Oil Politics 3: $100/barrel Oil Price and Petroleum Taxes

Below is my article published in Business Mirror(http://businessmirror.com.ph/) last Friday, November 9, 2007, page 10,Opinion section. Can't get the url for that day though.

Why a $100/barrel oil price and various petroleum taxes don’t mix

Bienvenido S. Oplas, Jr. *
November 7, 2007

Oil price, like the price of any other commodities and services, is driven mainly by the dynamics of supply and demand. High demand relative to supply means prices will go up. High supply relative to demand means prices will go down. And there are dozens of factors that determine both supply and demand. For instance, when millions of newly-riched Chinese and Indians, plus other people around the world buy new cars, then demand goes up. When oil producing-countries (OPEC or non-OPEC member-countries alike) pump more oil, and there are no supply disruptions (meaning no oil refinery or oil pipeline is blown up by bombs or knocked down by hurricanes), then supply goes up. But even if crude supply increases but oil pipelines are blasted, like the attack on pipelines in Yemen the other day, then supply can still go down, adding fears to oil consumers and traders, which further push prices up.

On Wednesday, world oil prices hit $97 a barrel, or just $3 away from the symbolic 3-digit level of $100 a barrel. This is partly due to the fact that despite continuing world oil price hikes in the past few months, world demand does not decline, staying at 85 million barrels a day on average.

Should oil prices finally reach $100 a barrel and stabilize there for say, one month, if not rise further, then it should be the right time for governments to cut petroleum taxes. In the Philippines there are at least 3 direct taxes slapped on petroleum products -- import tax (3%), excise tax (more than P5/liter for gasoline), and value-added tax (12%). Not included here are taxes slapped on companies that refine, distribute, and sell (wholesale and retail) oil.

The Philippine government says it is lukewarm to reduce or abolish the import duties. The DOE and DOF leadership say doing so will deprive the state of some P450 million/month in revenues while the people will only save around P0.23/liter. But what if a motorist, say a taxi driver, is consuming 60 liters a day or more, that’s a savings of around P14 a day. And there are more than 35,000 taxi units in Metro Manila alone. Another way of looking at this is that if the government will abolish the import duties, then the Filipino people will have P450 million/month of additional money in their pockets.

The continued imposition of excise tax on petroleum products is a callous decision. Excise tax is slapped on so-called “public bads” – petroleum (causes pollution), tobacco and alcohol products (can cause diseases to people). But is petroleum a “public bad”? People who do not want pollution from petroleum products should ride carabaos, horses or bicycles. A few people do this, but the majority can not. The use of petroleum to power vehicles that move people and their goods and services over far away places, is as necessary as food, clothing and shelter. Thus, abolition, or at least drastic reduction, of excise tax on petroleum products should be another measure that government should consider if it is honest in saying that it cares for the people.

The 12% VAT on oil products is possibly the only tax that can be retained. A zero import tax, zero excise tax, and 12% VAT, should be the best compromise between the public and the state to cushion an ever-increasing world oil prices without depleting the state’s coffers.
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I got 3 comments from 3 friends on my article above.

(1) From a friend working in Saudi Arabia, Lorrie Gallego. He wrote:

”You are correct Noy, Reduce taxes, reduce the number of congressmen, reduce the number of government employees!

”On supply and demand stats on oil, I remember between 1982 and 1985 Saudi Arabia was producing about 2.3 million barrels of oil per day. The price of crude at that time was ranging from 14 to 19 dollars per barrel. Now Saudi Arabia is producing around 9.5 million barrels per day and the price of oil is almost 100 dollars per BBL. In the last two years the world demand (or actual consumption) for oil remains around 84 million BBLs per day, but the price of oil went up from around $60 two years a go to near $100 now. Parang hindi proportionate ang price increase sa increase ng demand.

”Saudi Arabia's target production is 12 million barrels per day by 2009, and other middle east countries are drilling more oil wells too to increase their share of the oil supply. But I will predict that it will not take another decade before oil price will cross the 150 dollar per barrel mark.”

(2) From Ron:

“Noy, how about substituting petrol with nat gas or other 'green' alternatives? seems that phils do not consider this. jakarta has been using nat gas in some public transport, particularly their controversial busway system.”

(3) From Wyn:

“Then your point is to reduce if not eliminate big government taxes on petroleum. While this would be an immediate salve to our economic problems, i disagree. :) For the reason that fossil fuels are a fixed and diminishing resource. We can argue about when "the oil will run out", but run out it will.

Given that, i'd tend to support heavy penalization (thru taxes) of use of petroleum. Sure, it's *very* painful in the short run, but either we learn to curb our "oil appetite" gradually, or get a really rude shock sometime in the future.

Despite its immediate impact on our people, i believe that a stringent, penalizing energy regime is the way to go. It will teach us to pay attention to the (non-renewable) energy that we use and encourage development and use of renewable sources.”

Below are my reply to them.

(1) For Lorrie:

Thanks Lorrie for the additional information. Yes, $100 a barrel might be "expensive" for some people, especially the car owners. But other people who have never driven a car all their lives, they have been riding horses or bicycles only (like the millions of Chinese and Indians), now own a car, so what if the price of oil is $130 a barrel or more? The freedom of moving anywhere one wants to, along with his family and/or friends, can be priceless. Besides, they don't intend to use their car everyday, they can take the public transpo or their bicycles for their weekdays use. But on weekends or holidays or on special occasions, they need their car to tour their family, relatives or friends.

So it's not so much the price of oil as a result of supply-demand dynamics that's the issue. It's the hypocrisy of oil taxes, because the government that says it wants to help the price of oil "affordable" to the people, is the same institution that makes the commodity more expensive.

As I have argued in my paper, a 12% VAT on oil and leaving import tax and excise tax at zero should be fair to both the state and the Filipino consumers. But listen to what government officials will say -- they will not forego collections from import tax and excise tax, because they need the money to "help the people". So you can see the hypocrisy.

(2) To Ron:

Substitution is always a possibility under a free market environment. For instance, I contract a consulting work with A Consulting, Inc., I'm not happy with the outcome, so I go to (substitute you with) B Consulting, Inc., simple. Problem is no matter what substitute you make -- green substitute, brown substitute, black or pink substitute, if the mentality in government is "tax and tax and tax", the price of whatever substitute to petroleum or other "non-green" commodities will still go up much higher than the equilibrium price of that commodity if plain supply-demand dynamics was left alone.

(3) To Wyn:

My point in advocating the drastic cut, if not abolition, of import tax and excise tax on petroleum products, while retaining the value-added tax on the same, is because Malacanang, the DOE, DSWD, Congress, and every bleeding heart policy-makers and NGOs in this country say they care for the people who complain of high oil prices. So they think of various measures to "cushion" the impact of high world oil prices. In short, everyone in the above-mentioned category think of the price of oil, and not so much about oil depletion (or "peak oil") in the long-term.

So, if high oil prices is the main problem, as those guys have defined it, then one solution to bring down oil prices is those tax cuts on oil products. They can retain the excise tax on beer, wine, gin and brandy, cigarettes and tobacco, fine, but they should cut the excise tax on oil products.

I have anticipated earlier that some guys who trumpet too much about global warming and energy conservation would come forward and say that one solution to reduce global warming (and oil conservation) is the retention, if not the doubling, of current oil taxes. And I don't like that scenario. If governments want to encourage substitutes to petroleum products, those "green" energy, they don't have to trumpet cute slogans. They just abolish (or at least drastically reduce) all direct taxes and regulations to companies that develop wind energy, solar energy, nat-gas, geothermal, hydro, other "renewable" energy sources. But have we heard any government in the world brave enough to do this? So far, it's 100-100, or 587-587, nada, nothing.

* See also

Oil Politics 1: Bush vs. Chavez? March 12, 2007

Oil Politics 2: Oil prices and climate change, October 30, 2007

WHO is trampling freedom of expression?

A few friends in our Asian Liberty Forum (ALF) ygroups, Alec vanGelder of IPN (London) and Barun Mitra of Liberty Institute (Delhi) were barred by WHO bureaucrats from attending the WHO meeting in Geneva. Only NGOs, sometimes more aptly called government-funded organizations (GFOs), who are in favor of weakening (if not abolishing) intellectual property rights in health and medicine innovation, were allowed and heard.

Pretty soon, it is possible that we'll have some private medicine innovators shifting to innovating new skin whitening, new shampoo, new bath soap, new toothpaste, new fat burners, but not new and more effective medicines to cure human diseases. Why? Your IPR in developing new shampoo is respected. But your IPR in developing more effective medicines to cure AIDS or respiratory disorder or hypertension is weakened. Thanks to the health socialists, manygovernments and the WHO!

Below is a note from Julian Morris in the November 2007 issue of IPN Newsletter:

FREEDOM of speech is a fundamental human right. It also underpins liberal democracy. When the state intimidates, imprisons, or murders journalists solely for what they have written or might write, it gives up the pretence of both liberty and democracy. The list of states that engage in such vile acts is, sadly, long. Russia and Iran are among the most egregious, but Burma and Egypt have been doing their bit to catch up. This Friday, a second series of rallies are being held around the world for Abdul Kareem Nabeel Suleiman, a 22-year-oldEgyptian blogger who last year was imprisoned for four years for things he wrote on his blog. I believe that those of us able to speak freely have an obligation to defend those denied that freedom. So I encourage you to take part in the Free Kareem rally near you – if you are able.

Meanwhile, as I write this, freedom of speech, private property and the rule of law are all being undermined by the World Health Organisation. At its headquarters in Geneva, the WHO is holding a meeting to discuss plans to create a new global treaty that would transfer medical research and development from the private sector to the government. IPN has arranged for several people to be at the WHO to explain why it would harm human health and hold up progress. Unfortunately, Alec van Gelder and Philip Stevens from IPN, as well as Barun Mitra from the Liberty Institute in New Delhi, Tom Giovanetti from the Institute for Policy Innovation, and Jerry Norris from the Hudson Institute, have all been barred not only from observing the meeting, but from entering the Palais in Geneva where the meeting is taking place. By contrast, the many NGO proponents of health socialism have been allowed in; some are in the drafting room ... This selective denial of voice to legitimate representatives of civil society highlights the lack of democratic legitimacy of organisations such as the WHO.

Oil Politics 2: Oil prices and climate change

The first time I read about world oil prices hitting $100 a barrel or higher was sometime April or May this year. The projection then was that price will be reached sometime in February or March 2008, based on certain assumptions. But the $93/barrel has been touched already over the weekend, and it's not even end-October 2007 yet.

Oil price, like the price of any other commodities and services, is driven mainly by the dynamics of supply and demand. High demand relative to supply means prices will go up. High supply relative to demand means prices will go down. And there are dozens of factors that determine both supply and demand. For instance, when millions of newly-riched Chinese and Indians, plus other people around the world buy new cars, then demand goes up. When oil producing-countries (OPEC or non-OPEC member-countries alike) pump more oil, and no supply disruptions (meaning no oil refinery or oil pipeline is blown up by bombs or knocked down by hurricanes), then supply goes up.

When supply keeps increasing (both petroleum and petroleum-substitutes) and yet demand outpaces the growth of supply -- resulting in higher prices -- then it means one thing: the world (or a big portion of the world) is getting richer. Of course the number of poor people also expands, but the number of people who graduated themselves from poverty has expanded much bigger, and these people have bought new cars, or travelled more often in public transportations, which explains for the big growth in world demand for petroleum products.

Some environmentalists complain though when the world gets richer. Because this means more cars and buses, which means more petroleum consumption and more pollution, which worsens global warming. Thus, higher oil taxes can be a good thing so that oil consumption will be partly discouraged, and governments will have more money to fight global warming -- through more international meetings and conventions? more speeches? more tree planting? more subsidies to wind energy farms? Maybe, I usually do not buy governments' various alibi.

What I know is that when people are richer, they themselves find ways and have the resources to adjust to climate change. For instance, richer people tend to buy houses away from cities, in suburban areas where they are surrounded by trees and gardens. Or they buy idle lands and convert these into new real estate projects that have plenty of trees and open areas for outdoor recreation, entertainment that don't need huge air-con systems that require lots of power that require more power plants.

Should oil prices finally reach $100 a barrel this year and stabilize there, if not rise further, then it should be the right time to campaign for drastic cut, if not abolition, of petroleum taxes. In the Philippines for instance, at least 3 direct taxes are slapped on petroleum products -- import tax, excise tax, and value-added tax. Not included here are taxes slapped on companies that refine, distribute, and sell (wholesale and retail) oil.

Savings by households and motorists from lower pump-price of oil as a result of oil tax cut or oil tax abolition, can be used to buy new cars that are more fuel efficient (those cars that run 15 kms or more per liter). Or buy a new house or condo unit in those high rise buildings in the city center so that they will not travel far from their offices and their kids schools and hence, consume less oil. The options for households are unlimited as each household has unique needs and priorities. The bottomline is that petroleum taxes must come down, if not altogether abolished later, and let the households prioritize how they should spend the fruits of their hard work, especially in determining how they should cope with climate change.

* See also, Oil Politics 1: Bush vs. Chavez? March 12, 2007

Spontaneous Market 4: Entrepreneurship, Community and Property Rights

Entrepreneurship and free market, in the words of Adam Smith, Friedrich Hayek, and countless other intellectuals, lead to human welfare. People who want to be useful to society and at the same time become rich, invent things and services -- or facilitate the introduction and marketing of those inventions and innovations -- that improve human lives. From new rice varieties that can improve nutrition to new cellphones with cameras that improve communication among people, to new cars that are more fuel efficient, to new medicines that are more effective in fighting diseases.

We can add therefore, that only useful things get the attention of the people, and they buy those things and services, making the inventors and sellers of those things rich. Useless things like nuke bombs and more powerful killing machines are bought mostly by governments and military generals. If you have doubt about this, you can ask the Myanmar generals or Robert Mugabe or Fidel Castro, etc. why they bought hundreds of thousands of assault rifles for their troops.

One example of the fruits of entrepreneurship, is a first ever Oceanarium in the Philippines, that will open up less than 2 months from now. This means that Filipinos who want to see different marine animals and fishes need not go to Singapore or Hong Kong -- and pay thousands of pesos in travel tax, petroleum tax, terminal fee, security fee, to the state -- to see these marine creatures in style.

There is also an ocean park in Subic, about 130 kms. north-east ofManila, but there is corresponding or additional travel costs in going there. This oceanarium will be right in Metro Manila.

When people, children especially, can see live fishes and other marine creatures in front of them, and not just on Discovery or Animal Planet or National Geographic channels, or other documentaries, their appreciation of the marine environment will increase. Because who would want the destruction of marine environment if they will know that those colorful and beautiful, not to mention gentle, marinec reatures, will also be destroyed and killed?

(See the news report here,
http://businessmirror.com.ph/10232007/headlines013.html
First Philippine Oceanarium to open in December
By Louise M. Francisco

MANILA Ocean Park (MOP), the P1.1-billion joint oceanarium project ofChina Oceanis Philippines Inc. (Copi), and Singaporean and Malaysian investors, has set the opening of the first phase of its live aquarium facility on December 15, unveiling plans to exhibit more than 20,000 marine inhabitants of approximately 300 marine species. The oceanarium is divided into six sections named to evoke national pride....
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My two related papers in recent months:

(1) Markets, Government and Community

August 22, 2007

A friend defined these 3 concepts as follows:

Market - by competition
Government - by coercion
Community - by cooperation.

In my book though, I define them as:

Market = voluntary exchange
Government = forced exchange
Community = voluntary co-habitation.

Examples:
1) Market: I can only have your money if you like my hair-cut services, then you come back, you tell other people that i'm a good barber. The moment I become a lousy barber, or my barbershop stinks like a dumpsite, there's no way I can have you and your money.

2) Government: I will have your money even if you think policeman X is the most extortionist law enforcer, even if Congressman Y is the most corrupt politician, even if Mayor Z is the most arrogant mayor around. They are your public servants, so give me your taxes.

3) Community: I will live in this community (or village or condo building or barangay) only if it gives me peace of mind for me and my family, at a price that I can afford. The moment the peace and order deteriorates, or the cost of staying in this community becomes unaffordable for me, I and my family will be out of here, and we'll look for another community.

Market competition is only a means, not an end. The end-goal is choice. With choice, comes freedom. More choices, more freedom. In the process of voluntary exchange, some guys will lose out to fellow sellers as the buyers and consumers become choosy. So sellers are forced, even coerced, by circumstances, to be competitive, to produce goods and/or services that will be wanted and bought by the public. So in the process of giving consumers more choices, competition was born.

Government coercion is also a means to pursue a purported goal of public welfare. Oftentimes, the result, in the perspective of consumers, is lesser choice. Lesser choice means lesser freedom. When you have less take-home pay because of high income taxes, then you have less freedom to buy or consume certain goods and/or services that you deem important for you and your family.

Community cooperation is part of voluntary exchange. That is why builders and leaders of private villages and communities incorporate lots of amenities like good peace and order, garbage collection, street lighting, etc. to entice more residents and locators in their communities. More residents, more profit for them. Less residents and less buyers of their residential units, less profit, even losses for them.

Choice through voluntary exchange is a sacred goal to be pursued if one is to ensure individual and community freedom.

(2) Property Rights = Freedom

JUNE 12, 2007

A friend from Sri Lanka, Ms. Mala Gunasekera, wrote a short essay, "The conversion of bad title into good title by acquisition and vesting. This process has empowered governments and impoverished the poor."

In her paper, she observed:
"In Sri Lanka we had legislation called Waste Lands Ordinance to take over their lands. Successive governments fluctuated in their opinions whether the lands should be government owned or privately owned. From time to time cultivated lands were taken over and controlled by government, land laws were randomly altered thus creating many doubts in the minds of people. This created a political cultural ethos where entrepreneurs looked to their respective governments to obtain land for their industrial establishments. They never looked to willing sellers to purchase land for their projects."

What Mala wrote is so true. Property rights means Freedom. And zero property rights means zero freedom. If you can't say that you own your tv or refrigerator 100%, that is, somebody can always come in and he says that he also owns your tv or refrigerator and takes it away from you, then your life is a mess.

If you extend that analogy to lack of property rights to your agricultural land, or the lot that your house is sitting on, then you have 24 hours of absence of peace of mind. You come home from work and somebody else has already fenced your agri land, or your house has already been demolished and someone else is putting up a new house or shop in your lot.

I think that the absence of secure, well defined property rights among citizens is the single biggest GOVERNMENT FAILURE ever created. But if you look at the literature of those who always cry "market failure" to anything and everything around society, the concept of "government failure" never comes to their minds.

Governments around the world have many tools in their disposal to discourage private property rights. Among them are multiple and high taxes, multiple titles and requirements (and signatures and regulations) to secure, unstable and unpredictable legal and judicial system, and so on. A combination of all these and life can be chaotic. I think people in Zimbabwe, Congo, and many other African countries fully understand this.

The big challenge for free marketers, is how to remind governments to focus on that very important function - to ensure property rights, whether intellectual property or goods/lands property, of the people. By extension, governments should be discouraged from dipping their dirty fingers on endless regulations of business and entrepreneurship, on providing endless subsidies to things that are better relegated and administered as personal and parental responsibilities.

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See also:
Spontaneous Market 1: Profit, Trade and Personal Responsibility, May 22, 2006
Spontaneous Market 2: Market Failure vs. Government Failure, June 07, 2006
Spontaneous Market 3: No Nurses' Brain Drain, June 21, 2006

Market segmentation and pricing

On my recent trip to Hong Kong 2 weeks ago, at the HK airport on my way back to Manila, I was able to strike a conversation to 2 Filipinas who frankly admitted working as "pick-up" girls in the streets of Kowloon. They said that unlike in the Philippines where the male customers approach the female GROs (or sex workers), in HK, there are hundreds, even thousands of them competing for a few male customers on a strip of bar. So that in HK, its the ladies/GROs who should approach male customers, go out with them for $HK500 (cheapest, 30 minutes quickie), average rate $HK2,500 (3 hours). Supply exceeds demand. So that suppliers of a service or good have to settle for lower price or welfare. For these 2 ladies, they quit after 3 weeks because they were barely earning while the cost of living in HK is very expensive, so they went back home.

When supply exceeds demand, the "equilibrium price" for that particular good or service declines. It applies to domestic helpers from RP (and from Indonesia, from mainland China, from India, from everywhere) in HK. It applies to the squatter shanties in Metro Manila, Cebu, Davao, Bacolod, etc. It applies to the price of tomatoes during the dry or summer season.

A Filipino friend, Teddy, commented that
"If you talk of prostitution in HK, Filipinas belong to the lower rung of that god-forsaken market. The supply of "labor" along this end does not exceed demand. Demand is cyclical, depending on whether its tour season or not. Why do Filipinas belong to the lower rung? Many factors. First of all, they are not as "aggressive" as lets say, latinas and russians who make no fuss approaching men on the street corners. Pinays still have that "hiyang" attitude when it comes to these things. The average latina or chicana is 1,000 hkd for 30 minutes...."

Prostitution is not a homogeneous (same product quality) commodity.If you draw a supply-demand intersection on one graph, you can actually have thousands of different "equilibrium price", not just one. This is because there are thousands of combinations of "supply meets demand" for each pair of sex worker and sex customer.

It's no different from riding a boat, say a Super-Ferry: there are at least 6 different cottages with their respective fares: economy ordinary, economy air-con, business, etc. There is market segmentation on one boat going to one destination.

Even among Pinay sex workers, there is market segmentation among them, whether they work in the Philippines or in HK or in Japan or Korea, wherever. The "prettier and curvier" ones demand a higher price compared to the "uglier and less curvy" ones.

ASEAN 3: On Myanmar, Letter to Sec. Romulo

This is the letter I sent to the DFA.
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October 2, 2007

Hon. Alberto G. Romulo
Secretary
Department of Foreign Affairs
Roxas Boulevard, Pasay City

Dear Sec. Romulo,

We applaud you and other Foreign Ministers of the ASEAN member-countries for issuing a strong statement urging Myanmar leaders to exercise restraint and to release political prisoners like Daw Aung San Suu Kyi. We have also read and support your press release, “No let up on Philippine Advocacy on Myanmar Democracy”, dated September 27, 2007.

The Philippine government has hosted many ASEAN meetings in the past. For this year alone, our country hosted the ASEAN Summit in Cebu last January, the ASEAN Ministerial Meeting in Manila last July, and the ASEAN Economic Ministers Meeting in Makati last August.

As Filipino taxpayers that finance those expensive meetings, and as ordinary motorists that suffer heavy traffic whenever police escorts block our way to allow those officials of ASEAN and other participating governments have their way, we feel bad that part of our hard-earned money were spent on those Myanmar generals and bureaucrats whose definition of “public service” is to suppress their citizens’ economic and civil rights, then truncheon, imprison, or shoot them to death when they find courage to stand up to more than 4 decades of military dictatorship.

As taxpayers that finance the DFA budget, we urge you to take certain penalties on the Myanmar government should it continue its political and military repression of its citizens, in particular the continued detention of political dissenters like Ms. Suu Kyi. Please consider urging other ASEAN member-countries that they bar and exclude Myanmar’s leaders, even temporarily, from attending future ASEAN meetings. They have isolated themselves from their citizens, they have disregarded diplomatic requests from governments of other countries, let ASEAN isolate them, until at least they have followed your demands in the recent joint ASEAN statement issued last month. Please spare our tax money from pleasing those Myanmar leaders until they have learned to reform themselves and democratize their country.

Sincerely yours,



Bienvenido Oplas, Jr.
President, Minimal Government, Philippines
minimalgovernment@gmail.com, 0915-8204616
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On another note, our network of liberty-oriented think tanks, research institutes and other political organizations issued the following online campaign:

Solidarity with the People of Myanmar

2 October 2007

148th birth anniversary of Mahatma Gandhi

We, who are united by common principles and values of individual liberty, declare our steadfast support for the freedom of expression and freedom of association of the people of Myanmar to exercise these rights peacefully. In particular, we declare our solidarity with the people of Myanmar in their present hour of crisis, the people who have bravely faced the brutal force unleashed by the military junta against its own people. By its action on peaceful protestors the military regime in Myanmar has not only underscored its own illegitimacy, but also exposed its own vulnerability.

We call on the military regime in Myanmar to respect the popular sentiment of the Burmese people against authoritarian rule. We also call on the military to release from detention all political prisoners, initiate an honest dialogue aimed at reconciliation, and respect the ideal of political pluralism.

We, also call on the international community to support the democratic aspirations of the people of Myanmar to exercise their sovereign right to live in peace, with freedom and dignity.

Signatories, Institute or organizational representatives, as of Oct. 3, 2007:

· Khalil Ahmad, Alternate Solutions Institute, Pakistan

· Ozlem Caglar-Yilmaz, Association for Liberal Thinking, Turkey

· Melinda de Jesus, Center for Media Freedom & Responsibility, Philippines

· Trupti Parekh, Ambrish Mehta, Anil Patel, Action Research in Community Health and Development (ARCH), India

· Barun Mitra, Liberty Institute, India

· Todd Myers, Asia Institute for Social, Philosophical, and Economic Research, USA

· Krishna Neupane, Limited Government, Nepal

· Nonoy Oplas, Minimal Government, Philippines

· Muttukrishna Sarvananthan, Point Pedro Institute of Development, Sri Lanka

· Mohit Satyanand, Liberty Institute, India · Wan Saiful Wan Jan, Malaysia Think Tank, UK

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See also:

ASEAN 1: Asian regional bureaucracies, November 08, 2006

ASEAN 2: Regional Meetings, Indonesia's Military Businessmen, September 13, 2007

Tax Cut 6: Retreat of High Income Tax Philosophy

One important indicator of how socialist or (forced) collectivist leaning a country is, is the level of tax rate that citizens are forced to surrender their income to the state. Economies that emphasize forced collectivism and coerced contribution to social welfare have high income tax rates, say more than 40 percent. At this rate, the hard-working, high-earning, and performance-driven citizens are left with less than 60 percent of the fruits of their hard work, unless they learn to cheat their income tax payment and the tax system is easy to be manipulated, or the tax administrators and collectors are corrupt and easy to bribe.

The decades after WW2 saw many countries, especially their politicians, hugging socialist thinking. That is, in order to hasten the development of their societies, a big portion of the income and savings of the rich and high-earning people should be confiscated through high income tax rates, and the money be distributed to the poor and the weak, including the lazy and irresponsible, so that there will be more equality and more social progress. This thinking has pervaded until the early 80s, so that by 1980, the vast majority of countries have top marginal income tax rate of 50 percent or more. Exceptions were HK in Asia, Switzerland in Europe, and Argentina in South America, among others. A lot of tax cheating also happened in many countries where income tax rates are very high, resulting in lower tax collection by governments.

The wave of globalization in the 80s made many politicians and their respective technocrats realize that they need to relax a bit their level of income confiscation as there was an emerging “income tax competition” among countries. A number of their people and businesses are moving elsewhere where income taxes are lower or easier to comply. So that by 1990, more than half of Asia-Pacific countries have top marginal income tax rate of less than 50 percent. The same pattern was observable in South and North America. Europe remained enamored with social democratic and other variants of “limited socialism” ideology, except Switzerland and the UK. For African countries, there was tax rate reduction but still high, except in Jamaica.

The continued wave of globalization, especially the formation of GATT-WTO in the mid-90s, compelled more governments to further slash their income tax rates. By 2000, until 2005, only Japan and some European countries, have marginal income tax rate of 50 percent or higher. The philosophy and practice of high income tax rates, for both personal and corporate incomes, have retreated.

In addition, the new trend now for some countries in income taxation, is low, flat (or single rate) tax. This is particularly true for many formerly Eastern European countries. Russia is one of those countries that have recently embraced the flat tax philosophy and subsequently implemented it. This is after a realization by many governments that high income taxes not only push many of their productive and entrepreneurial citizens to migrate to other countries, but high and multiple-rate taxes encourage cheating, of lowering the declared income so that the corresponding tax rate will also be lower.

The tax burden for the citizens can be computed as:

Tax burden = tax rate + cost of compliance.

Regulations on tax exemptions for dependents, expenditures that are tax-deductible, plus the multiple tax rates or tax brackets, can be confusing, so that people have to spend extra time studying these things, or have to hire tax consultants to make their compliance easier. Hence, the attractiveness of low, single rate income tax.

But while it is true that many governments were compelled by new circumstances to reduce their income tax rates, this did not mean that they have fully abandoned socialist-leaning philosophy. Almost coinciding with the reduction of income tax rates, they introduced new, or hiked the existing, consumption-based tax rates, like value-added tax (VAT), sales tax, excise tax, vehicle tax, property tax, amusement or entertainment tax, travel tax. In addition, they also introduced new or hiked existing government fees and charges, like passport fee, visa fee, driver’s license fee, airport/seaport terminal fee, business permit fee, mining/quarrying fee, and so on.

This is a new ballgame for the citizens aspiring to have bigger leeway and freedom how they should spend their earning and savings given their household-specific needs and priorities. Meanwhile, the fight for even lower income tax rates compared to existing levels, if not the abolition of income tax, is a pressing challenge for the citizens, the free market-oriented NGOs and research institutes in particular. A zero income tax with high consumption-based taxes like those mentioned above, should be a good compromise and advocacy.


On another note, a friend with MGM, James Miraflow, wrote a short paper, "Debt and Taxes". It was a good paper, short and focused, and lots of good and updated data. In his closing paragraph, James asked, "Will this go forever (debt & taxes)? Will the public forever pay for debt of an ill-managed government?"

Sadly, I think the answer to his questions are YES to both. Government indebtedness started with Marcos government in mid-60s, perhaps even with earlier Presidents, and it's been the trend until now, until 2 or more Presidents from now. Government, especially big government, is a system of treachery and lies. Promise people of "subsidy here, welfare there". But just keep silent on "taxes here, fees & charges there, borrowings over there."

In order to break the cycle of debt and taxes, some people propose the abolition of the Automatic appropriation law (PD 1177) for public debts, agrarian reform, and a few other areas. I think that law is correct. If I lend someone money and I have no guarantee that he will pay me back, say automatic deduction from his monthly salary, or automatic forfeiture of his car or appliance/s, why would I lend him in the first place?

What is wrong is the need to perpetually borrow in the first place. If one cannot raise this income and revenue, why spend that much so that he will go on borrowing endlessly?

Increasing revenue through more or higher taxation is definitely a No-No. One reason, look at the WB and IFC's "Doing Business" annual studies. Number of business-related taxes for medium-size companies around the world, the Philippines has among the most number of taxes in the whole of Asia, even beating socialist China and Vietnam in having the most number of business-related taxes.

Increasing revenue through privatization, this I fully support. Large-scale privatization, even at a big bargain, get the money, and use it mainly if not entirely, to retire public debts, both domestic and foreign debts. Don't use privatization proceeds to increase budget for public education, military modernization, agri modernization, etc. Let the savings from lower interest payment and principal amortization be used for public basic education, etc.

Privatization without deregulation is bad, of course. It only transfers state monopoly corporation to private monopoly corporation. The economy should be deregulated, with or without existing government enterprise/s in certain sectors.

Government corporation always live on unfair playing field. First, they use tax money (money we could have used to buy additional milk for our babies, additional room for our house for our expanding family, additional food, etc.) for their capitalization. Second, they use tax money for their continued existence as they often live off on continued subsidies. Third, they almost always occupy monopoly position in whatever sector they were situated. So the twin evils of over-regulation and monopolization is the hallmark of most govt. enterprises.

Liberalization, deregulation and privatization ("LDP"). These are among the important policy tools if we want an economy that can harness unlimited entrepreneurial energy from the citizens. Liberalize, have 1,000+ hotels/food chains/pharma companies, etc. doing business in the country. Have 10 or more telecomms companies do business here. Singapore has only 4 M people, but has 5 or more competing telecomms companies. The Philippines has 88 M people, about 26M subscribers, being served by only 3 telecomms players.

Deregulate and abolish (at least downgrade) many regulatory government bodies. These bureaucracies decide who can enter bus line business and who cannot. They decide who can put up new airlines or shipping lines or telecomms or cable tv operators, etc., and who cannot. The amount of arbitary powers in their hands are big, so that if they decide to limit the number of players per sector to only 2 or 3, then us consumers have to endure the lack of choices and options.

-----------

See also: 

Tax Cut 1: Australia, May 10, 2006

Tax Cut 2: Ireland, Turkey, November 16, 2006

Tax Cut 3: Flat Tax Countries in the World, 2006, December 06, 2006

Tax Cut 4: Tax Competition Among US States, the Laffer Curve, March 19, 2007

Tax Cut 5: Tax Imperialism, Privatization (PRPX 2007 Hawaii), June 12, 2007

Pol. Ideology 8: Ideas on Liberty

Three years ago, I attended my second international conference about free market, the 1st Asian Resource Bank Meeting in Hong Kong, September 15, 2004. It was jointly sponsored by the Atlas Economic Research Foundation (USA), Unirule Institute of Economics (China) and the Friedrich Naumann Foundation (Germany).

Below are some papers discussed there.
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(1) Lunch Speaker, Dr. James Dorn, the China specialist of Cato Institute (www.cato.org). He talked about "Why Freedom Matters". In his presentation, he showed graphs, charts, tables, showing that stronger property rights enforcement and greater economic freedom results in greater wealth and faster poverty alleviation. Also the pattern of China's economic liberalization and growth. Below are the 5 Lessons/summary of his presentation. Also a quote from Havel...

Five Lessons

1. Private property, freedom, and justice are inseparable.

2. Justice requires limiting government to the protection of persons and property.

3. Minimizing the use of force to defend life, liberty, and property will maximize freedom and create a spontaneous market-liberal order.

4. Private free markets are not only moral; they create wealth by providing incentives to discover new ways of doing things and increase the range of alternatives.

5. Governments rule best when they follow the rule of law and the principle of non-interference (wu wei).

The market economy is "the only natural economy, the only kind that makes sense, the only one that can lead to prosperity, because it is the only one that reflects the nature of life itself."

-- Vaclav Havel

"Summer Meditations"

(2) Speech by Joe Lehman, Executive VP of the Mackinac Center for Public Policy in Midlands, Michigan, USA. April 2004, I attended the Mackinac Leadership Conference in their office, I have met Joe there, as well as Mackinac President Larry Reed.

Translating Ideas Into Success

(On Sept. 15 in Hong Kong, Joseph Lehman delivered the following speech to open the inaugural Asian Resource Bank, a meeting of Asian free-market think tank leaders sponsored by the Virginia-based Atlas Economic Research Foundation and the Beijing-based Unirule Institute of Economics. The remarks are a condensation of ideas presented at the Mackinac Center’s semiannual Leadership Conference, which has trained more than 300 national and international think tank executives in management, communications and fundraising. Contact Kendra Shrode for information on the next Leadership Conference.)

It’s a great privilege to address the very first Asian Resource Bank meeting this morning, make new friends, and reunite with familiar ones. Mackinac Center President Larry Reed asked me to express his warmest greetings to you. He told me he was so grateful that I could stand in for him today that he doesn’t mind if I borrow liberally from his material!

If you’ve been around think tank people very long, you’ve probably realized that not many of us can tell a good joke. In a lot of professions, that would be a real setback, but it doesn’t hold us back. We don’t have to come up with our own funny stories: We’ve got the whole government doing ridiculous things all the time for us to talk about.

We can even retell other people’s jokes; Will Rogers told that one more than 70 years ago. Telling jokes about the government helped make Will Rogers the best-known American humorist of his time. But government is not just funny – it’s a deadly serious enterprise. Some of you doubtless can testify first-hand to government abuse of the ugliest sort. Figuring out how to limit government – to make it the servant of the people and not the other way around – is a necessary work and a noble calling.

So how do we translate our ideas into success? How can we actually shape public policy with a mere notion – that freedom and free markets are the best way to organize society?

The Power of Ideas

We start by realizing that ideas are the most powerful force in the world. Power can be found in politicians, armies, activists and institutions. But the reason for their power is ideas, because ideas explain why people do the things they do.

What people believe determines how they behave, for whom they vote, the laws and rules they accept or reject and what kind of society they will work to adopt. Ideas determine whether a culture embraces free markets or socialism, democracy or dictatorship. Change ideas, and you change the world.

Political leaders may enact public policy, but they seldom generate the ideas that drive policy. Politicians usually act within a fairly narrow range of politically acceptable options. And they cannot operate outside that range without jeopardizing their political standing.

The range of credible ideas circulating in the intellectual marketplace determines the range of politically acceptable options. So if you have a think tank that changes the intellectual landscape, that think tank actually shifts the range of politically acceptable ideas. And that’s how think tank ideas have impact.

To take a simple example, if the generally acceptable income tax rate is 60 percent, it is very hard for a politician to say it should be 15 percent. A 15 percent tax is outside the window of political possibility. But if the tax is at 60 percent already, then 50 percent is easy to propose. Forty percent may be easy to propose if think tanks or others have done the research and shifted the intellectual climate of opinion. The 40 percent tax rate may not be enacted right away, but a politician can propose it without seeming crazy if intellectuals have paved the way.

Milton Friedman has said think tanks are at their best when they change what is politically possible.

We must remember we are engaged in a battle of ideas. In spite of political obstacles, we are not battling against personalities or people. We can win by promoting ideas that shift the very ground of battle.

Optimism

But even the very best ideas are apt to go nowhere without optimism. I have the privilege of working for probably the world’s most optimistic man. Larry Reed likes to tell the story of how he once lost control of his car on an icy road. As he was rolling over and over down an embankment, he swears the thought going through his head was this one: "At least I’m going to get a new car out of this!" Now that’s optimism!

Well, we don’t have to be pathological optimists to have every reason for optimism ourselves. We are winning the war of ideas.

We have watched the ideas of Soviet communism become discredited around the globe. The world’s most aggressive exporter of communism has crumbled. Liberalism is taking hold and gaining respect in dozens of former socialist strongholds. In my own country, about the only place you can find someone who still believes Marx was right is on college campuses!

Another reason for optimism is that the drift of ideas is in our direction. I don’t know about you, but I run into a lot more former socialists than former free-marketers. I can’t remember the last time someone said to me, "You know, I used to believe in free markets and individual liberty, but I’ve looked at the evidence, and now I think central planning is the way to go."

The final reason to be optimistic is simply that pessimism is self-fulfilling. What band of revolutionaries ever said, "It’s hopeless; we’re fighting a lost cause; but let’s spill our blood anyway?" An optimist is not blind to obstacles and setbacks, but he views them as momentary and finds ways to overcome them.

Entrepreneurship

The next ingredient for translating ideas into success is entrepreneurship. I don’t mean just talking and writing about it. I mean being an entrepreneur.

To really shift the window of political possibility, we have to get out of the purely academic mindset, where the goal is writing reports and studies. Our success is not measured by how much paper we push out the door. We succeed only if we actually shift policy in the right direction, and to do so requires an entrepreneurial approach.

Successful entrepreneurs are focused. They have lots of ideas, but they figure out their comparative advantage and spend their energy there. They don’t run in all directions trying anything that seems interesting.

This means that entrepreneurs are planners, but not in the sense of stifling creativity and flexibility. A good entrepreneur makes plans that avoid both rigid bureaucracy and unfocused, free-wheeling frenzies of activity.

Entrepreneurs are problem-solvers. They don’t just try to copy what works in other countries — they become the experts at applying freedom ideas and overcoming obstacles in their own countries.

Studies and seminars will always be staple products for a think tank. But sometimes you have to get creative.

The most powerful labor union of teachers in my state — the Michigan Education Association — routinely thwarted schools that wanted to save money by privatizing nonteaching jobs such as food, janitorial and bus services. Taking union dues from all the teachers was not enough. The teachers union wanted to force the school to hire only dues-paying cooks, janitors and bus drivers, too.

At the Mackinac Center, we had already published studies showing how much money the schools could save by privatizing, but the union was too powerful. We had to do something to weaken the union’s influence.

We brainstormed, and it occurred to us that the union had its own massive headquarters building with 500 employees. Surely the union did not employ their own unionized cooks, janitors and mail clerks. We decided to find out.

So, one of our policy analysts simply parked his car outside union headquarters and counted the various contractors’ trucks that entered the premises.

We learned that this union – the one that opposed it when schools privatized to save money – contracted with four outside firms for food service, custodial service, mail service and security. And in three of the four cases, the contract firms were nonunion!

We contacted the newspapers and state lawmakers and exposed the union’s hypocrisy. Schools were suddenly emboldened to oppose the union on privatization, and within a few months legislators gave schools explicit authority to privatize without the union’s approval.

If there were a think tank entrepreneur’s hall of fame, we would make that story our nomination!

Entrepreneurs are creative, but they build on the success of others. Don’t waste time comparing yourself to other think tanks or criticizing others in the movement. Learn what you can from them and apply it to your country’s unique marketplace of ideas.

Perseverance

The final ingredient is perseverance. Never giving up. Perseverance is the backstop of success.

Freedom is never won in an unbroken string of victories. It’s more like three steps forward and two steps back. We persevere by simply refusing to ever give up. There will be discouraging turns of events, unexpected setbacks and even seemingly overwhelming daily pressures.

But those are precisely the times to remember that we are on the front lines of a battle that is infinitely more important than any of our day-to-day struggles, disappointments, deadlines and duties. We can’t ever let those things distract us and divert our eyes from the prize.

In our office hangs a photograph that just screams "perseverance." I’m sure you’ve all seen the snapshot of a lone man in Tiananmen Square who is apparently stopping four Chinese tanks from advancing. That single image of perseverance has probably inspired more freedom fighting around the world than four tanks could ever hope to vanquish.

Let me close with the story of a man who personified perseverance. Some of you already know about William Wilberforce and the abolition of slavery.

Wilberforce was elected to the British Parliament in 1780. Seven years later, he decided to work to end British slavery.

At the time, slavery in the British Empire had broad political support and even intellectual defenders. People turned a blind eye to the cruelty of African slavery, which was considered essential to British military and economic success. Wilberforce was that rarest of politicians who stood virtually alone on principle.

He spoke against slavery in the House of Commons for the first time in 1789. Every single year for 18 years he introduced an abolition measure, and for 18 years they went nowhere.

He was ridiculed and called a traitor and a rabble-rouser. Once, even his friends deserted him when the opposition supplied his allies in Parliament with free theater tickets during a crucial vote. Through it all, Wilberforce worked tirelessly to turn the intellectual tide and public opinion against slavery.

Finally, on February 23, 1807, Parliament overwhelmingly approved a measure ending the slave trade in the empire.

This stunning achievement would have secured his place in history, but Wilberforce had not yet reached his ultimate goal of ending the practice, not just the trade, of slavery.

With his first victory taking 18 years to achieve, Wilberforce labored another 26 years, even after leaving Parliament, to end slavery. The prize was finally grasped on July 26, 1833, when Britain became the first major power to completely abolish the trade and practice of slavery everywhere in its dominion. Acclaimed as a victorious hero, Wilberforce died three days later.

We can transform policy with the power of ideas, optimism, entrepreneurship and perseverance. We must keep our eye on the prize – not better government, but less of it – and work with a persistence and passion worthy of our cause.

(3) A new friend then, Dr. Chatib "Dede" Basri, also presented a paper, I like the two quotes he used for his opening slides:

“People who intend only to seek their own benefit are led by invisible hand to serve public interest which was no part of their intention."

--Adam Smith


"People who intend only to serve public interest are led by invisible hand to serve private interest which was no part of their intention"

--Milton Friedman

Proof of Smith's statement are aplenty: the rice farmers, the carinderia owners, tiangge-tiangge operators, millions of other entrepreneurs and professionals...

Proof of Friedman's statement are also aplenty: hundreds of them in Malacanang, the Senate, House of Reps; thousands actually if you include many LGU leaders, the guys at the BIR, BOC, DPWH, DND, ...

A friend, Bruce Hall, made a commentary to my brief note above, he wrote:

I don't think that it is just the corrupt officials that are a problem. Even those who are uncorrupted end up serving private interests because there is no way they can ever see the entire big picture. Everyone has blinders on, has a particular perspective on events, that by necessity cuts out other people and perspective.


Do you remember the blackout that happened last year in huge chunks of the Northeast and Midwest US? All the coverage was about NYC while Ohio was basically ignored. Why? Because the journalists all live in NYC.


In the US a few years back, some Republican leaders tried to end funding for the Public Broadcasting System (the non-profit US network partially funded by government). It did not go very far largely because the Congressmenan and Senators were of the socio-economic group that watched PBS and therefore thought it valuable. Their votes on keeping the funding wasn't against the public spirit. They thought that EVERYONE supported PBS funding because EVERYONE that they knew did. Since they found PBS valuable, it must be objectively valuable to the entire public.


There are numerous other cases where good-hearted people make bad decisions because they take their necesarily limited particular experience and universalize it.


This is the problem with large bureaucracies, including large governments -- no matter how honest and dedicated the public servants, they are going to be biased towards their lifestyle and their lifestyle choices. At the very least, the first problems that they are going to address will be the problems they see in their daily lives. Problems where out in the boondocks will be unseen and unaddressed.

Thanks Bruce.

* See also:
Pol. Ideology 6: Quotes from Adam Smith, February 04, 2007
Pol. Ideology 7: Individualism, Entitlement and Freedom, April 30, 2007