Tax your way to prosperity!!!
That's seems to be the message of elixir from the outgoing President GM Arroyo's to incoming President Benigno "Noynoy" Aquino.
``The next government should consider imposing new taxes, President Gloria Macapagal Arroyo said on Friday, claiming that doing so will be crucial in maintaining the economic gains achieved during her nine-year presidency.
``She said sustaining the local economy’s strong start this year would hinge, among other factors, on getting enough revenues to sustain spending on social services and infrastructure.
``"We have to sustain the economic policies that we have done and build on them. But that will already be the responsibility of the next administration," Mrs. Arroyo told reporters.
"New taxes are very important to make sure we have revenues to sustain our economic growth," she added."
Amazing.
Yet this fallacious recommendation surprisingly comes from a former economic professor turned President of the Philippines.
This advice is founded on misplaced assumptions that higher taxes have no or little impact to demand and supply, it further assumes of the relative efficiency of government spending and the positive effects from the spending multipliers.
Nevertheless, one wonders if this is just a trap designed to drag down Mr. Aquino's popularity. And if this true, then again, this only reveals that in politics, it is the self-interests of the politicians that come ahead of public service.
Yet, higher or more taxes isn't the way to prosperity for the following reasons:
First of all, if this logic is valid, why not tax ALL output or have a 100% tax to perpetuate "sustained" economic growth?
Second, the linear assumption that "high taxes equals more revenues" defies basic economic fundamentals where high prices equals lower demand and vice versa.
Third, higher taxes impact both demand and supply schedules. High taxes increases the cost of business and reduce profitability of enterprises which leads to losses among the marginal producers. And closures from such losses translates to a reduction in supply which leads to higher prices. And higher prices leads to less buying power for consumers. So diminished consumer demand translates to less output for the economy.
Fourth, higher taxes distorts production patterns as the source of demand shifts from consumers to the government. Essentially this generates an economic structure known as "crony capitalism".
Fifth, since governments are net consumers, they bid away from society resources for productive uses, subsequently this leads NOT to capital accumulation (wealth) but to capital consumption.
As Henry Hazlitt wrote in Economics in One Lesson, ``for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers."
The technical word for this is "crowding out" effect.
Sixth, higher taxes can result a bigger informal economy, since the burden of compliance would render many entrepreneurs unprofitable.
Seventh, since taxes are redistributive, and where higher or more taxes leads to higher prices, lesser output and higher unemployment, this effectively translates to a fall in standard of living.
As Ludwig von Mises wrote, people will "consume their capital funds rather than to preserve them for the tax collector".
Eight, higher taxes translates to bigger risks of bureaucratic corruption as people would rather bribe officials than pay for the unjust confiscatory taxes.
Ninth, it's not just corruption but wasteful government spending.
Since government spending are NOT based on the requirements of the market, they are predicated on the whims of the politicians. And this implies a loss of productivity.
A good example is the foreign "working trips" junkets which have been part of PGMA's legacy at the expense of the Filipino taxpayers.
So how would such boondoggles enrich society?
This leads us to ask who benefits from higher or more taxes?
Naturally, the political leadership, the bureaucracy and the cronies.
``It is clear that the primary beneficiaries are those who live full-time off the proceeds, e.g., the politicians and the bureaucracy. These are the full-time rulers. It should be clear that regardless of legal forms, the bureaucrats pay no taxes; they consume taxes. Additional beneficiaries of government revenue are those in society subsidized by the government; these are the part-time rulers. Generally, a State cannot win the passive support of a majority unless it supplements its full-time employees, i.e., its members, with subsidized adherents. The hiring of bureaucrats and the subsidizing of others are essential in order to win active support from a large group of the populace. Once a State can cement a large group of active adherents to its cause, it can count on the ignorance and apathy of the remainder of the public to win passive adherence from a majority and to reduce any active opposition to a bare minimum."
A great example of this would be the unexplained wealth of the kin of the country's top executive whom GMAnews.tv quotes as saying that these were accrued from "donations" and from good investments.
And that's why politicians love to play Gods, the political apportionment of resources extrapolates to generous "donations". And that's also why aspiring politicians extravagantly spend to buy votes directly or indirectly during elections in order to get elected.
So in contrary to Mrs. Arroyo, our unsolicited advise is for President Noynoy Aquino to basically REDUCE taxes and to REDUCE government spending. He can start out by trimming the bureaucracy, abolishing pork barrel, streamlining, rationalizing and rescinding feckless laws, and allow Filipinos more economic freedom from the clutches of overregulation, bureaucratic and welfare costs.
Of course everything comes with a risk or a tradeoff, and this implies greater career risks from such undertaking. Nonetheless, it may be worth the sacrifice if public interest is indeed a priority.
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