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

Privatization 10: More on Selling PAGCOR

My article in interaksyon last week, FAT-FREE ECONOMICS: Pagcor privatization and reducing public debt has attracted some reader comments. I reply to them as much as possible, in order to clarify more points that I already made.

Here are the comments and my clarifications.

Roy Roger If the government wants new revenue, it should sell non-performing assets like idle lands first. Revenue earning assets such as pagcor & pnoc-ec should be sold last. Why sell a cash cow all of a sudden?
6 hours ago

Shan Tiodianco How much kickbacks will REcto gets from privatization of pagcor? These senators are very devious getting kickbacks of selling gov. owned companies.
Saturday at 1:52pm

Shan Tiodianco I don't trust sen. recto. why sell PAGCOR? it generates big revenues to our gov.
Saturday at 1:57pm

Paul Eugenio You haven't read the article, do you?

Saturday at 6:53pm

Nonoy Oplas Sen. Recto's goal is to raise more money for DepEd, DSWD, LGUs, the Treasury. I suggested that all privatization proceeds should go to retire some public debt, not to any specific department. Savings from annual interest payment can be used for other socio-econ programs. We just need to reduce that huge public debt stock and avoid future Europe type of econ instability.

Why sell Pagcor, to help reduce the public debt, save huge interest payment yearly. Pagcom as a regulatory body expected to earn more money as more huge casino/gaming companies from abroad are coming in.

Yesterday at 3:39am

Paul Eugenio What's the use of earning P40 B from Pagcor if it just goes to debt service, right?

Sunday at 7:53am

Nonoy Oplas hmmm, some people just want to argue on numbers even if the data are already given to them. 

Sunday at 11:26pm

Nonoy Oplas   Top Commenter · University of the philippines
Yesterday I went to the Senate for the Committee hearing of Pagcor privatization. I briefly argued the above in about a minute, in front of Sen. Koko Pimentel III and Sen. Ralph Recto. Thanks to Red Atienza for the invite.
Friday at 11:50am

Benedict Bernabe · Top Commenter · University of Melbourne
Nonoy, one of the reasons why European economies have huge public debt is because they radically privatised many of the state's income-generating activities in pursuit of the neoliberal model of growth (example, UK under Thatcher and US under Reagan), arguing that a scaled back state will be better for the market, and that the state should not operate those outside its spheres of competence. Yet even the World Bank, the IMF and ADB have repositioned themselves about scaling back the state. The Philippines has a healthy debt to GDP ratio, to the point that the country has become a net IMF creditor. A big majority of our public debt is peso-denominated, which means it's used in making the local economy work. Having lower public debt per se is not a good thing in itself. We need some public debt. For one, it's an investment vehicle for the financial market. What we need is a change in perspective in terms of looking at public debt. The governments obligations are reverse side of the coin of the investments of the market. Lastly, there are no guarantees that we will see the entry of more foreign gambling companies once we privatise gambling. Besides, if foreign gambling companies come in, that means they will take their earnings out of the Philippines. There are many ways to improve PAGCOR operations, including amending the PAGCOR charter. But not outright privatisation. I believe that gambling should remain a state monopoly.
17 hours ago

Nonoy Oplas ·A "healthy debt/GDP ratio" at 40%? And we pay P328 B a year on interest payment alone, it's "healthy? come on. CCT spending of about P25B already caused huge political debate here, and people don't think that paying debtors P300+ B a year is just fine? come on.
14 hours ago

Benedict Bernabe · Let's just say it's "manageable." It's important to know who our debtors are. According to latest estimates, 60% of public debt is owed to the domestic market. Meaning, the government is borrowing from Filipino individuals and corporations. So most of the interest payments go to Filipinos and circulate within the Philippine economy. The government is also progressively paying off foreign debt so that it will constitute a much smaller percentage of the national debt. Debt is important in plugging crucial gaps in public spending. The only sustainable way to reduce debt-to-GDP ratios is to grow the economy organically and raise new taxes. Privatisation creates one-off revenues that looks good on paper for one year but leaves a gaping hole the following year that can only be matched by another big ticket privatisation. At one point, the government will run out of things to privatise. Besides, the only time that privatisation makes sense is if the state enterprise is operating at a loss that it requires a lot of state subsidy. I don't think this is the case with PAGCOR. There are better ways to cut public debt than to sell off the state's monopoly on gambling.
13 hours ago

Benedict Bernabe · Also: "Huge government debt, not private sector and household debt, is the main reason for the on-going economic and financial turmoil in a number of European economies now. Their governments have been over-spending and borrowing irresponsibly over the past years and decades." This is an oversimplification. The increase in sovereign debt of European economies is a result of the fallout from the US subprime crisis, to which many European lenders were exposed, requiring bailout by national governments. Bailout expenses, and stimulus spending, coupled with an unresponsive economy that translated to poor growth, hence poor internal revenue, places European economies in a position that made it harder for them to borrow money to finance spending. "Overspending and borrowing irresponsibly" does not capture the essence of the European sovereign debt crisis. The Philippines is in a stable monetary position because of the lessons learned from the 1997 Asian financial crisis, our markets and banks are well regulated and financial institutions adequately capitalised. This will not put us in any European-like crisis anytime soon. So public debt reduction does not justify PAGCOR privatisation.
13 hours ago

Nonoy Oplas · "reduce debt/GDP ratio... raise taxes" ouch. Perhaps you're working in govt or foreign aid bodies that raising taxes to the public is so easy to advocate.

"increase in sovereign debt of European economies is a result of the fallout from the US subprime crisis." See table 2 above, Greece, Italy, Portugal have debt/GDP ratio of 100%, 105% and 62% respectively, already high figures even before the US financial turmoil in 2008-09.
10 hours ago

Benedict Bernabe · Nonoy, I worked with Standard & Poor's Capital IQ as a researcher on the European market. The US subprime crisis started in 2006. European banks have been exposed to these securities even before 2006, hence the increase in debt to GDP ratio. In 2008-09. This era was marked by heavy stimulus spending, believing that spending will not stimulate economic growth. When that didn't happen, they attempted austerity measures, which are still not working. Now they're bailing out their banks. I work for the United Nations after that, on the development side and have seen that cutting out these revenue-generating entities will deal a serious blow to programs that address social inequality. We need more taxes, especially at the higher-tier income. We probably need to create a 40% income tax bracket, and we now have a political opportunity to do that. Your minimal government agenda works in developed countries but we're not there yet. Scaling back the state at this crucial point in development will only mean losing the gains that we have made so far. The privatisation of PAGCOR will only benefit the large capitalists who have enough capital to benefit from the windfall profits coming from gambling. What we need is legislation that dictates the use of proceeds from PAGCOR, not privatise it. Besides there are existing schemes that allow private sector involvement. Gambling should remain a state monopoly, at least in the next ten years.
9 hours ago

Nonoy Oplas · So you really work for one of those "spend-spend-spend, tax-tax-tax" agencies like governments and the UN, no wonder. Many government bureaucrats and politicians are busy operating casino, black jack, lotto, sweepstakes, cockfighting, etc. They are also busy regulating, taxing and restricting entrepreneurs who only want to put up a food shop, a bake shop, internet shop, barber shop, etc. Government failure in running after killlers, murderers, rapists, land grabbers, kidnappers, carnappers, other criminals is very high.

Why would govt bureaucrats and politicians want to endanger their lives running after armed robbers and murderers, when they can easily make more money operating casino and other gambling facilities.
9 hours ago

Benedict Bernabe · Your first paragraph is argumentum ad hominem and your second paragraph is argumentum ad captandum. Your entire proposition is based on reducing public debt through privatisation of PAGCOR. Why are we discussing crime rates all of a sudden? I believe this proves that the economic basis of this proposition is unsound in the first place, and mostly made up of generalisations. Your hypothesis is PAGCOR privatisation will help reduce public debt. The real question is whether the public will benefit from losing a revenue-generating enterprise and pre-paying its debt rather than paying its debt on original terms and keeping PAGCOR. Our credit ratings and credit outlook prove that we are in a very good position to pay our public debt in the long term. Perhaps it was best if you illustrated how the supposed gains from privatising PAGCOR and pre-paying public debt offsets the actual revenue losses that the government will incur.
8 hours ago

Nonoy Oplas · hmm, not ad hominem. That's how I look and view governments, the UN, other multilaterals WB, IMF, ADB, USAID, etc. Their main advocacies are consistent, government to spend-spend-spend, then tax-tax-tax, as what you precisely argued.

I brought up the issue of criminals and government failure, because ultimately we have to define "what is the raison d etre of government" and I argued that running casinos and operating poker and black jack is not and should never be a govt function.

On illustrating how PAGCOR privatization can lead to more govt resources (not losses), see the paragraph after table 1 above.
2 hours ago
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See also:

Privatization 3: UP, NDCP, other SUCs, March 27, 2010

Privatization 4: Utilizing Proceeds and Revenues, August 06, 2010

Privatization 5: Regulate Exec. Pay or Privatize Govt. Corporations? August 31, 2010 

Privatization 6: Camps Aguinaldo and Crame, January 08, 2011

Privatization 7: Debts -- Cut Borrowings, February 23, 2011

Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011

Privatization 9: PAGCOR and Casino Operations, May 16, 2012

Fat-Free Econ 12: Privatizing PAGCOR

I went to the Senate yesterday as one of the invited resource speakers on SB 3178, privatizing the state-owned gambling firm PAGCOR, and creating a new regulatory body (no proprietory function) PAGCOM. Sen. Aquilino "Koko" Pimentel III chaired the hearing, while the bill's author, Sen. Ralph Recto, explained the proposed measure. Sen. Antonio Trillanes also came and asked a few questions.

I spoke for just about a minute, very brief, summarizing the arguments below. I talked to Sen. Pimentel twice, before and after the hearing. He looks as an intelligent and approachable senator.

Below is my article today (and 12th total) in TV5's news portal,
http://www.interaksyon.com/article/34177/fat-free-economics-pagcor-privatization-and-reducing-public-debt

(Editor’s note: This is the position paper Mr. Oplas presented during the joint hearing of the Senate Committees on Games and Amusement, on Government Corporations and Public Enterprises, and on Finance held on June 7, 2012)

There is no market failure in operating casinos, black jack, roulette and other gambling facilities. The existence of a government corporation, the Philippine Amusement and Gaming Corp. or Pagcor to provide this service for many years is a historical mistake that should be corrected soon.

A Senate bill privatizing Pagcor, while creating a regulatory body, the Philippine Amusement and Gaming Commission or Pagcom, has been filed by Sen. Ralph Recto, and is undergoing committee hearing chaired by Sen. Koko Pimentel.

Senate Bill 3178 is advantageous to the public for four reasons:

- Government can raise new revenues without raising existing taxes or creating new ones;

- Government can focus on more social and economic programs as there is no “market failure” in operating gambling facilities, and doing such function is far out as a government responsibility;

- Raise more revenues through tourism as private international operators mobilize their international network in bringing in foreign players and gamblers; and

- Reduce corruption in government as that corporation is known to be a major milking cow by previous administrations.

With the on-going financial, economic and political turmoil happening in a number of European countries, particularly the PIIGS (Portugal, Italy, Ireland, Greece and Spain), initiatives to reduce huge public debt by governments should be prioritized.

Governments should be able to raise additional revenues somewhere aside from increasing existing taxes and fees, or creating new ones, limit new borrowings, and drastically reduce the public debt to:

Reduce the heavy interest payment that on average, constitutes one-fifth of the annual budget;

Avoid future economic and financial turmoil that is currently happening in many European economies because of their huge public debt burden; and

Finance some government social and economic programs out of savings from interest payment, not from additional taxation or borrowings.

From 2010 to 2012, the government’s interest payment on its gross debt would be P328 billion per year on average, or 20 percent of the total annual budget. This is a big amount that must be reduced as quickly as possible, to give justice to the over-taxed sectors of Philippine society.

The lower box implies that if government can reduce the debt stock by P100 billion, say from Pagcor privatization, at an average interest rate of 6.5 percent per year, the government will be able to save P6.5 billion per year. This can be considered as perennial or sustainable revenues that otherwise would just go to the pockets of the rich lenders, but will be used for certain economic programs and services yearly.

Huge government debt, not private sector and household debt, is the main reason for the on-going economic and financial turmoil in a number of European economies now. Their governments have been over-spending and borrowing irresponsibly over the past years and decades.

The huge debt and other economic problems of the PIIGS have combined to make their GDP growth dive to negative territory, while their unemployment rate has significantly shot up.

This deadly combination is something that we do not wish to happen to the Philippine economy someday. That is why we have to start somewhere in raising additional revenues while limiting new borrowings.

Only a few Asian economies have public debt of more than 50 percent of their GDP as of this year. One good news for the Philippines and the current administration is that the public debt-to-GDP ratio would decline from nearly 60 percent just seven years ago to the projected 40 percent this year.

Still, this is not a valid excuse why we should not aspire to further bring down that ratio to 25 percent or lower. And the proceeds from privatizing Pagcor is a good candidate to use for this objective.

Ultimately, more government corporations and financial institutions should be privatized. There is no market failure in operating banks, and it is not wise, it is not fair, that government is a regulator and a player at the same time.
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See also:
Privatization 6: Camps Aguinaldo and Crame, January 08, 2011

Privatization 7: Debts -- Cut Borrowings, February 23, 2011

Privatization 8: Government Debts: Military Camps and Spratly Issue, June 20, 2011

Privatization 9: PAGCOR and Casino Operations, May 16, 2012
Fat-Free Econ 11: GDP Growth and Private Sector Role, June 02, 2012

Privatization 9: PAGCOR and Casino Operations

There is a bill by Sen. Ralph Recto, SB 3178 abolishing and privatizing the Philippine Amusement and Gaming Corporation (PAGCOR), and creating the Philippine Amusement and Gaming Commission (PAGCOM), a regulatory agency.

I support this move for two reasons: One, get the money from such privatization and retire some public debts. When the debt stock is reduced, interest payment will decline. And two, government should shrink somehow, get out of casino operations and not be a player and regulator at the same time.

Proceeds of privatization should as much as possible, go to retire some debts or the excesses and over-spending in the past. Whatever savings from principal amortization + interest payment should be larger than privatization proceeds to be allocated directly to certain sectors. Hence, the savings from the reduction in debt stock and annual interest payment is sustainable.

I hope that this bill, with revision on the proposed allocation of proceeds, will become a law before the next elections in May 2013. Meanwhile, here are the 3 short papers I wrote in 2010.
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Privatize PAGCOR
August 02, 2010

(This is my article for People's Brigada News this week)

The main function of the government is to protect the citizens’ right to life, right to private property, and right to liberty and self-expression. That is, the government should promulgate the rule of law – the law against killing and murder, law against kidnapping and carnapping, law against stealing and plunder, and so on. And then people can concentrate on productive economic activities that expand the country’s wealth and resources.

The country’s public finance has been in an ugly situation for many years now, where government profligacy as indicated by persistent budget deficit (expenditures are larger than revenues) is the norm. From 2001 to 2009, for instance, the budget deficit averaged about P140 billion per year. That means borrowings of P140 billion per year or more.

This year, the projected budget deficit is P300 billion. But about 60 percent of it has been reached already in the first six months of the year. Raising existing taxes is a bad option for the public.

Privatization of many if not all, government-owned and controlled corporations (GOCCs) has a big potential of reducing the fiscal bleeding. And the Philippine Amusement and Gaming Corporation or PAGCOR should be among the first to go. Why?

One, government can raise new revenues without raising existing taxes or creating new taxes. Two, operating a gambling facility is far out as a "government responsibility." Far out compared to operating a public hospital or a public high school. Three, reduce corruption in government as that corporation is known to be a major milking cow by previous administrations. Four, raise additional revenues through tourism. Gambling and related entertainment is a big tourism project. The best tourist drawers will be the international gaming corporations like those operating in Las Vegas, Macau, Hong Kong and Singapore.

By privatizing PAGCOR and selling it to private operators, government can use the proceeds to retire some of the public debt. Then government’s annual debt servicing (principal amortization plus interests) will decline, then there will be less need for more borrowings and/or more taxation to pay old debts.

How much money will the government earn if it will privatize PAGCOR now? Based on independent assessments, that corporation can easily fetch between P67 to P100 billion if it is privatized this year. Former PAGCOR President Raphael “Butch” Francisco agreed with such valuation.

Gambling is an unproductive activity for the government. Unlike spending time and effort in public education, devoting time and manpower to operate casinos, poker, black jack and other gambling activities is not a wise move for the government.

Government can keep its function of regulating casinos and gambling facilities by private enterprises. In which case, PAGCOR can be renamed as a Philippine Gaming Regulatory Agency or similar name.

Plugging the budgetary leak and fiscal deficit this year and the coming years is among the most urgent challenges for the new government of President Aquino. Privatizing PAGCOR and other state enterprises is an important step in the right direction.