Thursday, February 16, 2017

Tax Cut 29, Culture of exemptions and culture of envy

An article by Dr. Ciel Habito last week was shared in fb by several friends yesterday. Ciel wrote,

Why is it that we have a lower tax effort (tax revenues in proportion to gross domestic product) than most of our neighbors, and yet have higher tax rates than they do? Consider the following: In 2014, Philippine government revenues as a percent of GDP was 15.1 percent. The corresponding percentage was 19.9 for Malaysia, 18.5 for Singapore, 19.7 for Thailand, 16.5 for Cambodia, and 21.5 for Vietnam. And yet, among our neighbors, we have the highest rates of corporate income tax and value-added tax, and one of the highest for personal income tax.

Our corporate income tax rate of 30 percent well exceeds the Asia-wide average of 22.5 percent, with Indonesia and Malaysia having 25 percent, Vietnam 22 percent, Thailand and Cambodia 20 percent, and Singapore and Taiwan 17 percent. We also have the highest value-added tax or general sales tax, with our 12 percent VAT being higher than the 10 percent for Indonesia, Malaysia, Vietnam and Cambodia; 7 percent for Singapore and Thailand; and 5 percent for Taiwan. Our individual income tax has a top rate of 32 percent, against the Asia-wide average of only 28.4 percent. While ours is lower than Taiwan’s 40 percent and Thailand and Vietnam’s 35 percent, it is higher than Indonesia’s 30 percent, Malaysia’s 26 percent, and Singapore’s 20 percent.

I commented that it is both a culture of exemptions and a culture of envy. Why would the government attempts to confiscate 1/3 of a company's income in the first place? Because govt thinks that all companies are making money and rich and wealthy and so they must pay as high as possible to the state.

Two rules of the politics of envy: (1) confiscate as much as possible from the private sector; (2) many of the latter will be hurt so they will ask for favor/exemptions, that's the time for rent-seeking, extortion, favoritism and picking winners. The central planners, legislators and bureaucrats decide who should be favored and who should not.

That is why most central planners would hate low taxes, it removes their arbitrary power who should be given exemption and who should not.

The culture of envy is reflected on the tax rates. 30% income tax is envy, why would govt have the "entitlement" to get such amount from the efforts of working people? The culture of exemptions is reflected on low collection rates.

I think a flat income tax rate of 10%, zero exemption, will be a good compromise. Look again the demand curve, the lower the price, the higher the quantity that consumers will buy. Same with income tax, the lower the income tax rate, the higher the number of entrepreneurs who will come to do business. Overall, low tax rate (t) x high number of taxpayers (Q) = t xQ = higher tax revenues (TR)

The Laffer curve is telling high tax rate-countries like the PH that their 30%, 25% or even 20% income tax rate is not optimal, high on the horizontal axis (tax rate) but low on the vertical (tax revenues). HK collects only 17%, SG about 16% and they have more businessmen, more taxpayers.

I wish to see a zero income tax. Like Monaco, Brunei, even Saudi, etc. Their govts earn from many other revenues like selling land (all lands are owned by the state until they are privatized; HK model somehow), selling natural gas or petroleum (Brunei, Saudi, etc models), selling mineral products, etc. Or collect other taxes like VAT/GST, property tax, etc.

One beauty of small countries, small governments. they are forced to become efficient, outward looking and more business friendly, less bureaucratic, less tax-hungry.

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