As of this posting, Angara’s photo went viral, as it got more than 4,000 likes and was shared more than 9,000 times.
But what surprised me is that a lot of Filipino netizens are unaware of the country’s tax system and tax rates. Like most countries, the Philippines implements progressive taxation under the premise or principle of social justice. The more you earn, the higher your tax rate.
Progressive taxation was also inspired by that Marxist credo– ‘From each according to his ability, to each according to his needs.’ So, the higher the people’s demands for freebies and welfare services (e.g., RH law, universal healthcare, etc.), the more the State is justified to tax you or to impose more taxes and higher rates.
Observe that the leftists do not reject progressive tax system; they merely criticize rampant corruption in the government and social and economic inequality, which is actually the logical result of Big Government or too much government power and involvement.
Now Angara is one of ideologues in Congress who demand tax reform. However, what kind of tax reform are they talking about?
This issue reminds me of my previous blogpost posted more than a year ago.
This blog titled “Flat-Tax” Senatorial Bet Vs. Statist Quackonomist Winnie Monsod talks about losing senatorial candidate Greco Belgica and UP economist Winnie Monsod’s defense of our current tax system.
I will reproduce my entire blogpost here:
A Facebooker named John posted a very interesting YouTube clip on my Facebook site. The video features a senatorial candidate named Greco Belgica, a pastor-businessman and Manila councillor, who is running on a somewhat controversial political platform. This senatorial bet proposes a 10-percent flat-tax to be imposed equally on all Filipino taxpayers regardless of income.
A flat-tax system is unknown to most Filipinos. The Philippines adopts a progressive tax system that imposes higher tax rates on– or penalizes– those who earn more. The more you earn, the more you are taxed, and the progressives call this system ‘just fair’.
In a televised ‘job interview’ hosted by GMA7, public economist and Keynesian Winnie Monsod cast doubt on Belgica’s flat-tax proposal, claiming “research” shows that the politician’s flat-tax bill would only benefit the rich who wouldn’t be obliged to pay capital gains tax and other taxes. So, basically Mrs. Monsod asked the religious senatorial bet how he plans to “reconcile his pro-poor stance with his pro-rich flat-tax bill”.
Here I must add that the complete term is “flat INCOME tax”. Monsod is wrong to claim that a flat income tax system would exempt the rich from paying capital gains tax. A country may impose a flat income tax and still retains capital gains tax and other taxes. Also under this system certain exemptions may also be retained and imposed. It’s just a system, which means that any country may change or modify it according to its political and economic agenda.
Honestly I had to stop watching the video after hearing Monsod’s poor versus rich rhetoric. But before seeing the whole video I posted my response to John who said that Mr. Belgica “is really worth voting as he understands the inequity in our rigmarole of tax system with its graduated rates, double taxation, and endless rules and regulations.”
I posted the following reply:
Laffer curve works. A 15-percent flat-tax system is enough to improve revenue collection… It worked/works in Russia (which implemented a 13-percent flat-tax rate).Wait! A 15-percent flat tax could boost revenue collection IF…
- The country is not saddled with protectionism, or at least as open as Russia;
- Which means foreign investors can freely invest in the Philippines;
- There are not too much regulations.
I used Russia as a comparison because it implemented a 13-percent flat-tax ten years ago. Studies show that Russia’s revenue collection improved visavis its collection years before the tax cut.
In which John made the following comment: “I forgot to say that he is not only advocating for a flat
tax, his platform also includes minimizing government intrusion. Btw, there’s some things I don’t like about him, one is his religious biases which stems from him being a pastor, but apart from that I think he understands the concept of a free market well and the other thing is his nearly impossible chance of winning, at this point I’m just hoping that he won’t be discouraged to run next time.”
Then I made the following commentary:
That prompted me to watch the video. However, I stopped when that scumbag Winnie unleashed her usual pro-poor, pro-rich rhetoric. Flat tax is pro-rich? Is she even an economist? Why does a tax system have to be pro-poor or pro-rich? Why insert class warfare rhetoric into the tax issue?
A ten or 15-percent flat tax is not just pro-rich; it is also PRO-POOR. It is pro-rights and pro-man. A tax system that benefits the man who is responsible for creating jobs and wealth also benefits the man who is jobless or unproductive. A progressive tax system punishes the successful and hard-working people. It’s as if Winnie is trying to imply that the rich must be taxed more because they earn more. But why do they earn more in the first place? And why does the government need to punish successful and hard-working people?
Well, Winnie might argue ‘It’s because there are more poor people in this country and that the rich keep getting richer.’ The problem is that our pol-econ system is flawed at root, as it benefits the politically connected and the economically established.
If a flat-tax system is pro-rich, then it follows that it is anti-poor. Perhaps Winnie believes that if the government imposed 75% tax on the income of the top-earning pinoys, that would be pro-poor and would benefit the least advantaged members of our society. A flat-tax system is consistent with the equal protection clause, and the principle that everybody must be equal before the law.
John: “Good thing you stopped with her rhetoric-disguised-as-a-follow-up-question as even though Belgica gave a logical and rational answer, her facial reaction was very irritating as she obviously didn’t agree or maybe didn’t even think that someone would have the nerve to make free market principles a part of his platform. Countries like France are the reason why investors are flocking towards us, the Fitch report basically said that since the situation was so bad overseas, they would really look stupid if they didn’t give us an investment grade rating. The note was a good touch though, I’d like to be able to say that to a socialist at least once in my lifetime.”
Vincenton (ME): “I stopped and then posted my third comment… But I managed to finish the whole clip. I absolutely agree with the candidate. Our confusing, very complicated tax system and tax exemptions benefit high-income-earners. We need a flat-tax system and then abolish all exemptions. We need a very simple (or simplified) tax code. Our progressive tax system also encourages tax evasion by the rich. Instead of investing their surplus money, the top-earners are obliged at gun point to remit a substantial portion of their income to the State. Winnie talks about the possibility of the government not being able to meet its welfare spending. Well, it’s time to cut spending. Too much spending justifies taxation or higher tax rates.”
[End of Facebook conversation]
But wait! What research is Monsod talking about? She talked about unnamed European countries that had financial crisis and everything. What I find very much alarming is that Winnie Monsod, who is considered one of the most popular Filipino economists (because she’s on TV), is that it seems she doesn’t even know that the Welfare States in Europe went broke due to their unsustainable welfare programs, government spending, and regulations.
It seems to me that Mrs. Monsod didn’t do her own research again. This reminds me of her Inquirer column wherein she claimed that dismantling our protectionist system is “not necessary”, because apparently she read an UNKNOWN study published online. In that hilarious opinion piece, Monsod lifted all of her flawed, inaccurate information from a so-called study that covered years ranging from 1987 to 1986, and then she claimed that foreign direct investment “played only a minor role in the growth of most high-performing Asian economies”. [Please read this blog post to see what I’m talking about.]
What I know– and what every rational and intelligent economist should– know is that Laffer curve works. Like any punitive government policies, taxes affect people’s behaviour. A punitive progressive tax system would only encourage people to commit tax evasion, bribery, or any kinds of private-government irregularities. Also a progressive tax system with lots of loopholes and exemptions would only “benefit” high-income earners and the self-employed.
A reasonable flat-tax rate– say, a 15%, 13% or 10% tax rate– would not only encourage people to pay their taxes accurately, properly and responsibly; it would also encourage more investment and more economic activities. And as we all know, more investments mean more jobs and employment opportunities.
It’s a good thing that Mr. Belgica mentioned the case of Russia. Russia’s 13% flat tax was implemented by President Vladimir Putin, former chief of the Soviet KGB, in 2001. That was the year U.S. President George W. Bush adopted tax cuts to American families. Russia’s miraculous flat tax reform did not only lead to economic growth and increase in personal income tax revenues; it also reduced cases of tax evasion.
However, with our protectionism, welfare state and regulations still in place, I don’t think a 10% or 13% flat-tax rate would provide us a Russian “roulette” toward economic success. Russia’s 13% flat-tax propelled the country’s economy due to less protectionism.
The following are the differences between the Philippines economic policies and Russia’s economic policies:
- The Philippines has a 60-40 protectionist law that limits foreign ownership and investment. Russia does not impose the same policy.
- The Philippines totally bars foreign investment and ownership of land and public utilities. From 2001 up to 2007, Russia allowed foreign investors to own media, energy, aerospace, among others. It was only in 2008 that the Russian government moved to limit foreign investment in 42 strategic sectors.
- We totally ban foreign professionals (e.g., doctors, lawyers, engineers, nurses) from working in the Philippines. Russia does not have the same policy.
Apart from advocating a reasonable flat-tax system, Mr. Belgica should also promote free market reforms, including constitutional reform, which is the only way to dismantle our protectionism and unsustainable welfare system. However, I have yet to hear from Mr. Belgica’s pro-poor stance. Is his pro-poor agenda “socialistic” or “welfarist”? I’d like to know.
This site shows where Mr. Belgica stands on various issues:
- On pork barrel – He supports the abolition of the pork barrel. He said the fund should be converted to the Tuition Fee Voucher System wherein students can get a voucher and bring it into any school where they want to study. He said the system will ensure quality education and create competition among schools by lowering tuition fees while offering the best program.
- On the Sabah issue –Belgica said we should fight for Sabah and Filipinos in the area should be protected. While exercising all diplomatic efforts, he said the government should prepare to develop the best military and be ready for war at any given time.
- On campaign funds – Belgica challenged that candidates should prove that they are not using government resources for their election campaign. He added that a list of campaign donations that a candidate receives should be made public, so the public will know who bankrolled their candidacy.
- On the Freedom of Information bill – He is in favor of FOI.
- On political dynasty – He wants to end political dynasty.
- On same sex marriage – He opposes same sex marriage. “Same sex couples could live together, but could not be wed in church.”
- On divorce law – He is opposed to the divorce. Belgica emphasizes that the government should not intervene with the affairs of Church.
I strongly disagree with his stand on the Sabah issue. I believe we should respect the Sabahans’ right to self-determination. On ending political dynasty, the best way it is to have a well-informed electorate. I disagree with his stand on same-sex marriage, which clearly reveals his religious bias. Nobody– not even the government– should have the right to infringe upon anyone’s right to marry or to contract. Same with his stand on divorce law, I believe the State should have no power at all to interfere with certain family matters.
Here’s the senatorial candidate’s position on other issues:
- On the 60-40 foreign ownership law – Belgica believes in free trade. “If we give the capital to the people themselves, this would raise their standard of living and the only way to do this is investors see that we are open to trade.”
- On the election code – He believes that localized elections are better. “The government is a country composed of people representing the people. Localized elections can give opportunity to those underprivileged to represent their sector and to know the candidates very well.”
- On gender equality – “Although everyone was made equally, opportunities are not. Decentralize government could provide equal opportunity to all.”
What this country needs is a limited Republican government
- Source: MYTH AND REALITY OF FLAT TAX REFORM: TAX EVASION AND REAL SIDE RESPONSE OF RUSSIAN HOUSEHOLDS (Gorodnichenko, Martinez-Vazquez & Peter, 2007).
While writing this blog post I had this hypothesis that reasonable flat tax system works well in free economies, like Hong Kong and Singapore, and that it would not produce the desired results in protectionist and grown-up welfare states like the Philippines. This is because one of the main purposes of this system is to encourage investment and job growth. The desired goal is to have more taxpayers and to cut unemployment and dependency rates.
I had this notion that a reasonably low flat tax rate (of say, 13 to 15%) must be effectively supported by proper reforms and government downsizing. Such reforms might include deregulation, lower government spending, privatization, abolition of redundant government bureaus and offices, repeal of protectionist laws and environmental controls, among others. This makes a Flat Income Tax system more compatible with freer economies with limited government and liberal economic policies.
However, the Philippines is certainly not a free economy. It is a mixed economy with high level of protectionism and more controls and regulations. We impose the 60-40 protectionist policy that limits foreign investment. We also totally ban foreign professionals from becoming part of our economic Team. This is why I had to compare our policies with those of the Russian government.
Winnie Monsod’s reaction to senatorial bet Greco Belgica’s flat tax proposal is not surprising since she is known as a welfare/Keynesian economist. Perhaps she believes that more government spending is the only way to solving our economic and social problems. Well, that’s how some UP economists think. That’s how NEDA head Arsenio Balisacan thinks.
If a flat income tax system were implemented in the Philippines, the government had to lower spending, cut certain welfare programs, deregulate, and open our country to foreign investors, otherwise we would face huge budget deficit and possible economic and political chaos. Just as an obese human being cannot go on a crash diet, so our over bloated Welfare State can also not go on a “crash” economic cut and downsizing without first doing the required preparatory, precautionary steps. This means that we have to revise first our protectionist, regulative, oligarchic Charter. We need a constitutional reform to prepare our cancer-stricken country for the required ‘medical’ operation. Our country is sick, thus it needs proper medical treatment and attention.
Adopting an extremely low flat tax rate without opening our economy to foreign investors, deregulation, and embracing economic freedom would be both economically and politically disastrous.
A reasonable and extremely low flat income tax system is not for everybody! It is more compatible with free and relatively freer economies.
Now there is this study that investigated whether a flat tax is feasible in “grown-up Welfare States“. This 2007 study explored the economic impact of various flat tax reform scenarios for Germany in terms of equity and efficiency.
The research findings are as follows:
The basic idea is that an extremely low flat tax system in a protectionist state (like the Philippines) would end up benefiting the rich, the oligarchs and cronies. This is because the strong political barrier to foreign investment is still in place. That is why I argued above that it would be extremely politically dangerous and economically disastrous to implement a 10% or 15% flat income tax rate without revising first our Constitution to allow foreign investors and professionals to be part of our team. These reforms must also be supported by government downsizing, lower spending and deregulation.
The adoption of flat-tax system must be effectively anchored on strong political and economic objectives/goals.
WHY: Why do we need to adopt a 13% or 15% flat tax?
WHAT is the Main Goal: To improve our economy and reduce dependency on the government.
HOW: To see to it that the following institutions are properly in place–
- Investment- and business-friendly economic climate and environment
- Strong economic freedom and liberalization
- Strong rule of law
- Consistent laws and dependable economic policies
- Impartial and independent courts
- Strong property and IP rights laws
- Limited, non-intrusive government
- Clear and objective foreign investment rules
- Less intervention and regulations
Supporting mechanisms: Lower government spending, gradual reduction of welfare programs, and government downsizing.
Immediate goal: Create jobs and provide more employment and economic opportunities to people.
It is important to understand that the Philippine society is ADDICTED to, or is HEAVILY DEPENDENT on, welfare. The solution is gradual withdrawal or gradual reduction of addictive welfare services in order to minimize or eliminate the withdrawal symptoms associated with the massive dependence on such services.