Tax Cut 18: On 10% Flat Tax, Greco Belgica and GDP Growth

A tax cut seems to be an "in" thing these days as there are bills at the House of Representatives (by Cong. Miro Quimbo) and the Senate (by Sen. Sonny Angara) cutting the marginal income tax rate from 32 percent to 22 or 25 percent. Of course the BIR has its own version to complicate existing taxes.

One of the known advocates of a low, flat tax, is former Manila Councilor Greco Belgica. In the 2013 elections, he ran for the Senate. He was not serious in winning of course. He only used the elections  to propagandize the flat tax philosophy, which was a good strategy.

In his facebook wall, Greco posted these two entries in his wall a few days ago. These were shared by some of his friends. My comments after these two entries.

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My proposals during the 2013 election and the proposals today.

1. 10% Flat rate tax. vs lower tax proposals in both houses.

2. Abolition of the Pork Barrel System - DONE

3. Conversion of the Pdaf to Tuition Vouchers. - Tuition vouchers are now available for k-12 students.

These ideas comes are principles of a limited and small government. The same worldview and ideas espoused by our young heroes through the constitution they have written and fundamentally carried over by the constitution we still have today. And principles applied by all free nations and all men who fought for liberty.

Crony-capitalism and a Centralized System of Government (GDP & POVERTY)

Crony-capitalism are products of a centralized system of government – a system  communism and socialism espouses and most governments today share, including the Philippine government.

During the time of President Marcos, Cronies enjoyed all power, resources and opportunities from 1 man holding all powers of governments.  Today, Cronies enjoy the same privileges from 1 and the same government, however held by 2M bureaucrats and elected officials.

Re-distributing wealth, power and opportunities to the few at the expense of the rest through government laws and regulations.

GDP growth rates are useless economic indicators.  The economy measured as a whole is a useless indicator of economic strength.  It measures collectively as a whole and has nothing to do with individuals and family needs.  People are at the center of all economic activities not government.  In a free and christian society, government has nothing to do with business.  People create governments.  Governments does not make a people.

A nation exist primarily as individuals and families seek to come together and bind themselves through a constitution to preserve themselves and co-exist.  Primarily as individuals and as a family, secondarily as a country.  The centralized view of society espoused by communism comes from the same world view GDP measures society.  There is no freedom in communism while there is no poverty with liberty.  GDP as standard for economic strength is false.  That explains why while government continues to say GDP is growing, poverty continues to grow as well.

Correct economic standards must view the economy from the standpoint of the home and individuals.  The true standard are the extent resource – LAND & CAPITAL – are made available to FAMILIES and INDIVIDUALS and NOT Governments, Multinational companies and mega corporations.  The extent of a centralized power and system of government is proportionate to the extent of CRONYISM of a country.

Economics can not be measured or treated as a whole.  It is measured through the homes.  The extent of the availability of resources (LAND & CAPITAL) to individuals and families and the extent of liberty one enjoys to trade and pursue his dreams and happiness without threats of confiscation and the strangling arms of government regulations against  life and property and private properties.

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My comments:

Many good points like distrust of big government, socialism and communism, emphasis on individual liberty. And the need for a flat tax, 10 percent single rate. This is a brilliant proposal, not original of course as there are several  countries in the world now which have 10 percent flat income tax rate, both for individuals and corporations, like Georgia, Russia.

I voted for Greco in the 2013 election mainly because I could not fill up the 12 Senatorial slots and I believe in the low, flat tax proposal. I think I filled only about six names in the ballot, Belgica included. 

But he has a few wrong points above like "GDP growth rates are useless economic indicators" without identifying alternative measurements of growth, micro or macro.

One alternative to GDP growth is electricity consumption growth. When people are well off, they tend to have more gadgets and appliances, more air-con rooms, more lights, resulting in high electricity consumption. If they are poor, they cut spending on electricity. But Greco himself did not identify any alternative measurement.

A friend commented that “It's more important to look at the change in the rate of employment rather than that of GDP, in determining economic growth and the degree to which such productivity is enjoyed. Nonoy's electricity suggestion might not work if more efficient means of production actually bring down electricity usage.”

A change to employment rate as measurement of economic strength is itself tricky and not reliable, for these reasons.

One, definition of underemployment. Someone working 10-12 hours a day and still "wanting additional work" is considered as underemployed. Or someone already earning P100k a month but "wanting additional work" because he wants to earn P130k a month is also considered as underemployed.

Two, definition of unemployment. Someone who has been offered P80k a month but refuses it because he is waiting for a possible job call that will pay him P100k a month is considered unemployed if an NSO surveyor happened to ask him that day.

Three, reference period. It is possible to have a good overall business environment for 3 months but the labor force survey, conducted for only 1 or 2 days per quarter, was done on a bad day, and so employment data is bad. Or the business environment for that quarter is generally bad, but the survey was done on a rather good day, so employment data is good.

Thus, using employment figures, themselves are aggregates, as replacement for GDP growth figures is even more questionable.

For people with anti-GDP angsts like Greco, here are a few questions: If you wish to know how much was the growth (or lack of growth) of agri, in particular rice, corn, sugarcane, poultry, fishery, etc., how do you go about it? If you  wish to know how much growth (or lack of it) occurred in the services sector, especially in tourism, buses, retail shops, etc., how do you go about it?

I think their answer would be simple, the sound of silence. Currently, these sectors and sub-sectors are being measured. The measurement is not exact of course, it can never be perfect, but the estimates are there, including how much contribution from the informal sector.

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See also:Tax Cut 14: APTU Meeting in Bangkok, March 1-2, January 22, 2013 
Tax Cut 15: Some Resistance to Reducing Personal Income Tax, May 04, 2013 
Tax Cut 16: Conserving Fishery Resources by Taxing Demersal Fish Catch?, May 27, 2013 
Tax Cut 17: BIR vs. Physicians, March 06, 2014

Abolish Income Tax 8. From low flat tax to zero income tax, September 30, 2011 

Abolish Income Tax 9: Tax Revolt Against Government Corruption, September 29, 2013 

D.Ricardo, JS Mill, A.Smith and Bong Mendoza on Taxes, BIR vs. Doctors, March 14, 2014

Election 7: My Candidates for Senators

My main criteria for supporting or voting candidates is who among them will be the least populist and welfarist, least interventionist and tax hungry, compared to other candidates. Almost all politicians have shades of populism and welfarism and hence, for expanding government. They just vary in the degree of populism. Thus, choosing who among them will go against the populism tide seems a difficult task.

Nonetheless, here is my short list, the Senatorial candidates that I will vote tomorrow.

1. Ramon Magsaysay, Jr. Clear and explicit in calling for reducing the size of the bureaucracy, in simplifying business procedures and regulations, in liking minimal government.

2. Koko Pimentel. Favors the privatization of PAGCOR, rather independent minded.

3. Dick Gordon. Strong presence in civil society via the Philippine National Red Cross. The Red Cross is one clear example that civil society participation in public health promotion is very potent, that it's not all government in healthcare.

4. Greco Belgica. Advocates flat income tax of 10% for both individuals and corporations. His chance of winning of course is zero, but will vote for him nonetheless.

5. Eddie Villanueva. Never sought any appointed political position after he lost in the last two Presidential elections that he joined. He stayed with his church-based and civil society organizations. 

Ouch, only five. Will think of the other seven tonight. 

A friend commented that my criteria above is like “voting for those who won’t do anything.” I replied that it is not the case. Rather, it is voting for those who will attempt to leave us to do what we think is good for ourselves, our family and our community, and not regulate and nanny us how you should conduct our own lives, while getting more money from us so the government can regulate our lives more. 

"The election this Monday will determine our future as a nation and as individuals." -- from a radio commentator. If many people will believe this statement, then we are a bunch of hopeless idiots. We cannot determine our own life and future and that of our households and communities. Everything will depend on the politicians that we will elect and the army of bureaucrats who will implement the politicians' will. If the elected politicians are angels, then our future is good. If they are devils, then our future is hellish. That is a lousy life.

Meanwhile,  I have heard Comelec Chairman Sixto Brillantes in two or three election-related fora in the past, usually at Traders Hotel. He looked cool and frank to me. But recently, he's got the habit of typical government  "prohibit and ban" thinking. Like the recent moves to ban alcohol for 5 days instead of 2, ban bank withrawals beyond P100k, ban "excessive" pol ads, etc. 

LENTE forum, November 2011. Chairman Brillanes 3rd from left.

It is good that the current Supreme Court majority realize that prohibitionist/banning thinking is so central planning and dictatorial leaning. 

In a free society, ALL actions are allowed except for a few, expressly prohibited acts like killing, stealing, rape, abduction, etc.

In an unfree society, ALL actions are not allowed except with permit from government.

We are not there yet, of a totally unfree society, but as more and more permits are required in our ordinary lives, we are moving towards a less free society. Magtayo ka lang ng barber shop or bread shop, kaliwa-kanang permits, taxes and fees kailangan mo. May penalties pa for "late registration" daw.

As government expands, stupidity expands. So it is really important to limit the power of coercion of government. Including its power to forcibly collectivize endless subsidies and their endless financing.

More nice quotes:

A government that's BIG and populist enough to give everything you want is also BIG and dictatorial enough to take everything you've got. 

Free people are not equal, and equal people are not free.

"If it moves, tax it. If it moves further, regulate it. If it stops moving, subsidize it." -- R.Reagan

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See also:
Election Watch 3: Defining Celebrities, Politicians and the State, August 30, 2012
Election Watch 4: Senatoriables on Healthcare, March 08, 2013 
Election Watch 5: Sin Tax Law, Hospital Over-regulation and Senatoriables, May 07, 2013 
Election Watch 6: On Political Dynasty, May 11, 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