Business 360-30, Freedom to trade in South and East Asia

* This is my article in Business 360, published in Kathmandu, October 2015 issue.

Freedom to Trade in South and East Asia

The freedom to sell one’s extra output and services, and the freedom to buy other people’s goods and services, is part of human nature. Humanity’s economic, social and cultural advancement from the primitive to modern times was made possible only with their freedom to trade and freedom of entrepreneurship and innovation.

There are various measurements of freedom to trade of countries today. One of which is Fraser Institute’s Economic Freedom of the World (EFW) annual reports.

The EFW is composed of five areas: (1) Size of government, (2) Legal system and property rights, (3) Sound money, (4) Freedom to trade internationally, and (5) Regulation.  And area 4 is composed of four sub-areas, shown in the tables below.

The EFW employs a scoring system of 0 to 10, where zero is totally unfree and 10 means there is full economic freedom.  Thus, high revenues from trade taxes, high tariff, wide variations and deviation of tariff rates mean low score. And more regulatory barriers, more NTBs also mean low score, low degrees of economic freedom for entrepreneurs.

In South Asia, Nepal and Bangladesh have scored better than India, Sri Lanka and Pakistan. Nepal in particular scored 122^nd out of 157 countries. It ranked high in sub-areas (a), and average or mean tariff rate with just 12.2 percent, but it scored low in sub-areas (b) regulatory trade barriers and in (d) controls  of  movement of capital and people.

India ranked high in revenues from trade taxes and mean tariff rate, but was pulled down by big standard deviation of tariff rates, and controls of movement of goods and people.

Source: Fraser Institute, EFW 2015 Report,

http://www.freetheworld.com/2015/economic-freedom-of-the-world-2015.pdf

To serve as comparison, four ASEAN countries are also studied. The 10 countries in the ASEAN generally have low tariff rates, with scores of 8 to almost 10 (Singapore and Brunei). This is a reflection of the accelerated trade liberalization in goods in the region.

There are problems of course, like having wide variations and high standard deviations in tariff rates, like Singapore, Malaysia, Thailand and Vietnam; they scored below 6.

The 9 countries above except Singapore and Malaysia scored below 6, rather low, in NTBs. EFW used data from the WEF’s Global Competitiveness Report, survey on NTBs.

ASEAN countries generally have low tariff rates, with scores of 8 to almost 10 (Singapore and Brunei). This is a reflection of the accelerated trade liberalization in goods in the region.

But there are problems too, like having wide variations and high standard deviations in tariff rates, like Singapore, Malaysia, Thailand and Vietnam; they scored below 6. EFW used data from the WEF’s Global Competitiveness Report, survey on NTBs.

Possible lesson for Asian economies, continue reducing import tariff rates….

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See also:

Business 360-26, Nepal earthquake and lessons from it, July 12, 2015
Business 360-27, Public health in Asia, July 18, 2015 

Business 360-28, FDIs in South and East Asia, August 22, 2015 

Business 360-29, Low oil prices and energy development in South Asia, October 25, 2015

Free Trade 54, Eco-protectionism at APEC 2015 meeting, September 28, 2015 

Free Trade 55, TPP Agreement, finally, October 06, 2015

Business 360 15: How to Improve Economic Freedom in Asia

* This is my article for Business 360, a monthly magazine in Kathmandu, January 2014 issue.
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Economic freedom essentially means individual liberty, the freedom of an individual to voluntarily exchange various goods and services in various markets, as a seller or buyer, as a producer or consumer, the individual has various choices whom to buy and sell and to whom not to buy or sell. The individual is also protected from aggression and coercion by bullies who will rob them the fruit of their hard work.

Sadly, this kind of economic freedom is deprived to many people in Asia. Their freedom to put up a business is often restricted by various government regulations and bureaucracies. For those who manage to officially put up legitimate businesses, they have to pass to the consumers the cost of various regulations, taxes and mandatory fees.

The Fraser Institute, a free market think tank in Canada, produces the Economic Freedom of the World (EFW) annual reports. These reports are presented in various countries around the world, including the Economic Freedom Network (EFN) Asia annual conferences.

The EFW is composed of five main areas: (1) Size of government (its annual consumption, state enterprises, income tax rates), (2) Legal system and property rights (judicial independence, impartial courts, legal enforcement of contracts, reliability of the police, etc.), (3) Sound money (money growth, inflation, freedom to own foreign currency account), (4) Freedom to trade internationally (tariff rates, trade regulations, black market exchange rate, control of people and goods movement), and (5) Regulations (credit, labor, business incl. cost of tax compliance).

A score is given in each area and sub-areas for each country to indicate degree of economic freedom. Thus, high government spending and taxes means low score in area one, weak enforcement of private property rights means low score in area two, and so on.

Table 1 shows Below is a summary table of the scores of selected countries in Asia over the last 15 years. Has economic freedom in our continent improved or regressed over these years?

As of the EFW 2013 Report, half of the 21 Asian countries ranked 75^th or better out of 152 countries covered worldwide. The other half ranked 80^th or lower.

In what areas do many Asian countries score low, meaning in what areas their governments need to improve to give their citizens more economic freedom?

The next table will show this. Not included in this list are outliers Hong Kong, Singapore and Myanmar. The first two scored high in all areas while the latter scored low in all areas.

Many countries in Asia need to improve the enforcement of the rule of law, they need to relax the various restrictions in sound money, international trade, and business regulations.

Economic freedom and individual liberty are ends by themselves. They are not means to certain other objectives like national sovereignty or forced equality in society. Governments, politicians, business and civil society leaders in Asia should learn to appreciate more the value of individual freedom and individual responsibility.

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See also:
Business 360 11: Avoiding Middle Income Trap, September 19, 2013 
Business 360 12: Optimum Size of Government, October 13, 2013 
Business 360 13: US Government Shutdown and Lessons for Asia, November 28, 2013 
Business 360 14: Middle Income Trap and Economic Freedom, January 02, 2014

EFN Asia 32: Day 2 of Conference 2013 in Bangkok, November 09, 2013

Fat-Free Econ 41: Cut Income Taxes

* This is my article yesterday in interaksyon.com. The "movie editor" that I referred here is Manny Castaneda, my co-cast in the late 80s political satire program, "Sic O Clock News" aired in IBC 13 and directed by the late Marilou Diaz-Abaya.
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Mid-April each year is the deadline for filing income tax payments made the previous year for both individuals and corporations.  A friend, a local movie director, commented in his Facebook wall, “April, buwan ng pagbabayad ng tax. Personally, it's like throwing my hard earned money into a toilet bowl. Wala naman itong silbi sa buhay ko.”

This sentiment is common, especially among fixed income earners. For them, surrendering up to 32 percent or nearly a third of their monthly income to the government through the mandatory withholding tax is a painful reality that they have learned to accept. That is why a proposal for a low flat income tax is worth looking into, and for the following reasons:

One, a flat tax rate of 15 percent or lower would attract many investors from the rich countries of Asia, North America and Europe to do business and create jobs in the Philippines. The country's two dynamic neighbors -- Hong Kong and Singapore -- benefit from a low flat tax rate.

Table 1. Top marginal income tax rate for selected countries

 

Source: Economic Freedom of the World (EFW) 2012 Report

The investors in Europe and North America are already paying high taxes and yet their governments are still heavily indebted. Which means that taxes there will rise further, or new taxes will be created to generate the revenues required to pay off debt. Many investors want to jump ship, looking for attractive economies abroad where they can put invest their money and talent.

Two, Philippines' 32 percent top tax rate for individuals and 30 percent for corporations appear to be in the region of declining revenues on the Laffer curve. This curve shows that as tax rates rise, actual revenues decline as people either reduce work and rest more, or find various loopholes to avoid paying more taxes. In Table 1, note that countries that reduced their income tax rates since three decades ago have some of the world's most dynamic economies. Their governments realize that very high income tax rates are not good.

Three, a cut in the Philippines' income tax to a flat rate of 15 percent or lower can be compensated by raising the value-added tax (VAT) from 12 percent to 15 percent. Many rich people either pay very small taxes or none at all. Like many professionals, businessmen, showbiz stars, corrupt government officials, drug lords, gambling lords, land grabbers and other criminals. But these people flaunt their wealth -- their new house/s, cars, watches and jewelries, laptops and cell phones, clothes and shoes, travel and so on. All these things usually are captured by the VAT system.

Government has many other sources of revenue, which apart from VAT also include excise tax, vehicle registration tax, travel tax, real property tax, to name  a few. Then there are various transaction taxes like documentary stamp tax, franchise tax, common carriers tax, bank earnings withholding tax, capital gains tax. And there are various fees: passport fee, driver's license fee, terminal fee, business permit fee, and so on.

Table 2. Philippine Government Revenues, in Billion Pesos

Sources: Bureau of Treasury and BESF 2012-2013

Four, a low flat (or single-rate) income tax is not a novel idea, having existed in many countries. For instance, those that have 10 percent flat rates are Albania, Belarus, Bulgaria, Kyrgyztan, Kazakhstan, Macedonia, Mongolia and Serbia. Macau imposes 12 percent and Russia, 13 percent. Those that have 15 percent rates are the Czech Republic, Georgia, Iraq, Mauritius, Montenegro and Ukraine. Hungary and Romania impose 16 percent, while Estonia and Slovakia, 18 percent and 19 percent, respectively.

At least two Senatorial candidates in next month's elections -- Senator Ralph Recto and former Manila City councilor Greco Belgica -- are proposing to cut the country’s income tax rate.

Recto was the main author of Republic Act No. 9337 or the Expanded Value Added Tax (EVAT) Law. When he ran for re-election in the 2007 elections, he lost mainly because of a political backlash against his role in pushing that law. This time, Recto is playing a “taxpayers’ friend” role by proposing an income tax cut -- to what rate we have yet to divine.

Belgica proposes a “flat tax of not more than 10 percent of individual or corporate income only.” His proposal makes sense but his chances of becoming a senator next month, like many lesser-known candidates, are nil.

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See also:
Fat-Free Econ 15: IMF and Freedom From Debt, July 01, 2012

Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2012

Fat Free Econ 39: P57,000 Public Debt Per Filipino, February 25, 2013 

Fat-Free Econ 40: IMF Irrelevance, March 16, 2013

Abolish Income Tax 6: Income tax and VAT trade-off, February 08, 2010
Abolish Income Tax 7: Rene Azurin, Peter Wallace, John Mangun, August 19, 2011
Abolish Income Tax 8. From low flat tax to zero income tax, September 30, 2011

Tax Cut 12: Removing Taxes on Foreign Airlines, April 02, 2012
Tax Cut 13: Remove the Excise Tax on Oil Products, July 04, 2012, 

Tax Cut 14: APTU Meeting in Bangkok, March 1-2, January 22, 2013