The Real Reason Why PNoy Does Not Want to Lower Income Tax

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So President Noynoy Aquino (PNoy), in response to proposals by some legislators, said that he is not convinced that lowering income tax rates would be beneficial to the country. He claims that: “If we lower income tax rates, revenues will be smaller while the deficit will be wider. The widening deficit will be a negative factor when credit ratings agencies rate us.” To assess this claim, let’s put aside (for now) our skepticism that the administration needs more funds in an election year to support it’s effort in perpetuating it’s hold on power. How true is PNoy’s claim that a lower income tax rate would result in smaller revenue and bigger deficit? I’m not an economist but for some reason I find PNoy’s explanation of economic cause and effect to be rather flimsy; it negates other factors that contribute to change in revenue. Besides, why is he so obsessed with credit rating when it doesn’t really necessarily give a thorough image of the rosiness of a country’s economic favorability?

income_taxSo, does lowering the income tax rate necessarily result in smaller revenue? It is interesting to note that in America’s case, history seems to show that when taxes are cut, Federal receipts (revenue) has a very strong tendency to rise. When taxes are raised, government revenue has a strong tendency to fall. Besides, a quick look at the concept of Gross National Product (GNP) would suggest that how taxes affect a country’s output isn’t as simplistic as PNoy seems to pontificate. According to Investopedia.com, the aggregate demand equation shows the effect of taxes on a country’s economic output.

GNP = C + I + G + NX
where:

C = consumption spending by individuals
I = investment spending (business spending on machinery, etc.),
G = government purchases
NX = net exports

This, then, suggests that:

“Consumer spending typically equals two-thirds of GNP. As you would expect, lowering taxes raises disposable income, allowing the consumer to spend additional sums, thereby, increasing GNP.”

So if PNoy’s claim that lowering taxes would necessarily have a detrimental effect on the economy does not really hold water, then does credit rating status justify his refusal to lower income tax rates?

The definition of sovereign credit rating is:

“…a country’s ability to meet its financial obligations. Credit rating agencies provide these ratings and investors use this to assess the level of risk related with investing in a country. The rating may also include an evaluation of a country’s political risk.”

Let’s ask ourselves, did our country’s “improved credit rating” result in improved foreign direct investment? I don’t seem to notice foreign businesses flocking to the country to invest in the country nor invest in PNoy’s much touted Public-Private Partnership (PPP) scheme. An article by Alito Malinao reveals that the Aquino administration has very little to show in its PPP program. His article notes that:

“According to a document distributed by the Investor Relations Office (IRO), only five PPP projects would be completed when Aquino leaves office after his six-year term that expires on June 30 next year.

The five projects to be completed by middle of 2016 are not even big-ticket infrastructure projects.”

According to Business World Online, the Philippines, although having moved from 10th place to 9th place in East Asia in terms of Foreign Direct Investments (FDIs), is still dwarfed by those of its comparable Southeast Asian peers. For instance, in terms of credit rating, Vietnam has a lower credit rating (32, BB-) compared to the Philippines (54, BBB-) but Vietnam still beats us when it comes to FDIs. So isn’t it reasonable to ask: Does investment grade really matter that much as PNoy projects it? This is the danger in giving too much emphasis on credit rating. It gives us an illusion of investment (and economic) confidence when in fact there are a lot of other factors that should be considered. For instance, in Australia’s case, an article from The Guardian notes:

“The worry is that a credit rating downgrade will cause the yield on the government’s bonds to rise – meaning that it will cost more for the government to pay back its debt. As a general rule the higher your bonds are rated the lower the yield.

But there are, however, a lot of other factors that determine the interest rate the government will have to pay on its debt. For example Australia’s cash rate set by the RBA (currently at 50-year lows of 4.5%) is a major factor, so too is Australia’s expected inflation, and also very importantly is the yield of US government bonds.

In the bond market everything is connected to everything else, and everything is firstly connected to the US.

Australian government bonds generally follow the lead of US Treasury bonds. And over the past decade the yields for Australian government 10-year bonds average about 1.3 percentage points higher than those in the US.

In the past 18 months, the yields of US bonds have risen due to improved expectations about the US economy and also a belief that the US Federal Reserve will increase its interest rates. And so, as a result, the yield on Australian government bonds has also risen in that time – from around 3% to 4% for 10-year bonds.”

So at least for Australia’s case, a credit rating downgrade has very little (if any) to do with credit rating. So why is PNoy being so paranoid about this?

Now that we have seen how flimsy PNoy’s skepticism is with regards to lowering income tax rates, may I offer some reasons why lowering tax rates is a good idea?

First of all, I am not convinced that the Philippine economy is booming. Contrary to the Aquino administration’s claim that the bad road congestion condition in the country is proof that the economy is doing well, our country still needs a lot of the ingredients for a healthy economy. Forbes magazine has an interesting article that tells of what is the most important contributor to a nation’s economic growth.

Carl Schramm, head of the Kauffman Foundation, one of America’s top entrepreneurial think-tank, said:

“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.”

The article further states:

“Schramm says the U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.

This is an amazing statistic. Schramm is describing the X factor of America’s historical success.”

Have we seen a lot of start-up companies in the Philippines grow into a billion dollar revenue company within 20 years? What seems to be missing in making that happen? Infrastructure for one, perhaps? (Amongst many other needs) So how is the state of our country’s infrastructure?

Now I can grant that taxes are needed to pay for such public goods like infrastructure, national defense, and a justice system. But does this mean that the people have to give the government absolute power on how their money is used? Does anyone really think that the government uses other people’s money (i.e. taxpayer money) more efficiently than private individuals and businesses? Think about it! Has anyone really heard of a private individual or a business spend, say, Php22 on a packet of noodles when it really normally costs just Php7? So why are we not surprised to see government procurement of overpriced items such as imported rice?

Next, high taxes run counter to work and investment. Why would anyone want to work more if it means that the more effort exerted results in a bigger chunk taken out of one’s pay? In the same token, why would companies invest more of their earnings to further develop or expand their business if further development and expansion means more levies or taxes? I can see some relationship to the law of diminishing returns here. As people give more money to the government, at some point the return to the people would get smaller and smaller to the point that it even gets counter-productive. Isn’t that what we are seeing? As people’s tax burdens increase, do we see any improvements in our daily lives? How’s the traffic and the MRT condition nowadays, for instance?

Finally, if freedom loving individuals truly want to be free (which includes free of government over-reach), then lowering taxes offer a check on the expanding size and scope of government. With lower taxes, we are giving the government less of our money to play with. The fact is nobody really cares about money more than the person who actually earns it. In a free country, doesn’t the person who actually earns the money have the right to keep what they earn?

So there we have it. I do not see how PNoy’s skepticism in lowering taxes is justified. Now if we go back to the idea that we have an upcoming election and that funds are badly needed to help the administration ensure its electoral victory to extend its grip on power then perhaps that is a more believable reason.

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22 Comments on “The Real Reason Why PNoy Does Not Want to Lower Income Tax”

  1. I agree that lower taxes would greatly help the economy on an inclusive level for all. Spending and possibly savings would go up as the taxes go down, especially in consumerist regions like the NCR.

    However, I do believe the government is stuck in a rock and a hard place when it comes to revenue generation. They are a bunch of kleptomaniacs with no skills in leadership or long term planning on what to do with the money except half assed projects and massive kickbacks. Essentially, the money that is supposed to go back to improve the average citizens livelihood gets robbed, with nothing to show for it.

    The BIR demands businesses to put up a sign saying “Demand a receipt” and if the business doesn’t provide one, it can have a punishment of a fine and/or 2-4 years in jail. Yet, when you remit taxes to the BIR, they do not give a receipt showing where your tax money went. It’s a bit off topic..

    But point being, the country is a black hole when it comes to money. It’s why they rely on PPP agreements because the tax money disappears too fast to afford any quality long-lasting infrastructure projects. They are effectively selling the nation via PPP agreements, which then turn around and charge people more money in the form of toll roads etc.

    The country needs taxes to pay back old loan obligations as well. If they cannot pay these back then their credit rating will lower to junk status and they will have little to no chance of begging for more money to keep the country afloat. Like I said, rock and a hard place. They need to lower taxes, but simply cannot do so without lowering the nation further.

    1. Hi beenawhie,
      I think the government’s problem in revenue generation can be addressed through policy and system changes without necessarily the need to keep the income taxes at the current rate. With the right policies, decreasing the income tax rates would even be beneficial. Sure there are kleptomaniacs in government but I don’t think corruption is the sole (or even the biggest) reason why revenue generation sucks. China, Vietnam, and Indonesia have lousier corruption ranking than the Philippines (https://www.transparency.org/cpi2014/results) but their revenues are still better than ours (https://en.wikipedia.org/wiki/List_of_government_budgets_by_country). The Philippines also has the highest individual income tax rate in ASEAN nations. So obviously there are ways to generate more revenues without having to impose a huge tax burden on the working people. One thing I can think of is to ease our protectionism stance when it comes to foreign businesses to encourage competition. Competition in the market combined with tax cuts in income, I think will do wonders in revenue generation. Thanks for reading!

  2. Good thing my online profit is only for me. I will never pay tax as long as I can if I know I can’t trust our a$$hole of a government. Besides if the government would decide it would spend big money for the public it is always on the Metro Manila only and never on provinces. Unless those Motherf**kers want something in return for their own favor. F**k this country!!!

    1. Good idea there Rica because I feel that this bald guy seems not to know the basics of economy probably because he was sleeping on GMA’s class the way he sleeps on Senate sessions caught and uploaded in Youtube.

  3. We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.

    There is no worse tyranny than to force a Failipino to pay for what he/she does not want merely because BS Aquino and his YellowTard minions think it would be good for him/her.

    BS Aquino’s Government! Three fourths parasitic and the other fourth Stupid fumbling.

  4. Your taxes goes to their Foreign Bank Accounts. They want to Steal more, before they are out of power.So, Aquino does not want to lower taxes… DAP, PDAF, etc…have been used by Aquino.

    Maybe, he is using another trick to siphon your taxes to his Foreign Bank accounts.

  5. ?Actually, the alibi of PNoy against Miro Quimbo’s Income Tax Reform Bill is correct if we are experiencing a deficit. But, we are not; we have, in fact, US$ 80 Billion, and growing, reserve in Central Bank. He is more afraid of the credit rating company than of the people.

    He has NOT DONE ANYTHING IN ACTUAL DEVELOPMENT, so he wants the bubble economy holding, and this is dependent on the credit ratings. He is stupid, lazy, or don’t understand. Again, he has a golden opportunity opening up to him and he does not take it. Arrrrggghh

    We are a consumer economy now, so better to move the tax on consumption.

    1st step. Lower income tax to broaden the tax base. Lower corporate income tax, as well, as it is also highest in the world. This should be good in attracting investments. And, then remove the fiscal incentives, which is subjective and selective.

    2nd step. Increase the VAT. This is not anti-poor, if there will be exceptions on basic goods.

    3rd. Use opportunity to up tax on luxury goods, and I mean really up.

    4th. Rationalize and lower import tax, which ASEAN Integration will force on us, anyway. But, might as well be pro-active with it while we are in control of it. This should dis-incentivize smuggling in a big way.

    But no, this freaking kalbo is a bastard. He is again letting an opportunity slip by. Son ovb$&ch. Put#%ngna.

  6. Mr. Hector,

    I am for lower individual taxes. As to your analysis, a lower tax rate will result into lower G in your GNP equation. Thus, instead of government deciding what to spend, we leave it up to the consumer to decide where it will be spent. So the question IS: Do consumers decide BETTER on what to spend? So in a sense, programs that do NOT benefit the individual will not be spent on. For example, Pinoys in the province will not spend their income on de congesting Manila or improving the MRT service. And people in Manila will opt to vacation in Hong Kong instead of going to a provincial resort. So, please stop tilting towards on one half truth but also present the other side.

    My second point is that no one wants to say the obvious: Government should spend less because it has NO BRAINS to spend. ALL its programs are disjointed and short term oriented. I strongly use the term ALL. It does not mean that we don’t need to address the short term stuff but generally its a waste like the so called bicycle lane along Edsa.

    Point#3, an Improved Credit Rating means that a bunch of external agencies have graded us BETTER on our promise to pay when we say. To be fair to this government, it in NO WAY SAID that a high credit rating will result into richer Filipinos. It actually means that we are in a better position to source more funds from people with money who are abroad and non-Filipino.

    Point#4, a US dollar Surplus does not equate to budget deficit reduction or removal. Budget deficits are a result of OVER SPENDING in PESOS because politicians want to and the President wants to pursue their personal programs and agendas however they may be good or bad. US dollars are treated as assets used to purchase the country’s import requirements from suppliers abroad who do NOT want to accept the PESO as a form of payment and unfortunately that is everybody except Greece.

    1. Hi Mr. Gomez,

      To answer your primary question… generally speaking, yes… I think earners would do better in deciding how their money would be spent than the government would. As I mentioned in the article, nobody cares about money more than the ones who earned it. Sure there are idiots out there who would probably waste their money on stupid stuff (I actually know a handful of those). But I think fundamentally, people would act or spend on self-interest. So…. will people pay up for things like the military and police and a justice system to protect their rights? I think so as protection of one’s rights is a self-interest. I certainly will. But will I willingly pay to support programs (such as the dumb bike lanes you mentioned) that are beyond the scope of the proper role of government? I don’t think so. If I had a choice, I wouldn’t give a dime for such. So it really is about rational self-interest. But that’s the thing – choice. I believe in the importance of freedom / choice and not force or coercion. Taxation is force. The more taxes are taken from us, the more freedom we give up because the government gets more say on how our money will be spent. By giving less of our hard earned money, we also give away less freedom. We just give enough for the government to spend on programs that will fulfill the government’s basic role (protection of our rights and freedom) and that would be to the benefit of our rational self-interest.

      I have no objection to your second point. I am a firm believer in the idea of not spending money that we do not have. So yes, I am for fiscal conservatism.

      As to your third point, I don’t believe I suggested that the government claims that a higher credit rating will result in richer Filipinos. My objection is Aquino’s seeming over-emphasis on credit rating. But as I argued, credit rating isn’t really a big deal as Aquino purports it to be. Given our “improved” credit rating under Aquino has that resulted in more foreign investor confidence? I don’t think so, given the fact that we are still dwarfed by our neighbours when it comes to FDIs.

      As to your last point, I don’t believe I talked about US dollar surplus and how it equates to deficit. But thanks for educating me about that and perhaps that topic can be discussed in another topic or article.

      Thanks for reading!

  7. Your article discussed the issues very well for an easier understanding by a non-economist like me. I like the way you relate them to the impact on the GNP. Thank you and please keep sharing your valuable thoughts and insights!

  8. Thank you for the good read, HG. You’re points easily countered the stance of the government against lowered income taxes. Not an economist myself, but I am sure that the concepts you used in this article were very rudimentary to the point that it is dumbfounding when our supposedly tax experts and economists, with all their years of experience and education, agree to noynoy’s assertions.

  9. The underlying philosophy dispute here is between a socialist (Aquino) viewpoint and a capitalist one.

    BS espouses that the government is the engine of national prosperity, thus requiring higher taxes to redistribute. History has demonstrated otherwise, rather conclusively me thinks…B

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