Monday, November 19, 2012

Into the Eyes of the Gorgon: IMF’s Endorsement of the Philippines

The mainstream implies that accolades made by the IMF on the Philippines must be read as bullish for the stock market.

I’d say that the Philippine stock market and the IMF’s approval are two different issues.

Well with the IMF pushing for SMS Taxes[1] as well as Sin Taxes[2], the only thing bullish here is for politicians, who will have more political control over the populace, but not necessarily more money.

As I pointed out earlier[3], Sin Taxes in the United Kingdom have not only failed to achieve the desired tax revenues and the supposed morality to be attained from such a regulation. Instead sin taxes spawned a bootleg industry, increased health risks of alcohol patrons who decided to go underground, and importantly increased corruption, as well as risks of violence.

Sin taxes are equivalent to prohibition laws focused on human vices like drugs, cigarettes gambling, prostitution and etc… that seems noble sounding humanitarian based, but have been hardly in touch economic reality.

As exiting US Congressman Ron Paul said in one of the greatest speech ever[4],
Humanitarian arguments are always used to justify government mandates related to the economy, monetary policy, foreign policy, and personal liberty. This is on purpose to make it more difficult to challenge.  But, initiating violence for humanitarian reasons is still violence.  Good intentions are no excuse and are just as harmful as when people use force with bad intentions.  The results are always negative.
Importantly a common mistake has been to misinterpret taxes rates as a constant or linear function of revenues. An important economic axiom to realize is that “when you tax something, you get less of it.”

And such economic law applies to the effects of raising taxes on gold sales that has only prompted for the skyrocketing of smuggling activities[5] from the output of small scale gold mining or the informal gold economy in the Philippines. In fact, some lawmakers have appealed for the repeal of these taxes[6].

Rampant smuggling has not been limited to gold but has broad based.

According to an Inquirer report[7], smuggling activities in the incumbent administration has exploded to a $39.2 billion industry, or an average of $19.6 billion per year or for the two years of President Aquino’s tenure. This is far from the average of $3.1 and $3.8 billion for the Estrada and the Arroyo administration respectively. As a side note, mainstream economists may deny it but this seems to be one of the real factors contributing to the economic vitality. 

Political agents and the apologists of the state would like make us believe that edicts, ordinances and regulations can supplant the law of economics. Guess who will be wrong?

Or is it that President Aquino realizes that the informal economy has been real force behind the growth in the domestic economy for him to promote populist regulations that drives economic activities underground? So could he be hitting two birds with one stone?

Another more important point is that the diversion of productive resources to redistributive unproductive or politically directed activities will eventually lead to more debt and more inflation whose outcome will be worse than the cumulative effects of individual’s vices. Think Greece.

SMS taxes regardless of the form, on the other hand, will raise the cost of texting at the expense of consumers. Given that the mobile phone market will reach nearly 100% in terms penetration level[8], this implies that kernel of text users are likely to be from the middle to the lower income levels. 

So IMF’s Christine Lagarde in essence discriminates the poor by taxing them in favor of the political class.

Should I be bullish with the IMF’s endorsement? Ms Lagarde’s acclaim seems tantamount to the risk of catching the eyes of the mythical gorgon: victims turn to stone.

[1] Manila Bulletin IMF chief says SMS tax could help Philippines November 16, 2012

[6] Stop gold tax, BIR urged November 12, 2012

[7] Rigoberto Tiglao Smuggling at its worst under Aquino November 14, 2012

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