The Fallacy Of “ The Richest Filipinos and the Biggest Taxpayers are not the same”

In the eyes of the mainstream, prosperity or utopianism can easily be achieved by simply being virtuous, i.e. the assumption that virtuosity can be unambiguously categorized or defined and collectively practiced by everybody.

One good example is an email I recently received which apparently has been circulating in the cyberspace.

The message incorporates two articles from high profile mainstream analysts Business Asia’s Tony Lopez and Philstar’s Boo Chanco, whose respective original articles can be found here and here.

The central message: Philippine elites have not done their “rightful” share in contributing to the Philippine society by paying “due” taxes.

This signifies the typical liberal argument against capitalist ‘greed’.

These articles are representative of political talking points that assume a moral high ground but have largely been premised on the fallacy of reductio ad absurdum.

Let me first quote Tony Lopez,

Now, compare the Top 40 Richest Filipinos based on the Forbes list with the Top 40 Taxpayers of 2008, based on the BIR list, and make your own conclusions.

BNA got hold of the 2008 list. It is a very interesting and revealing honor roll. It is veritably the roster of current heroes of the Philippines. Two conclusions:

First, people who you think are among the country’s richest are not in the Top 500 Taxpayers list. So, too, are prominent and fabulously rich people who often rant about the need for good governance and having good corporate social responsibility.

Second, the most rewarding jobs are not in business or top management. They are in entertainment, broadcasting and movies.

Here Mr. Lopez confuses correlation with causation. He implicates that the top 40 richest Filipinos should mechanically equate to the top 40 taxpayers. This perspective is skewed for the simple reason that domestic taxes are fundamentally NOT a one-size-fits-all application.

Although I am a NO tax expert, this Commission on Audit guideline would illustrate that domestic income taxes are NOT applied equally.

For instance, dividends, which largely make up the assets of “elite” classes have NOT been subject to income tax. So local elites may not be dependent on salaries or wages, but on dividends. And the dearth of taxes on dividends may have depressed the tax contribution statistical data from which has resulted to such perceived imbalances.

[Important Caveat: It may be tempting to argue to plug the loophole with higher taxes on dividends, yet doing so would retard the incentive for enterprises to invest, hence higher tax rates may result to lesser taxes.]

Furthermore, the percentages of tax rates are applied differently depending on the classification of activities, such as capital gains or interest on any currency bank deposit and other monetary substitutes or etc..., and these are the activities frequented by the elites.

The point is: The elites are hardly the major culprits. They are simply responding to the incentives provided by the current tax structure, virtuosity aside. That’s because what matters is the interpretation of tax laws applied to the individual taxpayers. In short, paying less taxes does not translate to political iniquity as unduly portrayed by these self-righteous analysts.

Yet what is largely ignored is that it is the inequitable construct of the incumbent tax laws that represents as the major factor in the current tax leakages or shortfalls.

Laws engender incentives for people’s action. Period. Whether the consequent actions are positive or negative is beyond the scope of this rejoinder. The reason why the law of unintended consequences exists has primarily been due to its having greater costs (negative effects) from the impact of the imposed laws or regulations than from its desired or intended benefits. A video example here.

In short, many laws do not capture people’s responses to a mandated environment.

Perverted Interpretations

Another misguided interpretation is where “most rewarding jobs” had wrongly been classified as “not in business or top management”. That’s because the cited examples basically contradicts this assertion.

Mr. Lopez writes,

In serious business, mining is very remunerative. The highest-paid tycoons are miners—Philex Chief Executive Officer (CEO) Walter Brown with P26.83 million tax (No. 9) and Rio Tuba Nickel CEO, lawyer Manny Zamora Jr., with P19.96 million tax (No. 12).

Behind them are owners and CEOs of conglomerates: San Miguel Corp. Chair and CEO Eduardo “Danding” Cojuangco Jr., with P18.98 million tax (No. 13); PLDT Chair and Meralco CEO Manuel V. Pangilinan, with P18.55 million (No. 14); former Meralco President Manolo Lo-pez, P17.49 million (No. 16); Unionbank Chair and CEO Justo Aboitiz Ortiz, P15.2 million (No. 19); and SMC President and Petron CEO Ramon S. Ang, P14.85 million (No. 20). Trailing them are ePLDT and TV5 CEO Ray Espinosa, P12.27 million (No. 22) and GMA Network and dzBB broadcaster Mike Enriquez, P11.94 million (No. 23). [my comment-are these personalities not “top management” or businessmen?]

This makes Enriquez the country’s highest paid media-man. He finds it funny, if not ridiculous, that he paid more taxes than the owners of the two largest TV stations. “That means I pay the correct taxes,” he notes. His channel 7 colleague, Mel Tiangco, is No. 45 with P8.9 million in income taxes paid. That makes her the highest paid female broadcaster.

Television is a big moneymaker.

Four of the country’s 10 biggest taxpayers work in TV entertainment. Willie Revillame leads the pack as No. 2, with P58.6 million in tax payments. He used to make P1 million a day while hosting his hugely popular Wowowee noontime show. Actor Piolo Pascual is No. 3, with P55.8 million tax payments; Kris Aquino, No. 8 with P25.44 million; and Michael V., (Beethoven del Valle Bunagan in real life) No. 10 with P22.26 million.

Boxing’s Manny Pacquiao, the No.1 taxpayer, is by his lonesome self, with P125 million in tax payments. In June 2009, Forbes magazine estimated the Filipino boxing great’s 2008 income at $40 million or P1.778 billion.

He paid P7 of tax for every P100 of income, a tax rate of 7 percent Revillame had a higher tax rate, P58.6 million out of P365 estimated gross for a 16 percent tax rate.

To be sure, 2008 was a crisis year for Philippine business. It was the year the world went into the deepest recession in 80 years.

And along the lines of the erroneous assumption of one size fits all nature of taxation, celebrities and high echelon representatives of business entities can hardly be classified as operating on the same tax levels. So basically this would account for an “apples to oranges” comparison. Classifying people in aggregates reveals its stark shortcomings.

To add, the last statement can be construed as an exaggeration—the claim that 2008 had allegedly been a crisis year for Philippine business. This is patently unfounded.

According to ABS CBN (bold highlights mine)

In a statement Sunday, the PSE reported that the combined net income of publicly listed firms dropped to P198.91 billion in 2008 from P281.54 billion in 2007, a banner year...

Lim noted, however, that revenues of listed firms grew 12.8 percent to P2.67 trillion from P2.37 trillion.

The recent data were culled from the latest financial statements submitted by 233 out of 246 listed companies. Of the 233 reporting firms, 159 posted net gains while the remaining 74 posted net losses.

First of all, while indeed corporate profits of publicly listed companies, which represent the biggest firms of the country, dropped in 2008, they did not turn negative. They remained substantially up. [Caveat: We would like to remind everyone that specific reference points determine the contrast effect.] In addition 68% of the corporations reported positive gains.

On the other hand, despite the modest decline in profits as measured from 2007, top line revenues of major firms rose in 2008. This hardly places the Philippine business environment in a “crisis” mode.

And if seen via economic performance one would ask, crisis where?

The Philippines as shown by chart from tradingeconomics.com did not fall into a technical recession (two quarters of negative growth). There had been even NO instance of negative growth in 2008 or throughout 2008-2010.

To argue about such a crisis is to engage populist sensationalism. What has been true for most of the world, has NOT been true for the Philippines. What has affected the local stock market, does not represent a similar cataclysmic event for the domestic non-financial markets or the economy. We identify this argument as logical fallacies.

When people assimilate on interpretations of information that are hideously out of reality, then obviously this affects the public’s quality of thought.

And because we are aware that ideas have consequences, then it is part of our responsibility to refute such politically polluted outlook.

Another moralizing comes Philstar’s Boo Chanco who writes,

It is just frustrating that the burden of financing this government is placed on the middle class like us whose tax payments are mostly withheld at source or added on to the things we buy. And of course, we cannot afford to get top notch tax accountants and are at the mercy of BIR examiners. But if we are to help P-Noy succeed, he needs money and not just a lot of hot air from pontificating tycoons in the Makati crowd.

How about a voluntary lifestyle tax from say, everyone who can afford a Manila Golf, Alabang or Wack Wack share?After all, the minimum amount to get to the Top 500 list is just P2.1 million and the side bets in many golf games exceed that on any one day. It shouldn’t hurt to dedicate a Saturday’s side bet once a month to help P-Noy achieve his goals for our own good.

Oh well… let us just end with this quote Tony used from Oliver Wendell Holmes: “Taxes are what we pay for civilized society.” Otherwise, stop complaining about the anarchy around you.

Although we sympathize with the position of the tax ‘burden’ for the middleclass’, as I belong to this category, however when people argue that taxes extrapolate to “civilized societies”, then such presumption erroneously romanticizes the infallibility of government [which ironically in other occasions he criticizes].

This further presupposes one or a combination of the following conditions: people’s incomes are owned by the government or that taxes are spent wisely and efficiently by the political institutions that produces net productivity gains for the economy or that taxes are inviolable and sacred. All of which premises are false.

These people seem to forget that it is production that creates wealth. Taxes, which finances the coercive redistributive nature of governments-taking away resources from productive Pedro and giving these to non-productive Juan-leads not to prosperity but to entitlement and dependency. And these are hardly traits of a prosperous society but one of parasitism or feudal political society. Moreover, political distribution of resources triggers envy, and animosity (since politicians can’t please everyone) than from voluntary exchange.

So this represents not only a post hoc argument, but also one that is economically derelict.

Discriminatory Tax Laws

I’d like to add these articles represent as another example of misreading symptoms for the cause.

The articles hardly delve with how the nature of domestic politics has led to the current tax regime.

One, the gist of the problem of taxes is essentially government spending: the more the government spends, the more taxes would need to be raised sometime in the future. There is no way out. Thus the solution isn’t a ‘voluntary lifestyle check’ but to cut or reduce government spending. You can’t have both. Redistribution has its limits, as currently evidenced by the ongoing debt crisis in Greece. The laws of economics or scarcity ensure this. There is no free lunch.

Next, if we take a look at the roster of Philippine elite classes, many of them appear to have achieved their privileged status from political connections as manifested by monopolies, cartels, guarantees, government contracts, and other political based concessions. This postulates that many of the present laws had been erected to ‘protect’ these politically favoured private institutions from competition.

Alternatively this implies that because of the patron client nature of our political economy then obviously arbitrary laws are likewise subject to discretionary, if not political, interpretation in the implementation of these laws. Hence, these entities can afford “to get top notch tax accountants” to negotiate and strike a deal with BIR examiners, rather than be at their “mercy”.

In other words, these laws were set up precisely for such goals—to protect the interests of the favoured political economic class via legal anti-competition roadblocks and to extract added benefits via legal loopholes...where only the politically favoured parties will benefit at the expense of society. We call this crony capitalism.

At the end of the day, it’s easy to prop up a strawman or a fall guy or to blame the dearth of virtuosity on the economic elites for present government woes.

While the economic elites may not be entirely irreproachable, as many of them have formed unholy unions with the political class and has been instrumental in the institutionalization of these partisan and discriminatory laws (as lobby groups), they are not mainly responsible for the incentives provided by these laws or regulations that serve as the backbone for the operating tax regime.

Yet playing up the rhetoric of political class wars, from these sham representation of inequality, would be a popular way to connect with people who lack the understanding of how economics work.

A timely and pertinent reminder on systematic legal plunder from abusive laws, from the great Frederic Bastiat,

“Nothing can enter the public treasury for the benefit of one citizen or one class unless other citizens and other classes have been forced to send it in. If every person draws from the treasury the amount that he has put in it, it is true that the law then plunders nobody. But this procedure does nothing for the persons who have no money. It does not promote equality of income. The law can be an instrument of equalization only as it takes from some persons and gives to other persons. When the law does this, it is an instrument of plunder.

With this in mind, examine the protective tariffs, subsidies, guaranteed profits, guaranteed jobs, relief and welfare schemes, public education, progressive taxation, free credit, and public works. You will find that they are always based on legal plunder, organized injustice.”

Inequality isn’t mainly about greed of the marketplace, instead it is about greed for the power by political personalities and their followers using the marketplace as an excuse or justification to expand or usurp power. All the rest are gullible victims of their illusory propaganda.