government abuse of the ugliest sort. Figuring out how to limit government – to make it the servant of the people and not the other way around – is a necessary work and a noble calling.
So how do we translate our ideas into success? How can we actually shape public policy with a mere notion – that freedom and free markets are the best way to organize society?
The Power of Ideas
We start by realizing that ideas are the most powerful force in the world. Power can be found in politicians, armies, activists and institutions. But the reason for their power is ideas, because ideas explain why people do the things they do.
What people believe determines how they behave, for whom they vote, the laws and rules they accept or reject and what kind of society they will work to adopt. Ideas determine whether a culture embraces free markets or socialism, democracy or dictatorship. Change ideas, and you change the world.
Political leaders may enact public policy, but they seldom generate the ideas that drive policy. Politicians usually act within a fairly narrow range of politically acceptable options. And they cannot operate outside that range without jeopardizing their political standing.
The range of credible ideas circulating in the intellectual marketplace determines the range of politically acceptable options. So if you have a think tank that changes the intellectual landscape, that think tank actually shifts the range of politically acceptable ideas. And that’s how think tank ideas have impact.
To take a simple example, if the generally acceptable income tax rate is 60 percent, it is very hard for a politician to say it should be 15 percent. A 15 percent tax is outside the window of political possibility. But if the tax is at 60 percent already, then 50 percent is easy to propose. Forty percent may be easy to propose if think tanks or others have done the research and shifted the intellectual climate of opinion. The 40 percent tax rate may not be enacted right away, but a politician can propose it without seeming crazy if intellectuals have paved the way.
Milton Friedman has said think tanks are at their best when they change what is politically possible.
We must remember we are engaged in a battle of ideas. In spite of political obstacles, we are not battling against personalities or people. We can win by promoting ideas that shift the very ground of battle.
But even the very best ideas are apt to go nowhere without optimism. I have the privilege of working for probably the world’s most optimistic man. Larry Reed likes to tell the story of how he once lost control of his car on an icy road. As he was rolling over and over down an embankment, he swears the thought going through his head was this one: "At least I’m going to get a new car out of this!" Now that’s optimism!
Well, we don’t have to be pathological optimists to have every reason for optimism ourselves. We are winning the war of ideas.
We have watched the ideas of Soviet communism become discredited around the globe. The world’s most aggressive exporter of communism has crumbled. Liberalism is taking hold and gaining respect in dozens of former socialist strongholds. In my own country, about the only place you can find someone who still believes Marx was right is on college campuses!
Another reason for optimism is that the drift of ideas is in our direction. I don’t know about you, but I run into a lot more former socialists than former free-marketers. I can’t remember the last time someone said to me, "You know, I used to believe in free markets and individual liberty, but I’ve looked at the evidence, and now I think central planning is the way to go."
The final reason to be optimistic is simply that pessimism is self-fulfilling. What band of revolutionaries ever said, "It’s hopeless; we’re fighting a lost cause; but let’s spill our blood anyway?" An optimist is not blind to obstacles and setbacks, but he views them as momentary and finds ways to overcome them.
The next ingredient for translating ideas into success is entrepreneurship. I don’t mean just talking and writing about it. I mean being an entrepreneur.
To really shift the window of political possibility, we have to get out of the purely academic mindset, where the goal is writing reports and studies. Our success is not measured by how much paper we push out the door. We succeed only if we actually shift policy in the right direction, and to do so requires an entrepreneurial approach.
Successful entrepreneurs are focused. They have lots of ideas, but they figure out their comparative advantage and spend their energy there. They don’t run in all directions trying anything that seems interesting.
This means that entrepreneurs are planners, but not in the sense of stifling creativity and flexibility. A good entrepreneur makes plans that avoid both rigid bureaucracy and unfocused, free-wheeling frenzies of activity.
Entrepreneurs are problem-solvers. They don’t just try to copy what works in other countries — they become the experts at applying freedom ideas and overcoming obstacles in their own countries.
Studies and seminars will always be staple products for a think tank. But sometimes you have to get creative.
The most powerful labor union of teachers in my state — the Michigan Education Association — routinely thwarted schools that wanted to save money by privatizing nonteaching jobs such as food, janitorial and bus services. Taking union dues from all the teachers was not enough. The teachers union wanted to force the school to hire only dues-paying cooks, janitors and bus drivers, too.
At the Mackinac Center, we had already published studies showing how much money the schools could save by privatizing, but the union was too powerful. We had to do something to weaken the union’s influence.
We brainstormed, and it occurred to us that the union had its own massive headquarters building with 500 employees. Surely the union did not employ their own unionized cooks, janitors and mail clerks. We decided to find out.
So, one of our policy analysts simply parked his car outside union headquarters and counted the various contractors’ trucks that entered the premises.
We learned that this union – the one that opposed it when schools privatized to save money – contracted with four outside firms for food service, custodial service, mail service and security. And in three of the four cases, the contract firms were nonunion!
We contacted the newspapers and state lawmakers and exposed the union’s hypocrisy. Schools were suddenly emboldened to oppose the union on privatization, and within a few months legislators gave schools explicit authority to privatize without the union’s approval.
If there were a think tank entrepreneur’s hall of fame, we would make that story our nomination!
Entrepreneurs are creative, but they build on the success of others. Don’t waste time comparing yourself to other think tanks or criticizing others in the movement. Learn what you can from them and apply it to your country’s unique marketplace of ideas.
The final ingredient is perseverance. Never giving up. Perseverance is the backstop of success.
Freedom is never won in an unbroken string of victories. It’s more like three steps forward and two steps back. We persevere by simply refusing to ever give up. There will be discouraging turns of events, unexpected setbacks and even seemingly overwhelming daily pressures.
But those are precisely the times to remember that we are on the front lines of a battle that is infinitely more important than any of our day-to-day struggles, disappointments, deadlines and duties. We can’t ever let those things distract us and divert our eyes from the prize.
In our office hangs a photograph that just screams "perseverance." I’m sure you’ve all seen the snapshot of a lone man in Tiananmen Square who is apparently stopping four Chinese tanks from advancing. That single image of perseverance has probably inspired more freedom fighting around the world than four tanks could ever hope to vanquish.
Let me close with the story of a man who personified perseverance. Some of you already know about William Wilberforce and the abolition of slavery.
Wilberforce was elected to the British Parliament in 1780. Seven years later, he decided to work to end British slavery.
At the time, slavery in the British Empire had broad political support and even intellectual defenders. People turned a blind eye to the cruelty of African slavery, which was considered essential to British military and economic success. Wilberforce was that rarest of politicians who stood virtually alone on principle.
He spoke against slavery in the House of Commons for the first time in 1789. Every single year for 18 years he introduced an abolition measure, and for 18 years they went nowhere.
He was ridiculed and called a traitor and a rabble-rouser. Once, even his friends deserted him when the opposition supplied his allies in Parliament with free theater tickets during a crucial vote. Through it all, Wilberforce worked tirelessly to turn the intellectual tide and public opinion against slavery.
Finally, on February 23, 1807, Parliament overwhelmingly approved a measure ending the slave trade in the empire.
This stunning achievement would have secured his place in history, but Wilberforce had not yet reached his ultimate goal of ending the practice, not just the trade, of slavery.
With his first victory taking 18 years to achieve, Wilberforce labored another 26 years, even after leaving Parliament, to end slavery. The prize was finally grasped on July 26, 1833, when Britain became the first major power to completely abolish the trade and practice of slavery everywhere in its dominion. Acclaimed as a victorious hero, Wilberforce died three days later.
We can transform policy with the power of ideas, optimism, entrepreneurship and perseverance. We must keep our eye on the prize – not better government, but less of it – and work with a persistence and passion worthy of our cause.

(3) A new friend then, Dr. Chatib "Dede" Basri, also presented a paper, I like the two quotes he used for his opening slides:

“People who intend only to seek their own benefit are led by invisible hand to serve public interest which was no part of their intention."

--Adam Smith

"People who intend only to serve public interest are led by invisible hand to serve private interest which was no part of their intention"

--Milton Friedman

Proof of Smith's statement are aplenty: the rice farmers, the carinderia owners, tiangge-tiangge operators, millions of other entrepreneurs and professionals...

Proof of Friedman's statement are also aplenty: hundreds of them in Malacanang, the Senate, House of Reps; thousands actually if you include many LGU leaders, the guys at the BIR, BOC, DPWH, DND, ...

A friend, Bruce Hall, made a commentary to my brief note above, he wrote:

I don't think that it is just the corrupt officials that are a problem. Even those who are uncorrupted end up serving private interests because there is no way they can ever see the entire big picture. Everyone has blinders on, has a particular perspective on events, that by necessity cuts out other people and perspective.

Do you remember the blackout that happened last year in huge chunks of the Northeast and Midwest US? All the coverage was about NYC while Ohio was basically ignored. Why? Because the journalists all live in NYC.

In the US a few years back, some Republican leaders tried to end funding for the Public Broadcasting System (the non-profit US network partially funded by government). It did not go very far largely because the Congressmenan and Senators were of the socio-economic group that watched PBS and therefore thought it valuable. Their votes on keeping the funding wasn't against the public spirit. They thought that EVERYONE supported PBS funding because EVERYONE that they knew did. Since they found PBS valuable, it must be objectively valuable to the entire public.

There are numerous other cases where good-hearted people make bad decisions because they take their necesarily limited particular experience and universalize it.

This is the problem with large bureaucracies, including large governments -- no matter how honest and dedicated the public servants, they are going to be biased towards their lifestyle and their lifestyle choices. At the very least, the first problems that they are going to address will be the problems they see in their daily lives. Problems where out in the boondocks will be unseen and unaddressed.
Thanks Bruce.

* See also:
Pol. Ideology 6: Quotes from Adam Smith, February 04, 2007
Pol. Ideology 7: Individualism, Entitlement and Freedom, April 30, 2007

Thursday, September 13, 2007

ASEAN 2: Regional Meetings, Indonesia's Military Businessmen

The Association of South East Asian Nations (ASEAN) is turning 40 years old this year. From a military alliance of some SEA countries, it has morphed and evolved into a dynamic economic bloc in this part of the world.

I think that without the persistent inclusion of their 3 rich neighbors in the north-east, namely China, S. Korea and Japan (what used to be "ASEAN + 3"), many heads of states of ASEAN-member countries could be dragging their butts on the issue of trade and investment liberalization. Our "rich confucian neighbors" have a very strong confucian ethic of hard work and entrepreneurship, values that somehow infect the businessmen and some politicians/bureaucrats of the laggard ASEAN member countries.

Of course a number of member-countries of ASEAN have their own dynamism themselves, their own ethic of hard work and entrepreneurship, like the Thais, Malaysians and Singaporeans.

Now, ASEAN has attracted more countries to become its "regular observers" in its annual summit meeting of its heads of state. It's now "ASEAN + 6" (China, Japan, S. Korea, India, Australia and NZ). Outliers like Myanmar and possibly Laos, should be dragged upwards economically along the way.

ASEAN meetings are plentiful. For instance, this year, the Philippines hosted at least 3 important ASEAN meetings: (a) ASEAN summit last January in Cebu, (b) ASEAN Ministerial meeting last July in Manila, and (c) ASEAN Economic Minsters Meeting last August in Makati.

Us Filipino taxpayers do not know how much from the money confiscated from our monthly earnings and from the taxes on the goods and services that we buy, were spent on all those expensive meetings. In addition, when these officials and bureaucrats come, we're like 3rd class citizens and motorists in our own country, judging from the way our local policemen and traffic "enforcers" edge or wipe us away from the roads when the cars and convoys of these bureaucrats would pass by.

Government bureaucrats -- national, regional, multilateral -- they think we owe the world to them. They suck.

I wrote this last June 21, 2006:

Indonesia's Military Businessmen

Can soldiers be good businessmen? And that they can own or control more than a thousand companies in a poor country?

Well, the Indonesia military think they can, and so they own until today more than 1,500 companies in Jakarta, of which only about 6 of them are profitable. A story from the Financial Times today, June 21, "Indonesian military to divest some businesses" (By Shawn Donnan in Jakarta), says that

"Indonesia is scaling back plans to force its military to unload its business interests... Indonesia’s parliament in 2004 passed a bill requiring the powerful military, known as the TNI, to unload all the businesses it controlled within five years. Advocates of reform have long accused the TNI’s network of legal and illegal businesses of contributing to corruption, illegal logging and other crimes and of complicating life for foreign companies looking to invest in south-east Asia’s biggest economy.

"But in an interview with the Financial Times, Juwono Sudarsono, Indonesia’s defence minister, said Jakarta now expected to be able to force the military to divest just “six or seven” profitable businesses of the 1,500 it controls.

"The main reason for that, he said, was the 'meagre resources' of Indonesia’s defence budget with the civilian government providing just 48 per cent – or $2.8bn – of the 'minimum budget required' by the military."

This is the issue: soldiers are trained to fight wars, to control and defeat armed enemies of the state, both domestic and foreign. They are not trained in the detailed art of cost-minimization, revenue-maximization, and profit-optimization of business in a competitive environment. Very likely, military generals can make profit for their companies not in a competitive environment; they only make profit because they get all forms of subsidies from taxpayers, and various forms of protection from competition that deprive taxpayers of other choices.

In this case, the Indonesian (or other countries') "military-businessmen" are only moving in a dirty and vicious cycle: business through protectionism and endless subsidies results in a bad business environment, that discourages more private entrepreneurship, that shrinks potential tax revenues, that shrinks potential budget for various government services including defense, that makes them retain "military-businesses" that just live off on protection and endless subsidies...

The sooner that "military businessmen" (a contradiction in terms in the first place) realize this, the better for itself and the Indonesian economy. But the more they procrastinate in letting go of military business interests, the more inefficiencies and wastes they will inflict upon their countrymen.