Thursday, October 08, 2009

Abolish Income Tax 3: Taxes and Congress

There’s a new document posted in the UPSE website, "Fiscal imperative for next administration" by Romy Bernardo,

Dr. Felipe Medalla, Dr. Dante Canlas and Dr. Ben Diokno (all UPSE faculty members) were proposing to hike value added tax (VAT) from 12% to 15%, and income taxes (personal and corporate, I think) to be cut to 25%. Currently, personal income tax is up to 32% and corporate income tax is 30% (was 35% from 2005 to 2008).

Personally, I will support a VAT hike from 12% to 15%, or even 18%, if income taxes – both personal and corporate taxes -- are abolished, zero. The WB-IFC "Doing Business" annual report shows that supposedly capitalist Philippines has more taxes than socialist China and Vietnam. There are too many taxes that the Phil. government can collect and recoup whatever "losses" from a zero income tax policy, two of which will be the higher VAT and higher excise taxes.

Dr. Medalla, Dr. Canlas, and Mr. Bernardo are among the FEF fellows. But one of their co-fellows, Peter Wallace, will applaud any move towards a zero income tax policy.

I am not aware of any country in the world that has zero income tax (there are a few, maybe 5 or 8, states in the US which have zero state income tax). So you can just imagine the number of entrepreneurs, Filipinos and foreigners, and corporations that will be rushing to do business in the Philippines and create millions of new jobs. Of course there are other factors that investors consider (infra, peace and order, rule of law, etc.) but the factor on taxation alone will be a major incentive for them to come in.

Got 2 comments from the above points:
1. “The people will not stand for more taxes and no candidate will stand for more taxes. Abolishing Congress would be nice. Massive instant savings.”
2. “Increasing VAT would be regressive. Plus, it would also encourage the underground ‘cash economy.’”

Most people don't declare their real income, or don't file income tax at all. Smugglers, kidnappers, robbers, prostitutes, drug pushers, most in the informal sector, corrupt government officials, showbiz stars, etc. Check for instance how much the President’s husband Mike Arroyo and family pay in income taxes. Even the son, Cong. Mikey, cannot even declare a proper SALN. Also, those working in foreign aid and multilateral institutions -- UN, WB, ADB, IMF, OECD, USAID, etc., are not subject to mandatory income tax deduction. A few of them pay income tax, but most don't. So properly collecting income taxes is a big problem.

This makes income tax policy a huge hypocrisy: collect from a few, especially the fixed income earners, but not collect from the many, especialy the well-off.

On the other hand, even smugglers and robbers and corrupt government officials show off their consumption: new house, new car, new mobile phone, new laptop, new travel, new jewelries, recent dinner in expensive hotels and resto, etc. All such action are captured by VAT. The rich and the big time officials and consultants of the WB, USAID, UN, etc., don't eat in “turo-turo” or carinderia where there is no VAT collection. They eat in Greenbelt, Eastwood, other more fancy places where VAT collection is automatic and mandatory.

So VAT is progressive. They spare the poor, and collect from the rich. Income tax is the reverse. It mainly collects from the fixed income earners, collect little from the rich.

On abolishing Congress, it’s not a wise move. We cannot abolish Congress. All new legislations, say abolishing income tax, or abolishing certain departments and ad-hoc offices under the Office of the President (OP), etc. will require legislation. So we need legislators. Whether we go for big or small government, big or small taxes, etc.

What should be abolished is the party-list system in Congress. It's another hypocrisy. Even the COMELEC is complaining with the 300+ groups that want to be considered as a political party for the "marginalized" sectors. Cockers (Sabungero at magmamanok), they fight each other who is the marginalized between the two of them. If there are so many groups who still feel marginalized despite the huge number of congressmen, senators (plus departments and agencies under the executive branch to "fight poverty"), then all of them must be a failure, somehow. So we have to choose who will represent the “marginalized” groups, the district-based (well-defined territorial coverage) or the party-list (nationwide coverage) congressmen. I say retain the former, abolish the latter.

Never fails. Any government policy to attract "participation" by the public almost always attract the most shrewed, the most opportunist segments of society. That is why you seldom see intelligent people in business jumping into politics. But politics and politicians are always jumping into endless business regulation and extortion.

Two more reactions from friends:
3. "I think zero income tax would be too drastic. I'd settle for 18% income tax and 15% VAT", and
4. "Is there anything in the Public Finance literature that proposes zero income tax policy?"

Between 0 to 18% income tax, both personal and corporate, I will still be happily supporting it, but VAT should NOT increase even by 0.5% if there is no corresponding income tax cut. That is why I never supported the people and groups who pushed the 12% VAT with no income tax cut in the 2004 debate.

Zero income tax is not a far-out proposal. I'm not the original proponent of that. I have heard or read it before, And at least 3 local newspaper columnists are proposing it -- Peter Wallace of Manila Standard, John Mangun of Business Mirror, and Rene Azurin of BusinessWorld.

The World Taxpayers Association (WTA) is pushing for low, flat tax. At least 7 countries now have 10% flat tax policy. Until about 3 years ago, the tax competition rate was at 12%. Then other countries became more aggressive than them, hence the 10% rate. I will not be surprised if 3 yrs from now, some countries will have 8% flat income tax rate.

Below is data from WTA. Year in parenthesis is the period of effectivity of such flat income tax in those countries.

Kyrgyzstan (since 2006) 10%
Kazakhstan (2007) 10%
Macedonia (2007) 10%
Mongolia (2007) 10%
Albania (2008) 10%
Bulgaria (2008) 10%
Serbia (2008) 10%
Georgia (2005) 12%
Macau 12%
Belarus (2009) 12%
Russia (2001) 13%
Hong Kong (1947) 15%
Ukraine (2004) 15%
Iraq (2004) 15%
Montenegro (2007) 15%
Mauritius (2007) 15%
Czech Republic (2008) 15%
Romani (2005) 16%
Slovak (2004) 19%
Jersey and Guernsey (1940) 20%
Estonia (1994) 20%
2010 19%
2011 18%

See also Part 1, Low flat tax and economic growth, June 27, 2008, and
Part 2, VAT and tax extortion, August 01, 2008

1 comment:

Anonymous said...

Taxation in the Philippines with all the corruption needs some drastic solutions. We should look into separating the internal revenue service from the executive department. For as long as the government has the power to spend and to collect taxes, high taxes and corruption will sure to be present. Separate the power to tax from the power to spend, then we as the taxpayers will have a say on what to pay for, and ultimately what and how much to collect.