Tax Cut 32, Rene Azurin on zero income tax

I am reposting this column 11 years ago by a friend, former UP CBA Prof., Dr. Rene Azurin. Rene has published several books. He mentioned me and Vernie Atienza here. Enjoy.

BusinessWorld, July 12, 2007

STRATEGIC PERSPECTIVE

René B. Azurin

Zero income tax

'Zero income tax' has a nice melodic sound. It produces in me the same resonant vibrations as Toyota's 'zero defect' production system and the environmentalist movement's 'zero waste' program. So, given the current hoohah over the BIR's latest failure to meet its tax collection targets, it seems timely to propose that hard-to-collect income taxes be now scrapped altogether and the revenue derived therefrom raised instead through easier-to-collect consumption taxes. This replaces a messy, susceptible-to-corruption system with a simpler, less discretionary one.

I have actually been suggesting this for many years now to any tax official who would listen so I was very glad to learn that my friend and former graduate school classmate, Dr. Veredigno Atienza, has created an advocacy group to lobby for this to happen. The organization founded by Dr. Atienza is called the Philippine Taxpayers Union and it is affiliated with the World Taxpayers Associations, a movement now in 42 countries that grew "out of the desire of citizens to protect themselves from the increasing tax claims of the state." I think that is an excellent reason for citizens to band together. Taxes, after all, are forcible impositions made by those with power on those without it. From a historical perspective, these are qualitatively no different from the tong extorted from people by the ancient predatory bandits who called themselves kings. In fact, taxes can be effectively looked at as the goods that the productive members of the community are compelled to give up in order to support the lifestyles of a non-productive group of individuals sometimes called politicos.

Of course, in a modern democracy, taxes are supposed to be payments for certain support services – like maintaining order and administering the system of justice – performed by the politicos who capture control of government power. Accordingly, citizens are well in their rights to demand that the goods they are forced to give up is used in the proper manner and not used to enrich parasitic politicos who think that they are entitled to lavish compensation for what they imagine is productive work. From a practical standpoint however, citizens have no real power to make that demand – since politicos wield the coercive instruments and armed might of the state – and this is why it is necessary for individual citizens to band together to achieve the small modicum of power possible through concerted group action.

The WTA and its member associations like the PTU support initiatives that "limit tax burdens, prevent unjust harassment by tax collectors, and provide clear information about government taxation and expenditure." In a recent forum organized by Dr. Atienza, PTU Secretary-General Bienvenido Oplas Jr. presented a paper arguing for the abolition of income taxes and making consumption taxes the main source of government revenue. Principally, he argued that income tax collection is "very bureaucratic, discretionary, costly, and corruption-prone… (because) people do not want to divulge their true income… (and it is) cheaper to hire good accountants and lawyers and bribe revenue collectors than pay the full income tax liability." Additionally, Oplas argued that individuals and enterprises that engage in economic activities – by producing goods, services, and jobs – "already serve welfare functions in society… and they should not be penalized with income taxes and bureaucratic licenses and permits."

I agree completely. Taxes based on consumption are simpler to administer since these are collected from merchants and businesses which constitute a far smaller number than the number of individual taxpayers. Consumption taxes are also inherently fairer. The more you consume, the more taxes you pay. Moreover, this is more consistent with individual freedom because it allows each consumer to spend all that he earns in a manner that maximizes his satisfaction while still generating for the government the required amounts to fund support services. To address social welfare concerns, consumption tax rates can be set higher for non-essentials like cars and condos, and lower for essentials like food and medicine. Certain basic commodities like rice and galunggong can even be exempt from any consumption taxes whatsoever.

If one grants that the present national budget of some P1.1 trillion is a reasonable imposition on the producing classes of our society, then the required tax bite will amount to some 17% of the aggregate

value of goods and services produced domestically (assuming a GDP of around P7 trillion). The amount in tax take to be foregone from the abolition of personal and corporate income taxes – I believe this was around P881 billion in 2006 – can actually be drawn from various consumption-based taxes already being collected like value-added taxes, sales taxes, excise taxes, real property taxes, vehicle registration taxes, travel taxes, amusement taxes, and import duties. How this is to be distributed just takes a little arithmetic.

One might also argue however, as PTU does, that scrapping income taxes will actually expand the total tax base and therefore allow a desired tax take to be raised with not too high an increase in the prevailing rates of existing consumption-based taxes. The argument made is that zero income taxes will stimulate business investment, generate greater economic activity, and bring currently underground businesses (the so-called informal economy) out into the open. This can mean increased government revenues even with lower taxes per taxpayer. And there will be less corruption. In the end, this translates into faster growth for the economy as a whole.

So, citizens, let us band together and support this initiative. A zero income tax system is good for all of us. But not, maybe, for some people in government.

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See also:
Tax Cut 29, Culture of exemptions and culture of envy, February 06, 2017 
Tax Cut 30, Trump's 20% CIT, deregulation, October 09, 2017 
Tax Cut 31, Talk at Deloitte TRAIN forum, January 2018, February 11, 2018

BWorld 171, Global vs national tax reforms

* This is my column in BusinessWorld last December 13.

“The problem is not that the people are taxed too little. The problem is that government spends too much.”

— former US President Ronald Reagan

Until 1980, much of the world’s countries and governments were socialistic in their taxation and spending policies. For instance, the top marginal income tax rates that year were 60% in Malaysia and Thailand, 70% in the Philippines, 75% in Japan, 89% in South Korea, 70-75% in the US, and 83% in UK.

Then the Reagan-Thatcher era in the ’80s changed this, they cut their respective tax rates by half. Both were advocates of limited government and free market as indicated by Reagan’s statement above. He also once described role of many governments as “if it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.” Ms. Thatcher on the other hand once said that “the problem with socialism is that you eventually run out of other people’s money.”

In the Philippines, former President Cory Aquino and other world leaders in the ’80s also joined to institute drastic income tax cut.

Fast forward today. The Duterte administration initiated drastic personal income tax cut, which is a good thing. The problem is that it also increased taxes elsewhere as it expanded public spending big time. The average increase in the national government budget of the previous administration was around P250-300 billion/year. Dutertenomics easily doubled this level: P670B increase in the first year (from 2016’s P2.68 trillion to 2017’s P3.35 trillion), another P420B increase next year with 2018 budget of P3.77 trillion.

Among the global NGOs that fight high and multiple taxes, big and wasteful public spending, is the World Taxpayers Association (WTA).

Formed in 1998 as Taxpayers Associations International, it was renamed as WTA IN 2000. It has many members from over 60 countries promoting lower tax rates, limited government, and more individual freedom.

The WTA held its regional forum and meeting last week, Dec. 9-10 at Rembrandt Hotel Bangkok, Thailand. I went there and I was the only participant with an institute from ASEAN countries. Other participants were from China, Hong Kong, South Korea, Japan, India, Nepal, Australia, UK, Sweden, US and Canada. Former WTA Sec. Gen. Bjorn Tarras-Wahlberg, current WTA Chairman Troy Lanigan who is also the president of Canadian Taxpayers Foundation (CTF), and current WTA Sec. Gen. Cristina Berechet were there.

Among the biggest members of WTA and represented in the Bangkok meeting are the Korea Taxpayers Association (KTA) with 1.2M dues-paying members, CTF with 117,000+ members, Taxpayers Alliance (UK) with 75,000+ members, others.

The Philippine government seems to be the most tax-hungry among the 10 members of the ASEAN as reflected in the total tax rate (TTR) as % of commercial profit. This is reported by the Price Waterhouse Coopers (PWC) in its “Paying Taxes” annual reports. TTR is the sum of corporate taxes + labor taxes (mandatory contributions for employees’ SSS, health, housing insurance, etc) + other taxes and fees (by other national and local government agencies).

On the country list, I chose members of the proposed Regional Comprehensive Economic Partnership (RCEP), composed of ASEAN 10 countries + 6 regular dialogue partners China, Japan, South Korea, India, Australia, New Zealand; then the two tiger economies in the region, Hong Kong and Taiwan. Also included are the biggest economies in North America (US and Canada) and Europe (Germany and UK). Of the 22 countries covered, only four (indicated by *) have experienced increase or deterioration in TTR (see table). 

The good news is that over the past five years, many countries and governments have learned to cut their various taxes and fees collected from corporate job creators. The bad news is that after such decrease, the level of TTR remains high.

Take the Philippines.

Its TTR has declined from 46.4% of firms’ commercial profit in 2012 to 42.9% in 2017, that’s the good news. The bad news is that this 42.9% is the highest in the ASEAN, even higher than socialist Vietnam.

So can the Duterte TRAIN help remove this dubious image of the Philippines having the most tax-hungry policies in the ASEAN and other neighboring countries?

With new tax hikes affecting the prices of cars, oil, electricity, and sweetened beverages; high VAT affecting many goods and services, the answer seems to be an ugly NO.

Dutertenomics could have improved this situation by cutting the VAT from 12% to 8% or lower with zero exemption except raw agri and fishery products. But Dutertenomics is focused on spend-spend-spend with little regard for the inflationary pressure of its tax-tax-tax policies.

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See also:

BWorld 168, Uncertainty in mining policy and the Manicani debate, December 12, 2017 

BWorld 169, On tobacco tax and plain packaging, December 12, 2017 

BWorld 170, The Habito carbon tax distortion, December 28, 2017