Taxes suck but people’s government dependency suck more

According to the Yellows, the leftists and all other anti-Duterte forces, our country is currently in a state of economic turmoil. With the “crippling” 6.4% inflation rate, the Yellows assert that aside from ordinary working class Filipinos being burdened by the increased basic commodity prices the poor (which make a large chunk of the nation’s population) are now doing a lot worse from the reckless economic policies and punitive tax regime of the current administration. Bayan Muna (a leftist partylist group) representative Carlos Zarate puts most of the blame on Duterte’s TRAIN law that caused the increased inflation rate. Like many of Duterte’s critics, Zarate suggests that the president’s economic policies are simply “anti-poor”. While it is quite easy to point the finger at the TRAIN law, the problem with the argument of the president’s critics is that they are simply refusing to recognize the elephant in the room. Everybody seems to be talking about the effects and direct cause of the problem but no one seems to delve into its root cause. The root cause is the people’s dependency on Big Government which has been exploited by the current and previous administrations!

Big Government is primarily defined by its size, measured by the budget or number of employees, either in absolute terms or relative to the overall national economy. In addition, it is also defined by the magnitude of government’s involvement (or intrusion) in the private sector. If we look at our national budget, you will notice that the biggest chunk of our expenditure, in terms of Expense Class, is spent on personnel services at almost 30%. Personnel services represent the salaries and other compensation of civil servants. In terms of Sector, General Public Services get the most bite out of the budget at almost 1.3 trillion pesos. General Public Services covers expenditures for general administration such as lawmaking, fiscal management, foreign affairs, public debt transactions, and other governance or regulatory services, among others. So what is the big deal? If a huge government is necessary to ensure that public services are operational and that laws are crafted and enforced to put a check on abusive corrupt politicians and greedy corporations so that the nation’s wealth is spread in a more equitable way, why is Big Government so bad? Well it is one thing to say that a huge government is necessary to ensure that public services and social justice is given to everyone, to demand that people pay for it is another story. Author Timothy Noah correctly stated that: “What people want is big government that they don’t have to pay for.”

Going back to Duterte’s critics and their finger pointing at the TRAIN law, I would have to agree with them but not because of the law’s “anti-poor” design. On the contrary, the TRAIN law actually lowers the personal income tax burden on the majority of taxpayers except for the highest earners. In fact 83% of taxpayers are exempted from paying income taxes under the TRAIN law! Going with the design, the TRAIN law is actually “anti-rich”! It increases the taxes on non-essential goods and services such as those chino-chino-latte-sossy-coffee drinks and Botox treatments that the poor can live without. Not only does the TRAIN law maintain high income tax burden on the rich it also plugs tax loopholes that corporations take advantage of such as VAT-exemptions that have been merely abused to evade taxes and encourage corruption. So in actuality, Duterte’s TRAIN law aims to put more money into the pockets of the majority of the working class at the expense of the rich so that it will have the funds to support its programs (such as it’s Build Build Build infrastructure program and other social programs). While it seems like a good or “fair” approach people seem to ignore the fact that the principle is fundamentally flawed and the current approach is half-baked.

The fundamental flaw in the principle of the TRAIN law by lowering the tax burden on the poor and middle class at the expense of the rich in the spirit of “fairness” is that it isn’t actually fair at all! As per the design of the tax law, the majority (83%) of taxpayers are not even paying any income tax at all! According to the design, the “rich” or top earners are actually pulling the most weight in terms of tax burden. How is it any fair to pick and choose who benefits from tax exemptions based on income? To put it another way, why is it any more fair to punish one segment based on financial status? Isn’t this tantamount to punishing financial success? Shouldn’t there be equal protection under the law? Besides, under that kind of principle what kind of incentive is the government promoting in terms of financial success if it means that the more one makes would mean more financial punishment? More to the point, as American politician Jon Kyl once argued in the case of “progressive taxation” in America in 2015: “People who do not share in the sacrifice of paying taxes have little direct incentive to care whether the government is spending and taxing too much.”

With regards to the government’s aim to raise revenue to support its ambitious infrastructure program, I am very much supportive of that. If the tax revenues are used for infrastructure then I would say that the sacrifice in increased taxes in goods and services would eventually pay dividends in the end in terms of productivity. I have followed an interesting exchange on the internet regarding inflation. One of the participants in the discussion (Vipul Gupta) argued that:

“What government decides to do with the tax revenues also has significant impact on the inflation rate. Excess spending on employee salaries, imports, subsidies and freebie welfare policies leads to increase in inflation rate, while the investments in export sector, and infrastructure development will lead to long term increase in productivity, thus cheaper products.”

The problem with the current administration is that while it has increased it’s spending on infrastructure, it also increased its spending on public administration as well as social welfare and doleout programs. As economist Ben Kritz has told me in a conversation I had with him, increased spending on public administration has a negligible positive impact and the fact that more of the tax revenues are spent on public administration the more the government is actually spending on bloat.

What amazes me is how toxic our politics currently is despite the major factions actually embracing the very same policy of Big Government. Under the Duterte administration we have seen free state university and college tuition fees, doubling of salaries of the military and police, increase in social security pension, increase in disability and employee compensation benefits in the private sector and caregiver allowance in the public sector. On top of that 83% of taxpayers are exempted from paying income taxes and that spending on social welfare has been increased as well! Anti-Duterte forces have been advocating for the very same policies deemed as “pro-poor” elections after elections! These benefits have been made possible through government revenues from its taxation scheme. The problem is that the more doleouts and benefits the government provides, especially to the poor, at the expense of the “rich” the more the people feel “entitled” to the doleouts and benefits. The more the government expands on its social welfare, benefits and doleout programs the more cost is involved in administering these programs.

After all is said and done I do realize that the political reality in the Philippines is different. The electorate is simply already deeply dependent on Big Government. The people are indoctrinated in the notion that it is the government’s responsibility to provide for the people’s (especially the poor) cradle to grave needs. It is easier for politicians to promise the people free stuff and to promise social justice through income equality rather than the promotion of wealth creation and personal responsibility. The Duterte administration, at least, is working towards building the pathway to wealth creation through increased productivity from its infrastructure program. The problem is that while it is plugging a leak at one end it seems to be also making the hole of the other leaks bigger. Would the opposition such as the leftists and the Yellows be any better? I doubt it, especially those with a platform of pandering to people in the “laylayan”.

(Credit goes to pinascitizen.net for the photo.)

Hector Gamboa

Calling a spade, a spade…