Sunday, March 30, 2008

Free Trade 6: Unilateral Free Traders HK, Georgia, Who Else?

A friend and also a board member of Lion Rock Institute (LRI, in HK, Mr. Dan Ryan, wrote a paper, "How to Make Hong Kong Uncompetitive". LRI is HK's first and independent free market think tank.

Mr. Ryan is protesting the HK government's decision to put up an Anti-trust or Competition regulatory body. He argues that HK's low tariffs, low taxes, little or no barriers to entry of firms, are what makes the economy free and competitive, that there is no need for a government agency to ensure competition.

He also observed that some big law firms in the US and Europe are positioning to get into HK in anticipation of law suits and legal cases that the planned Anti-trust body will hear. And a number of HK academics are gearing to be appointed as officials of the planned body.

Mr. Ryan is right, definitely. Competition or anti-trust regulatory body is first and foremost, a bureaucracy. Creating a new bureaucracy immediately creates 2 costs automatically: (1) taxes and fees to establish and sustain that bureaucracy, and (2) compliance costs to those regulated (hiring of lawyers, auditors, PR guys, etc.) that will help represent them in arguing with competition bureaucrats.

It's also true that academics -- them with PhDs included -- are among those who salivate to be appointed as government regulators, and enjoy the perks and popularity of being "public servants" while screwing the public with taxes, fees and regulations that somehow limit competition.

I urged LRI to continue this kind of public education. Many free marketers around the world are looking at HK as one of the models of a free market economy for our respective countries. If HK degenerates to become a bureaucratic country, we'll have less "models" in our fight.

People are also watching HK whether the force of socialist government of China will ultimately pull HK towards big and interventionist government philosophy, or HK will retain its Copperwhite legacy and free market tradition.

I believe that HK's unilateral trade liberalization is a good model, not those high profile, highly bureaucratic trade negotiations in the WTO. If a government really wants to give its people the freedom of having more choices for their consumption and production needs, then just liberalize international trade,
unilaterally, no ifs and conditionalities that other countries should also open up their markets to you. After all, people trade with each other; countries and governments don't.

I'm still looking around what other economies have unilateral trade liberalization policy aside from HK. The other 3 are Singapore, Dubai and Georgia. The latter has enacted a zero tariff on imports just a few years ago. I'm not sure Brunei, Estonia and Chile could be among the unilateralist free traders.

See also:
Free Trade 1: Estonia's Free Market, Globalization, May 09, 2006
Free Trade 2: Unilateral Trade Liberalization, May 17, 2006
Free Trade 3: Protectionism Perpetuate Poverty, September 05, 2006
Free Trade 4: FTA in APEC, July 09, 2007
Free Trade 5: Business, Rock Music and Cycling Globalization, July 17, 2007

Thursday, March 27, 2008

9 outstanding free market institutes

The Atlas Economic Research Foundation ( will give 9 winning institutes (from 180 applicants) up to $100,000 grant each for the next 3 years, courtesy of the Dorian & Antony Fisher Venture Grants.

The winners are:

Alternate Solutions Institute (Lahore, Pakistan)
Bluegrass Institute for Public Policy Solutions (Kentucky, USA)
Canadian Constitution Foundation (Calgary, Canada)
Cathay Institute for Public Affairs (Beijing, China)
FundaciĆ³n Ecuador Libre (Guayaquil, Ecuador)
FundaciĆ³n F. A. von Hayek (Buenos Aires, Argentina)
IMANI: Center for Policy and Education (Accra, Ghana)
Istituto Bruno Leoni (Turin, Italy)
New Economic School-Georgia (Tbilisi, Georgia)

I know and have personally met the Presidents or Executive Directors of 5 of those winning think tanks: Khalil Ahmad of ASI Pakistan, Chris Derry of BIPPS USA, Feng Xingyuan of CIPA China, Franklin Cudjoe of IMANI Ghana, and Paata Sheshelidze of NES Georgia.

Congrats to all of you guys! You're doing well, and you deserve that prize!

I also congratulate Atlas' panel of judges because I sincerely believe that all the winners deserve the award.

I kidded Jo Kwong, Atlas VP for Institute Relations, that our group Minimal Government, did not pursue hard this award because we were waiting for a $1M prize that Atlas may give away soon! :-)

The free market movement around the world is still small. The number of statist institutes and think tanks in our respective countries should easily outnumber us by 10 to 1, or more. The free market-oriented think tanks should support each other; otherwisem, the statists, the lovers of more government, more taxes, more regulations, will trample us further in the public policy debates.

WHO and property rights confiscation

The perception that there is widespread “market failure” in public health care has prompted many government health ministers and bureaucrats, upon the prodding of health activists, some policy writers and media people around the world to advocate more government intervention as “government solution to market failure.” And the World Health Organization (WHO), through its InterGovernment Working Group on Public Health, Innovation and intellectual Property (IGWG), will be one of the the chief instruments of such bigger involvement by governments.

In late April this year, government health officials, health activists and lobbyists for more government involvement in health care – and more taxes and bureaucracies for such additional intervention – from many countries will head to Geneva, Switzerland, to attend the continuation of the second session of the IGWG.

Among the planned additional interventions that will be discussed by the attendees, are for WHO member-governments to encourage: (1) entry of cheap drugs via parallel importation and/or copying without bio-equivalence testing; (2) local production through huge subsidies to chosen players; (3) issuance of compulsory licenses (CL); and (4) price controls.

The reason for the above respective measures are as follows: One, there is the persistent pressure to deliver “cheap at all cost” drugs even without strict bio-equivalence testing that will ensure equivalent efficacy and safety of medicines. Two, big multinational pharmaceutical companies do not prioritize in their R&D and production drugs for many poor country diseases. Three, compulsory licensing is allowed even in WTO’s trade-related aspect of intellectual property rights (TRIPS). And four, price controls will allow more sick people to have access to otherwise expensive but effective drugs.

A longer discussion of these old and new government interventions and related issues are tackled by the new paper, “Increasing access to medicines: Civil society commentary on the IGWG draft Plan of Action”. It is a report jointly sponsored by 24 independent think tanks and institutes from 21 countries, including Minimal Government Thinkers. (If interested to see the document, send the author a private mail)

Due to space constraints, we will briefly discuss only the “copy” drugs and CL. The IGWG’s draft Action Plan conflates “copy” drugs with generics drugs. The latter are required to pass “bio-equivalence” testing for a reference drug or product. If drugs do not go through this testing by a rigorous and scientifically-capable drug regulatory body, then these are just “copy” and very often, substandard drugs. Most counterfeit, unsafe – and cheap – drugs fall in this latter category and they can be dangerous if not fatal, to patients.

When a patient takes substandard or fake drugs, treatment failure happens. The patient either feels no improvement after taking the medicine, or develops resistance to genuine drugs while the disease may be mutating inside the body of the patient. So a hunt for “cheap at all cost” drugs can backfire.

On CL, assume there are 100 different medicines to cure AIDS patients. About 1/4 of them can cure an average patient in 7 to 10 years; another 1/4 can eradicate the disease in 5 to 6 years; another 1/4 can do the job in 3 to 4 years; and another 1/4 can control the disease in 1 to 2 years. But among the "top 25" medicines, about half are effective but have some adverse side-effects or cause allergies to people who have other diseases (diabetic, have hypertension, etc.) and the other half are plain effective.

Which of those medicines will be issued compulsory license (CL) by governments? The bottom 3/4, even if they are cheap, readily available and can also fight the disease? Not a bit. It's those in the top 10 or 15 most effective medicines, which are also among the most expensive.

And this tells us one thing: the selective application of CL is driven by envy, by the simple desire for quick-fix solution through more unproductive government intervention.

Huge investments by innovator companies do not matter. What matters is to spot who among those innovator companies have the most effective medicines, then disrespect their patent and intellectual property rights, copy the effective medicines for use by a government corporation or crony generics manufacturing company which spent very small, if ever, in expensive R&D. And the state that issued the CL is now a "hero" while the innovator companies that invented the effective drugs and resisting the CL are now the "villains".

Instead of interfering with the market for medical treatments, governments should step aside. Scrapping taxes on medicines would be a good start. In the Philippines for instance, medicines are slapped with an import tax of 5 percent and a value-added tax of 12 percent.

Geneva next month will be crowded with many technocrats and bureaucrats who have little appreciation for respect for private property, and they won’t hesitate to further incite national governments to extend their intervention and adapt confiscatory policies that disrespect the property rights of innovators and freedom to choose of patients.

Patent busting and price controls might bring cheaper drugs in the short term, but they threaten the well-being of poor patients and stifles medical innovation over the long haul. Governments can achieve “cheaper medicines” by simply getting out of the way and allowing more competition among innovator companies to reach out to the patients and their physicians.

Tuesday, March 25, 2008

Friedman and the market

Dr. Andrei Shleifer of Harvard U. recently wrote a paper titled "The age of Milton Friedman". In that paper, he wrote, "In the Age of Milton Friedman, the world economy expanded greatly, the quality of life improved sharply for billions of people, and dire poverty was substantially scaled back. All this while the world embraced free market reforms."

"Amen" to this paper by Shleifer. Free market + less government regulation and taxation of business, but more government protection of private property rights, are indeed among the most important policies not only for rapid economic growth but also for respect of individual freedom. In fact, protection of the citizens' right to life, right to dignity, and right to private property, is the single most important function of government. All other functions are either minor or unnecessary.

Friedman was a believer of individual freedom more than forced equality. Because forcing equality among people would mean pulling down, if not killing, creativity and innovation, and encouraging laziness and personal irresponsibility.

Migration and Freedom 3: Remittances and Guest workers

The WB released its report titled Migration and Remittances Factbook 2008. The top 5 recipient countries in remittances in 2007 were:

1. India, $27 billion
2. China, $25.7 billion
3. Mexico, $25 billion
4. Philippines $17 billion, and
5. France, $12.5 billion.

The Philippine's remittance figure rose from its 2005 level of $13.57 billion, and 2006 level of $15.25 billion.

In terms of country source of remittances in 2006:

1. US, $42 billion
2. Saudi Arabia, followed by Switzerland and Germany.

Total remittance flows worldwide in 2007 were estimated at $318 billion, of which $240 billion went to developing countries. Not included here are remittances via informal channels.

These are huge amounts, much bigger than all foreign aid by rich and big countries combined. remittances are direct people-to-people transfer of resources and income, whereas foreign aid is government-to-government transfer.

Many governments, the Philippines' included, impose plenty of regulations and regulatory fees to their people planning to work abroad or already working abroad. Much of those mandatory fees are indirect tax grabs.

On April 06, 2006, I made these observations:

Migration and welfare: why they mix together

The "guest worker" and similar proposals related to migration is a hot topic in the US these days. In Europe, raising the mandatory retirement age and migration is a continuing hot issue too.

Some people, including previous migrants who were granted residency or citizenship in their adopted countries, want to restrict if not close the migration door since they're already in, because they see the influx of more migrants as potential competitors for the jobs or professions that they are currently practicing. If they think that way, then the locals and original citizens who were displaced, even temporarily, when they were allowed entry, should have been correct in opposing the entry of early batches of migrants.

If you are a businessman in the US or western Europe or Japan, with global competition getting more fierce, you have 2 main choices to bring down your costs and enable you to sell at a more competitive price: (a) relocate your business or factory outside to countries where labor, taxes, land lease or rental, are cheaper, or (b) retain your business or factory in your country but hire cheaper labor, that migrants are willing to supply.

The argument of some people against the "guest worker" program in the US is that it will encourage more illegal immigration because more and more people will just make their way to the US (esp. from Mexico where one can literally run or to the border). The program proposes that those who don't have the papers to stay in the U.S. legally will be allowed to stay as long as they could find an employer who will hire them. This will irritate and give undue friction to people who apply for migration through legal ways because this is a costly and time-consuming process. Thus, the "guest worker" program is seen as rewarding violators of US migration laws while penalizing those seeking formal and legal migration entries.

I think the "guest worker" program is one way to circumvent the bureaucratic process by the US immigration laws. Many people in the US, businessmen and ordinary households alike, are in desperate needs of hiring foreign workers (like a Filipino household with young children in need of a Filipina nanny), but the US immigration procedure is so bureaucratic and strict, so some guys lobbied to have "guest worker" program rather than lobbying to change and relax the current immigration laws.

Governments (US, European, others) are supposed to be out of the picture in voluntary contracts between private companies and their potential employees, between private households and their potential household workers. Labor costs in those countries are expensive mainly because of rigid labor laws like high minimum wage, mandatory health insurance, unemployment insurance, maximum working hours, paid leaves, etc. So some migrant households would rather hire their relatives or neighbors from their original countries to render household work for them at a much cheaper pay.

But the governments of rich and welfare countries would assert that they need to intervene in the private and voluntary contracts between employers and potential workers because of the "social welfare to be given" to the new-comers. One medium- to long-term option is to cut government welfare programs in exchange for tax cuts. A household who got cheap foreign workers to help in their house and take care of the kids already experience welfare, much better and more direct than some government welfare programs that require high and multiple taxes to sustain. With tax cuts, households can save more for their own HMOs and other personal and pension needs someday.

The US government can learn from the current serious "French (and German and Italian and Dutch and...) labor problem". The labor laws of the latter are so "rigid", so "pro-labor", that companies and households are not hiring many people, so that unemployment is so high (10-11% unemployment rate for France for the last 30 years). The government and labor laws are too interventionist and threatening that many companies and households are scared to hire additional workers.

Meanwhile, one report today in the international papers, the Danish government is proposing to raise retirement age from 65 to 67 (in Sweden, they're proposing retirement of up to 69 or 70+ years old). That is, for the younger generation to work longer, to maintain the expensive welfare system for an ageing and "greying" population. Another option by the Danish government is to allow more migrants, young ones. They will work long and hard, to pay high taxes, so the generous pension of the retirees will be paid by the government.

On the extension of retirement age, one may ask -- which gives more welfare: more pension but retirement age of 67 or older, or less pension but you retire at 65? And you go back to the Newtonian 3rd law of motion: for every action, there is an equal opposite reaction. Reformulated in the current issue as: for every welfare, there is an equal opposite diswelfare.

(See also, Migration and Freedom 2: Taxing residents abroad, March 19, 2007)

Tuesday, March 18, 2008

Oil Politics 4: Is Expensive Oil Good for the World Economy?

One blogger asked, "could there be a danger for a bubble burst if oil prices dramatically and suddenly decreased given the current economic woes and enviromental concerns?"

I think world oil prices are heading north more than head towards the south. The trend is there: investors with lots of cash who are afraid to put their money in the banks because they don't know who will follow next to Bear Stearns, so they park their money in oil, gold, silver, other commodities. Here, they are assured of protection from high inflation and good returns, at least in the next few months.

Besides, with more globalization, more people around the world are working harder, they move more often, and use more petroleum or oil-substitutes more often.

So, is expensive oil good for the world economy? In a sense, Yes. The volume of cars and trucks on the roads, the boats and ships on the seas, and airplanes on the skies, will remain the same if not become plentier. But with higher oil prices, only more essential and more productive trips are made; the less essential and frivolous trips are postponed and substituted by online communications.

What about the poorer sectors and people of the world? Expensive oil will hurt them, true. But so will cheap oil in the form of "over-consumption" of the commodity, which leads to more traffic congestion, more pollution, more diseases, and less investments and R&D to fuel-efficient cars, "green" energy alternatives.

Meanwhile, the world is now getting accustomed to 3-digit oil prices. After the symbolic $100 a barrel has been reached about 2 months ago, the next "target" was the all-time high price of $103.7 a barrel, which was the current equivalent value of the $30+ touched in 1980 during the Iran hostage crisis. This week, the $110 has been touched, and as the trend continues, a $115 a barrel or higher, may not be too far.

The net gainers of these are the oil exporting countries (OPEC or non-OPEC members) of course, plus the speculators who make big profit margins with the continuing oil price spikes. They just collect higher revenues for the same volume of oil they sell and export. Prices of gold (has already touched the symbolic 4-digit level of $1,000 an ounce), silver, rice, wheat, many other commodities are rising anyway, so must oil.

If economies are generally competitive and there is easier entry and exit (near "contestable market" condition) for firms, high prices will attract new entrants and producers, either of the same goods or substitute goods. As oil prices continue to rise, the more profitable will be the “alternative energy” sectors, from windmills to solar to biofuels, etc.

On a related note, I posted this last February 28, 2008.

Inflation in oil exporting countries

As world oil prices tend to stabilize around the $100/barrel price, inflationary pressure building up in many oil-importing countries is understandable. But when the same pressure builds up in oil-exporting countries themselves, it's a little bit of news.

Well, not exactly. With so much money made from selling ever more expensive oil, inflation will surely happen in many oil-exporting countries -- if the supply of goods and services needed in those countries do not correspondingly increase. Remember that price increases only when the growth of supply of certain goods and/or services do not rise correspondingly with growth in demand.

More imports and trade liberalization, including increased inflow of workers and professionals from other countries who provide the services needed by the local people, will help tame inflationary pressures. For instance, if more Arab people will demand more modern health services, and if the number of healthcare facilities (clinics and hospitals, health laboratories, etc.) and health professionals do not expand, then those rich Arabs will flock to existing facilities and health professionals and crowd out their poorer countrymen and expats, resulting in high inflation in the health industry.

See also:

Inflation and CBs 3: "Bank of Last Resort"

I am not in favor of a central bank like the Fed, bailing out certain banks because they're "too big to fail". The Fed provided a credit line of around $30 B to Bear Stearns, which was bought by JP Morgan for only $2/share when less than a month ago it was trading at $90/share.

Then I read that had the Fed not acted so, other bigger banks like Lehman Brothers would be next to possibly free fall. And possibly threaten others like UBS, City and Morgan Stanley. Could this be true? I feel that the above-mentioned banks were too gigantic to be dragged down.

I hope that the next banking reform there will be that the Fed will just concentrate on setting monetary policy, no “bank of last resort” function, no bank supervision and bail-out function?

The private banks themselves should put up their own “bank of last resort”, use their own money that will be used to put up and maintain such bank. When that bank decides to bail out one or a few banks, it’s the bankers’ money that will be on the line, not the public’s. This will hopefully remove any “moral hazard” problem in banking.

On another note, a number of economic analysts are discussing how to stop inflation, and how central banks (CBs) or federal reserves can help to attain this goal. CB’s tight interest rates and other contractionary monetary policies over the long term, cannot reign in inflation. If interest rates are high to “warn” people not to spend too much, then entrepreneurs who have to borrow to start a new business or expand an existing one will have difficulty, the high cost of capital they will pass on to consumers, which can set inflationary pressure itself.

Central banks are among the remnants of central planning thinking of socialist school of thought. Central bankers maybe a “necessary evil” at the moment but nonetheless, they are unproductive bureaucrats who can better help the economy fight huge inflation spikes by becoming entrepreneurs who produce more goods and services, the best way to fight huge price spikes.

* See also: Inflation and CBs 2: Panama has no Central Bank, February 20, 2008

Friday, March 14, 2008

Popularity and piracy

More popular songs, medicines, rubbershoes, cellphone models, any invention, tend to get pirated more than their less popular counterparts. This is a regular pattern. And this is being done not only by individuals, households or firms, but also by governments. The case of compulsory licensing (CL) of popular drugs against AIDS, cancer, TB, etc., is an example. Only those drugs that are more effective will be
issued CL or be copied by copycat manufacturers; the other less popular, less effective medicines, are left alone.

If I were a singer, say a famous rock star, and my songs and CDs are being pirated in many countries around the world, I could cry foul and sue IP infringement all over. But the cost of enforcement, by going through litigations in so many places, is much
much higher than the benefit of piracy being controlled or minimized.

One attitude I could choose, is to allow piracy of my songs and CDs, I won't run after the pirates. Then my songs will be heard even in the remotest and poorest villages in poor countries because my CDs are sold dirt cheap there. Many people on earth would have heard of my songs and known my name and my band. The manufacturers of known brands, whether sports equipment or cellphone, car and tv manufacturers will take note of this, and pretty soon, I will be swamped with plenty of offers for commercial endorsement. That's where I will make lots of money. Also, I can do live concerts in many cities around the world, I can charge high, and many people will still come and pay the high tickets because of my popularity, courtesy of my pirated songs and CDs.

It's a matter of "internalizing the externalities" of piracy. But then again, this is one option that IP owners can take. They can take the opposite tack, which is full and costly enforcement of IP rights.

I think that both approaches can be merged. If certain taxes and government regulations related to invention and composition will be removed or at least drastically cut, then the cost of production, distribution and marketing of songs, medical innovations, other agricultural or industrial inventions, will become lower, which translates to higher profits to inventors and innovators, which attracts new players and competitors, which translates to lower prices, which reduces the incentives for piracy.

Thursday, March 13, 2008

CL and Government use

When you work hard to hopefully earn big income for your kids or for a dream house or for a dream vacation, and you have to surrender a big portion of your income to the state in income taxes alone, you may feel bad because the politicians and other government administrators who invented and implemented the compulsory payment to the state have other priorities which are different from your personal priorities and

The same way, when you invented something revolutionary or miraculous, say an immune system-boosting rice variety, or a medicine that can cure AIDS or prostate cancer at a period three times faster than currently popular medicines, then the state will expropriate your property rights to such invention, you will also feel bad. All the big investments and risk-taking, all the years that you waited to test, re-test, and develop such inventions, all the sacrifices. If you failed to develop the medicine that you wanted, you simply lose money and other career opportunities. And if you succeeded, the state will simply expropriate the fruits of all your efforts and sacrifices and use it for some government or crony corporations, or other copycats
who never risked big money and time, to benefit.

Compulsory licensing (CL) is a tool used by some governments to use a patented invention or medicine without the approval of the patentee, usually at government-dictated compensation. The rationale is that many people are too poor to afford the expensive but effective and safe medicines. Come to think of it, products and medicines that are targeted for CL are only those effective ones. For instance, if there are 100 different medicines available in the country to cure AIDS or breast cancer or hypertension, the state will not issue CL to those medicines that are in the bottom of physicians' and patients' list. Rather, the state will issue CL only to the top five or top 10 most effective medicines, and it is those effective medicines that are priced higher precisely because the amount of investments and risks devoted to bring those medicines to the drugstore shelves were very high if not very prohibitive.

The case of the Thailand government's actions is an example. In 2006, the military government there declared that it could not afford several brand-name drugs to treat AIDS and heart disease. This was hardly plausible as the government refused massive discounts from the drugs' patent-holders. Thai leaders also rejected drug-purchase money offered by the Global Fund to Fight AIDS, Tuberculosis, and Malaria.

The state-owned Government Pharmaceutical Organization (GPO) issued CL to selected medicines, suspended the drugs' patents, and started making knock-offs. Local copies like these seldom win safety certification from the World Health Organization. And Thailand's GPO had a tragic track record. In 2005, scientists reported that the firm
had given Thais afflicted with AIDS received poor-quality medicines that may have increased the number of drug-resistant cases. That same year, the GPO took in US$35 million in profits from copied medicines.

Here in the Philippines, the proposed new legislation on "cheaper/affordable medicines" bill is not even planning to strengthen the CL system that is currently provided in the country's Intellectual Property Code (IPC). The proposed bills, which are now in the bicameral conference committee, is doing away with CL because
Philippine experience in CL shows that "it takes a long period of time to get approval because of procedural delays caused by appeals by the patent owners" (Senate Committee Report No. 6).

So what it proposed is "government use" where the CL approval procedures will be skipped and the Philippine government can just appropriate a patented drug and use it for whatever purpose. In addition, the "government use" provision will have a solid legal cover � exemption from granting of temporary restraining orders (TRO) and
preliminary injunctions, except when issued by the Supreme Court.

Abrogatory moves or attempts by governments like this, is sure to discourage the entry of more medicine innovator companies. Who will spend hundreds of millions of dollars and many years of clinical trials and development, to invent very effective and safe medicines against evolving killer diseases, when the state can come in anytime for some frivolous reasons and expropriate your invention?

What these proposals and attempts will attract are non-innovator drug companies, copycats, and traders/importers of very cheap but unsafe medicines.

If governments are sincere in making quality medicines be made more available and more affordable to the people, first thing they should do is to drastically cut, if not abolish, some or all of the taxes on medicines. Second is to strengthen the intellectual property right (IPR) system that attracts and protects medicine innovator companies, so that they will come into the country, many of them, and let them compete among each other, which will compel them to provide big discounts, which makes quality and safe medicines more affordable. Then the country will not court disaster by having less effective, if not harmful but very cheap, medicines.

Tuesday, March 04, 2008

Tax Cut 8: Comparing HK and Philippine Taxes

I have read a recent report by Horwath Hong Kong re some tax cuts and rise in exemption allowances in HK. Below are the tax changes; those in parenthesis are comments by a friend, Peter Wong, Exec. Dir. Of Lion Rock Institute (, HK’s first and only free market think tank.

1. No tax on dividends, capital gains, interest from banks and other
financial institutions (no change).

2. No tax on business registration (one-time).

3. No tax on wine, beer, other alcoholic beverages except spirits with
immediate effects [high alcohol content drinks] (permanent cut).

4. No hotel accommodation tax (permanent cut).

5. Higher ceiling for tax-deductible donations (permanent).

6. Lower corporate profits tax from 17.5 percent to 16.5 percent (back to 2002 level).

7. 100 percent profits tax deduction for capex of environment-friendly
machinery and equipment in the first year of purchase (newly introduce but some of us don't like it).

8. Reduce personal income tax from 16 percent to 15 percent (back to 2002 level).

9. Raise exemption allowances for individuals, single parents and
married persons.

10. Lower property tax from 16 percent to 15 percent (back to 2002 level).

When you compare HK's and the Philippines' tax policies on these items
alone, you can shake your head. Because in the Philippines:

1. There ARE taxes on dividends, capital gains, interest income on
bank deposits (20 percent).

2. There ARE taxes and fees on business registration -- with SEC, BIR
(Bureau of Internal Revenue), DTI, local governments, etc.

3. Att least double taxes on wine, beer, spirits -- excise tax and
value added tax.

4. There ARE hotel accommodation taxes -- VAT by the national government, and local government tax.

5. No change in ceiling on tax-deductible donations.

6. Corporate income tax raised from 32 percent to 35 percent by 2005; but will go down to 30 percent by 2009.

7. Am not aware of tax cut on environment-friendly equipment, but I
think there's none.

8. Personal income tax still at 32% top rate for annual gross income of
US$12,500 or more, after some deductions. If you have this annual income and after the state has removed the 32 percent tax, if you have 2 or 3 children and you're the sole bread winner, you can easily slide to poverty level!

9. Somehow, there is an increase in income tax exemption level.

10. Property tax is applied even to houses and condo units, unlike in HK where only the landowners and building owners are taxed.

In the Philippines, if you own your house or condo unit, you will pay real property tax (RPT) to the city or municipal government. If you own a house or condo and you rent it to other people, you will pay at least 3 taxes -- RPT, value added tax (VAT) for rentals above PhP10,000 per month, and income tax for your rental income. But many people pay only the RPT and do not pay the latter 2 taxes.

Meanwhile, I wrote this last February 28, 2008

Tax Havens, Why They are Important

In recent days and weeks, Germany and UK, even the US, have been pounding on a tiny European economy Liechtenstein for being a "tax haven" to many of their rich nationals and suspected tax cheats who park their big savings there which should have been heavily taxed in those countries.

Are tax havens just a way for the rich to escape their tax obligations in their countries, or do they serve some positive function in the global economy?

My vote is the latter, that tax havens have a positive function in the global economy. Some very hard-working and innovative people in rich and industrialized countries are unhappy that a big portion of their income and savings are automatically confiscated by their governments in the form of high and multiple taxes to pay a huge bureaucracy and other government programs that they may not be in favor of.

For these hard-working people, one option is to work less, earn less, and pay less taxes. But a better option for them is to continue working hard, produce more goods and services that many people in the world need, earn big, and put their extra savings in tax havens. This latter option serves the global economy better.

Many Western European and North American investors have started leaving their country and do business in Eastern Europe, in East Asia, other countries/regions where taxes are lower and business regulations are more relaxed. Others opted to stay put and park their extra savings in tax havens.

Some of those savings temporarily parked in tax havens are invested in poorer countries in Asia and South America, which helps creates jobs there, make more people richer, so that they can also buy imported goods and services by companies from high taxes countries like W. Europe and N. America, and those countries receive more tax revenues from those firms. This is what “tax havens serve some function in the global economy” means
* See also Tax Cut 7: Reduce Business Taxes, December 19, 2007

Monday, March 03, 2008

Market Failure vs. Government Failure, Part 2

One big reason why there are so many instances or scandals of corruption and inefficiency in government is because there as so many opportunities for stealing and waste in so many agencies. And it has come to that situation because government has assumed or arrogated upon itself so many functions and responsibilities, many of which should have been personal and parental or corporate responsibilities in the first place. No thanks to many people who endlessly rant “market failure”, the “greedy nature of markets”, and “tendency for wide social inequity under markets” thinking.

Repeated attacks and distrust of the market is often bordering between ignorance and just evil desire to intervene in other people’s lives, like taking a big portion of people’s income and savings through various taxes and fees. The market is often equated with big corporations, like those engaged in the stock market and foreign exchange market. But market refers to all individuals, both consumers and producers. Even the economically dependent (children, physically or mentally disabled, old people) and the plain lazy and irresponsible people who don’t want to work, are part of the market. Because even if they earn no income, they consume (food, milk, medicines, alcohol, cigarettes, haircut, etc.) and that makes them part of the market for various goods and services in society.

“Market failure” has been abused to justify various forms of government intervention, regulation and taxation. And a number of people who enter the bloated government have seen opportunities for stealing and corruption. Some politicians run for public office, or bureaucrats beg to be appointed to high government positions, mainly to steal; or secure certain business favors that would not be available to them if they are out of government. Or perhaps just an ego-trip to show to other people how “intelligent” and how well-connected politically they are.

Those in government whose main intention is to steal can do it in various departments and their attached agencies or bureaus. Or there are several hundred government corporations, financial institutions, state universities, even constitutional bodies, to occupy where stealing or rent-seeking can be done. Or head certain regulatory agencies that decide who can do business and who cannot. All that one who leads any of those regulatory agencies do, is to make plenty of strict regulations, so that some of those who want to be allowed to do business quickly will be forced to pay bribes or grant certain economic and political favors. This largely explains the widespread existence of illegal gambling, illegal drugs, prostitution, and other services despite the fact that government prohibits all of them, at least in paper.

Those multiple and repeated instances of robbery, or small-scale wastes that happen a hundred or a thousand times elsewhere, already constitute ample proof of “government failure”. But instead of government withrawing from those sectors and services where abuses, red tape and corruption are repeatedly noted and reported, "government failure" is addressed by another set of government intervention, by instituting plenty of anti-corruption bodies and counter-check mechanisms and procedures. These moves are often pouring more public money to determine how much public money have been stolen and wasted already.

An option to go "back to the market" and "less government intervention" is far out among the minds and demands of many groups and people, even from those very vocal sectors and individuals that regularly note government failure, like those in media, the academe, NGOs and civil society groups.

There will always be market failure in all spheres of our lives as individuals and communities become more specialized, as tastes and preferences constantly change and evolve. For instance, Juan demands a rice variety that also boosts his and his family’s immunity against dengue and malaria because they live in a mosquito-infested neighborhood. But such rice variety does not exist yet, so this can be taken as “market failure” already. Or even assuming that such variety is already available but its price is too expensive for Juan and his family, other people will again call this “market failure” because the supplier/s of such rice variety only think of their profits, not public health and nutrition.

Market failure often creates market solutions. An initial lack of supply of a certain good or service that caught the attention of a big section of the public results in entrance of new players and producers. Pretty soon, the problem is no longer lack of supply but over-supply. Over-supply sends a signal to various producers and suppliers in the form of declining prices. The market's self-correcting mechanisms guide societies, producers and consumers alike, to allocate resources where they are needed, and stop supplying those resources when they are no longer needed.

Government failure on the other hand, almost always results in more government checks and balances, more bureaucracy, and hence, more taxes and fees to finance the expansion of the bureaucracy. Government failure is more sinister, more damaging and more disastrous to the lives of people, of private taxpayers especially.

Crisis situation of corrupt administrations should be a good opportunity to remind people that the problem lies less on the morality of the people that administer the state, but in having a big and interventionist state that can turn angels into devils. Stop or limit this transformation of people by limiting the size and power of the government.