Thursday, July 31, 2008

The Benefits of Sharing the Income Tax Burden: A Possible Scenario

In the my preceding post, i made some suggestions related to taxes, wages and safety nets. Depending on which segment of society you may belong to, chances are, you would have liked some portions of the proposal and disliked others. However, i believe that the proposals have to be taken as a package because there should be an element of give-and-take, where benefits and burdens are widely shared among the various Economic Classes within Philippine Society. A visual summary of the benefits and burdens allocated to each sector is shown below.
Figure 1: Tax, Wages & Safety Nets: Trade-offs Between the Classes (Click on image to enlarge)

To give a more concrete example on the potential benefits of the above, i'd like to walk through a hypothetical scenario in which the above package of recommendations were implemented back in 2006. I chose this year because this was when the most recent Family Income and Expenditure Survey (FIES) was conducted, the results of which i can then use as basis for this scenario building exercise.

A. The 2006 FIES Results

In terms of average individual incomes per segment (classified in deciles), the FIES for 2006 shows the following:

Table 1: 2006 FIES Average Income, Expenses and Savings by Income Decile

Notice that the annual savings of the richest ten percent of Filipinos (at 156K pesos) is bigger than all the other income segments combined. At the other extreme, you have the poorest thirty percent, on average, actually ending up with a deficit, i.e. having more expenses than income.

Consolidating all the individual incomes within each category, we get the total incomes per decile...

Table 2: 2006 FIES Total Income, Expenses and Savings by Income Decile

...which can in turn be represented visually below:

Figure 2: 2006 FIES Income and Savings
(Click on image to enlarge)

The 2006 FIES reveals a situation where one-third of our population is unable to meet its expenses much less save for the future (as represented by the people who are underwater in the above diagram). What then would the situation be if my mix of proposals were implemented? The rest of this entry describes one possible outcome.*

B. The Possible Impact of 12% Flat Tax and 20 pesos per day Food Subsidies on 2006 FIES Data

With the recommended twelve percent flat tax and 20 pesos food subsidy (that comes in the form of vouchers similar to the food stamps in the United States) for all adults ages 18 to 64, the individual expenses** and savings of the different income segments will become as follows:

Table 3: 12% Flat Tax and 20 pesos Food Subsidies applied to the 2006 FIES Average Income, Expenses and Savings

As can be seen above, with the flat tax and food subsidies, even the bottom thirty percent of income earners are now able to have some savings***

The resulting aggregate income would then be...

Table 4: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Total Income, Expenses and Savings

...and the over-all situation**** in terms of savings improves for all segments of society (as represented by the increased number of coins in the diagram below).

Figure 3: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Income and Savings
(Click on image to enlarge)

For the Upper Tier of Society, more savings***** means more funds that can be invested in housing, education or business activities.

C. Conclusion

From the above example, we can see that a combination of lowering the income tax to a flat rate of twelve percent and providing food subsidies of twenty pesos for each Filipino adult (18 to 64 years old) may (all other things remaining equal) result in a near doubling of the aggregate savings rate (809 Billion from the original 428 Billion Pesos aggregate savings).

*Outcomes depend on factors such as the accuracy of FIES data (which i used as basis for the above), eventual tax collection efficiency as well as the propensity by which people may try to game the system to avoid paying their share.
**Expenses are reduced because taxes are included as part of household expenses. You can refer to the FIES Method of Computing Family Income and Expenses here.
***Given the assumption that the individual income earner does not choose to increase his/her expenses on other commodities and services.
****I am, of course, talking in terms of averages which means that within a given segment, there will still be those who are better and worse off. Uniformly better outcomes is highly improbable.
*****Included in this savings amount is the amount deducted for Social Security, Housing and Medical Insurance which i also proposed to be at a cumulative 12 percent of taxable income.


Anonymous said...

Again you haven't taken into account the debt repayments. This flat tax should be around 20% to 30% for us to be able to repay the debt.

But if you bring it to those levels, it would be too high for the lower income to pay.

Hence the progressive tax rates. Richer pay more, poorer pay less or none. Hey wait a mintue, isn't that our present tax system?

Enough with your pontificating that the middle class are paying too much. Your solution essentially is to cut their taxes to half. But this "solution" would bankrupt the government.

There's not getting around it-the middle and upper class would be paying high taxes for the forseeable future and the government should reduce wastage of funds by corruption for the long haul.

Only when we've invested enough in infrastructure and education then can you talk about flat tax. Only second and first world countries as far as I'm concerned can afford those.

cvj said...

Anonymous, on your 20% to 30% tax rate, you'll have to back it up with numbers and corresponding justifications. As i said, i haven't forgotten your objection. I'll deal with that in due time.

I think the basic philosophy of the rich and middle class paying taxes while those who are poor are exempted is wrong headed because it encourages parasitism (already, there is another anonymous commenter complaining about parasitism in the previous thread, and rightly so). Everyone who earns an income has to pay taxes, if only to allow them to keep their dignity and self respect. As for preventing starvation, that's what the subsidies are for.

anonymo us said...

the food subsidy should include all persons (yes, babies too) in the family.

cvj said...

Anonymo us, ideally yes, but i don't think we can afford it. As it is, there is already one commenter in the previous thread who is dismissing the twenty pesos per day as barely enough for five pan de sal (salted bread). More importantly, i believe that given our population problem, i don't think we should on principle encourage the subsidy recipients to have more babies.

The above, however, doesn't preclude a separate set of school feeding programs.

Anonymous said...

"Anonymous, on your 20% to 30% tax rate, you'll have to back it up with numbers and corresponding justifications."

My justification is simple: I am for the current tax rates.

Isipin mo na lang, with the current tax rate we're already having problems paying the debt and paying for public programs. Tapos, hahatiin mo pa at dodoblehin ang spending via socialized food stamps and socialized education? Imposible dre.

Anonymous said...

And I'm waiting to hear about you plans to pay off billions of dollars in debt. I'm predicting debt for sovereignty crap. Pero mukhang wala nang GOCC na maibebenta pa. Maybe sell off more mining and forest concessions? Ubos na rin yun.

Government bonds? Debt forgiveness?

Hows about giving us a preview of this debt plan in a sentence?

cvj said...

Anonymous (at 3:59:00 PM), i re-looked my numbers and it appears that because of the increased exemptions in RA 9504, you are right that the 12% rate on taxable income is too low if the exemptions are still in place when such a tax rate is applied. Otherwise, a higher rate is needed to achieve a target 12% effective rate (perhaps your recommended 20%). I'll discuss further in a future blog entry.

As for your request for a previous, doing an Argentina is indeed an option but not the only one. BTW, what's Debt for Sovereignty?

Anonymous said...

"doing an Argentina is indeed an option"

No offense, but this is probably you're dumbest suggestion. Argentina has half the population but eight times the land area. They're a net agricultural exporter. Their problem was similar to ours, in the 1960's that is. The solution they did recently is basically what Macapagal did in the 60's, which is decontrol.

Their problem is that they couldn't afford to go industrial, but have plenty of food and other basic necessities. Which is why in the article you linked it mentions "Argentina hasn't gotten a lot of foreign direct investment in the last five years, and it cannot directly borrow in international bond markets."

The Philippines is in an opposite situation. Bonds are basically our lifeline. Bond supply some of our dollar need from time to time when OFW remittances cannot cover the dollars that are needed to export oil and rice, two very basic necessities. Argentina has some oil and plenty of food.

Basically, the Argentinian solution only looked good because the currency situation was so bad. But in the context of a resource independent economy. But in our country, the currency situation looks ok (could turn bad intermittently but could turn worse if mismanaged) but in a very resource-starved environment.

These are two very different countries needing totally different solutions. So do you have any other suggestion to pay off our debt?

cvj said...

No worries anonymous. Though you come off as a neoliberal asshole, i do learn from your fortright inputs so keep them coming. In effect, what i hear you saying is that we shouldn't have to do an 'Argentina' unless our currency situation deteriorates and our resource situation improves. That's useful as far as sequencing is concerned.

Anonymous said...

"BTW, what's Debt for Sovereignty?"

I meant debt swapping, which has proven to be an epic fail.

Anonymous said...

"Though you come off as a neoliberal asshole"

I'm basically for the status quo. I used to think why the president is so dumb and fantasized about being president (this was during the time of Ramos). But as I got older and learned more I realized they're doing the best they can, given very precarious situation.

Ramos was doing things OK with all the liberalization stuff only for Erap to blow up the deficit with his war on Mindanao. That was the start of our downturn I think. Now GMA has to undo his crap. Which is why I thought it was understandable that she was "protecting her votes" and prevented another Erap (FPJ then) from winning the office during the whole Hello Garci affair.

cvj said...

Anonymous, thanks for your link on debt-swapping.

I do sense that you believe that the current situation is the best that can be managed under the present circumstance.

What i see instead is an epic con job where the neoliberals encouraged us to accumulate debt and let the world market supply our food needs (neglecting our local capacity to produce food), and then when things turn for the worse, someone like you will come along and say that we cannot afford to piss off our creditors because we depend on the world market for our supply of food. Doesn't that sound like the tactics of a drug pusher?

BTW, our present problems have a lot to do with a Middle Class that thinks it is justified to have the Masa cheated because the latter are not seen as equals. Well, it happens that Gloria was 'protecting her votes' from a candidate who had Food Security as his number one priority. So we end up shouldering the costs of expediency brought about by a superiority complex that turns out to have been misplaced.

Anonymous said...

I'd like to think you're correct. But could the situation be that our leaders, from the time of Macapagal and Marcos, foresaw that the population is outstripping food supply so decided the best way to feed the population is to decontrol the currency so the country can afford to buy rice overseas?

If there's a study about this I'd like to know. Assuming our arable lands are utilized to close to 100% efficiency, can we supply for 80 million people?

It doesn't help of course that we are the most typhoon ravaged country in the whole world.

So maybe it's something to think about. Maybe without neoliberal policies, the middle class would be starving right now.

cvj said...

Anonymous (at 4:33:00 PM), i don't think decontrol can make imported rice more affordable (quite the opposite because of devaluation) if that's what you mean, and i don't think that was the intent of decontrol in the first place.

From what i read, the push for decontrol was from the hacenderos who wanted to be able to export their agricultural products at more competitive rates with a devalued peso. This clashed with the interests of the local import-substituting manufacturers who needed to import capital equipment. (Decontrol was one of the main reasons why we failed to industrialize.)

Here's one study on rice-self sufficiency. As per this study, one of our main problem is low productivity:

"The rice yield in the Philippines is 1/2 of China; 7/10 of Indonesia and Vietnam; 3/4 of developing Asia average; higher than Thailand but the latter has more land. Rice yield must grow by at least two and half times higher from 2003–2020 than during the 1990s in order to ensure self-sufficiency without increasing hectarage."

The Study goes on to say that low productivity is because of lack of irrigation and lack of investment in Research and Development (R&D).

As to available land, did you hear about the Memorandum of Understanding (MOU) between the government and San Miguel-Kwok for the use of 1 million hectares of idle government land? This means that there is still some land available, around 3 million hectares of idle government land including the 1 million that was allocated to SMC-Kuok. For the record, I don't agree that the government let SMC use such land instead of allocating these for the poor to grow food. (I elaborate more in another blog entry.)

Anonymous said...

FPJ supposedly said :
"Kailangan konsultahin ang mamamayan. Hindi sugod ng sugod" (The people should be heard first and not make hasty decisions),
FPJ's campaign spokesman said on the type and system of governance the actor would employ once elected as president in May 2004.

Lahat ata ng kandidato, iyan ang sabi. "Makikinig ako sa mga mamamayan." Si Mar Roxas din. Si Loren Legarda din. Si GMA din. Si Makoy din. Si Ramos, ganoon din.

Anonymous said...

"Sunday, August 03, 2008 12:47:00 AM"

I think you may be right on all points. But is it fair to put under one umbrella all neo liberal presidents under one umbrella?

GMA and Ramos were only children when Diosdado instituted those "reforms".

And is it a wise solution to totally ignore our present neo liberal policies to solve the problems created by it? I mean, wouldn't the situation in the short term be further aggravated if we do a 180 degree turn and suddenly go protectionist?