HB 10963 TRAIN’s Initial Victim: Coca-Cola Will Be Laying Off Workers! The Back Shifting Effect of Excise Taxes Validated!

IN mid-January, I enumerated reasons why HB 10963 (Tax Reform for Acceleration and Inclusion Act) will fail. [See Four Reasons Why R.A. 10963 or the TRAIN (Tax Reform) Legislation Will Be Derailed January 15, 2018]

I wrote that since the government thinks in the context of statistics, it disregards the fundamental economic laws. I also noted since the tax reform operates on the supply side premise of having to tax consumption only, the government has scant understanding of how such policies would spawn material distortions and dislocations in the economic system

Coca-Cola’s predicament is a testament to these.

Coca-Cola Femsa Philippines Inc announced it would scale down on workers amid changes in the beverage industry and the business environment, calling it a “very difficult decision.” The decision emerged “after a careful assessment of various factors, such as operational efficiency, and the evolving regulatory environment” The estimated number of affected employees would be around 600, according to the Inquirer. [Inquirer.net Coca-Cola PH laying off workers February 6, 2018] (bold added)

The official statement was “In light of recent developments within the beverage industry and in the business landscape as a whole, the Coca-Cola System is undergoing an organizational structure assessment. This involved a comprehensive review of the roles and responsibilities within Coca-Cola FEMSA.” Furthermore, “This restructuring has been a very difficult decision. It was carried out only after an exhaustive and conscientiousassessment of the evolving regulatory environment, our operational efficiency, and consequent performance in the market.”

The Inquirer noted that the company “deferred from expounding beyond what the statement said”.

As an aside, this statement is proof of the political correctness of bubbles (credit bubble that has fostered a government bubble). To avoid from being excoriated or mob lynched or politically harassed or ostracized, evading the truth is the du jour comportment!

Back to Coca-Cola

Since the Train law imposes a P6/liter tax on beverages using caloric and noncaloric sweeteners and P12/liter on beverages using high fructose corn syrup (HFCS), industry sources previously told the Inquirer that this would hamper demand, especially since consumers would be shouldering the added cost.

The company had earlier announced of plans to invest around close to $1 billion in the country up to 2022. However, in an interview last year with Juan Lorenzo Tañada, company director for legal and corporate affairs, “a decrease in consumption rates would push the company toreevaluate its plan to have an additional investment in the country, warning that this was what any other business would do”.

To the mainstream, market prices have little relevance to the economy. That is, with the exception of real estate and the stock market. For them, tax hikes on consumption would simply be compensated by statistical GDP (whatever that means).

Coca-Cola’s dilemma validates the back-shifting effects of the excise tax. The great dean of the Austrian School of Economics, Murray N. Rothbard, I quote anew

[Murray N Rothbard, B. Partial Excise Taxes: Other Production Taxes, 4. Binary Intervention: Taxation > 3. The Incidence and Effects of Taxation Part...Power and Market: Government and the Economy Mises.org]

The general sales tax, of course, distorts market allocations insofar as government expenditures from the proceeds differ in structure from private demands in the absence of the tax. The excise tax has this effect, too, and, in addition, penalizes the particular industry taxed. The tax cannot be shifted forward, but tends to be shifted backward to the factors working in the industry. Now, however, the tax exerts pressure on nonspecific factors and entrepreneurs to leave the taxed industry and enter other, non-taxed industries. During the transition period, the tax may well be added to cost. As the price, however, cannot be directly increased, the marginal firms in this industry will be driven out of business and will seek better opportunities elsewhere. The exodus of nonspecific factors, and perhaps firms, from the taxed industry reduces the stock of the good that will be produced. This reduction in stock, or supply, will raise the market price of the good, given the consumers’ demand schedule. Thus, there is a sort of “indirect shifting” in the sense that the price of the good to consumers will ultimately increase. However, as we have stated, it is not appropriate to call this “shifting,” a term better reserved for an effortless, direct passing on of a tax in the price.

Since the consumer’s purchasing power is limited, Coca-Cola can hardly afford a price pass through. Hence, the primary effect of the excise tax is to raise the firm’s cost of production, thereby squeezing its profits.

The ramification of the excise tax on Coca-Cola is to force the streamlining of the company’s production structure, part of which is to cut down on their workforce, as well as, to “reevaluate its plan to have an additional investment”. Such measures effectively “reduce the stock of the good that will be produced”. Consequently, “the reduction in stock, or supply, will raise the market price”, “given the consumers’ demand schedule”.  That is to say, distortions from excise taxes are bound to spread.

If political circumstances compelled Coca-Cola to make a “very difficult decision”, how much more would such taxes affect the marginal firms or firms with lesser operational efficiencies in the industry? Will the marginal firms not be driven out of the business? And how will this impact the industry’s upstream and downstream supply chains? Would the natural course of action be an investment slowdown, as the Coca-Cola officialwarned, “this was what any other business would do”?

So Coca-Cola validates the back-shifting penalty theory from excise taxes.

That is not all.

Unless the laid-off workers find immediate replacements, there would be less consumption from them. Moreover, with higher prices in the economy*, the consumer’s purchasing power will diminish. So consumer will be faced with a perfect storm, lesser income**, and diminished consumption!

So the excise tax would be a double whammy: it will reduce investments and consumption.

When you tax something you get less of it.

Now some questions:

If investments and consumption decline, who will use the roads and the other forms of infrastructure that the government will build?

And with insufficient taxes, just how will these massive government expenditures (not limited to infrastructure) be funded? Will it be through debt or through inflation?

Grinding from higher prices, will there be enough spending power for consumers to satisfy the race the to-build supply of retail outlets, shopping malls, real estate projects and hotels?

Remember, the new economic paradigm: BYE BYE CONSUMERS, HELLO BIG GOVERNMENT! 

 

*The BSP reported January CPI at 4% which it attributed to the TRAIN:

Year-on-Year headline inflation increased to 4.0 percent in January from 3.3 percent in December. The higher inflation outturn was at thehigh end of the Government’s target range of 3.0 percent ± 1.0 percentage point for 2018. Likewise, core inflation—which excludes certain volatile food and energy items as a means to depict underlying price pressures—rose to 3.9 percent from 3.0 percent in the previous month. Month-on-month seasonally-adjusted headline inflation also increased to 0.7 percent in January from 0.3 percent in December.

The uptick in headline inflation for January was traced mainly to higher prices of food and non-alcoholic beverages, alcoholic beverages and tobacco items, and domestic petroleum products. Food inflation went up as most food commodities, particularly corn, meat, and milk, cheese, and eggs, posted higher prices during the month. Meanwhile, weather-related production disruptions pushed up prices of rice, fish, and vegetables in many regions. Similarly, non-alcoholic beverages and alcoholic beverages and tobacco inflation rose as a result of the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law. At the same time, transport inflation also increased due to adjustments in gasoline and diesel prices, largely influenced by higher international prices of crude oil and the excise tax on petroleum as prescribed by the TRAIN Law.

These numbers looked understated.

**More interesting data.

The Philippine Statistics Authority reported that “The national median monthly basic pay for 2016 was posted at P12,013, an increase of P257 (2.2%) from P11,756 in 2014”.

Since the annual CPI rates from 2014-2016 were at 4.1%, 1.4% and 1.8%, from the basic pay perspective, workers suffered NEGATIVE growth in real wages!  

Wow! If the PSA’s number is right then the race to build supply has been operating on negative wage growth! Why wouldn’t there be serious overcapacity issues?

Chart of the Day: Americans will Spend More on Taxes in 2016 than on Food, Clothing and Housing Combined!

From Tax Foundation's "Tax Freedom Day 2016 is April 24"

Infographics: Taxes Around the World

(hat tip zero hedge)

Source: Online-Accounting-Degrees.net

Possibly one of the reasons for rising food prices in the world can be also be traced to Denmark's bizarre "Cow flatulence tax". 

Anyway, global tax on wages reportedly rose in 2013. The Reuters says that total world taxes on wages rose to 35.9% in 2013 from 35.7% a year earlier based on OECD data. 

You can see the graphic on tax wedge and unemployment rate of the OECD countries by clicking on the link here.

How Tax Distortions Contribute to the Boom Bust Cycles

I recently posted about the glaring disconnect between stock market pricing and earnings expectations in the US. 

Aside from the US Federal Reserve’s easing policies and from the implicit guarantees also from the same agency, there is another very significant factor that adds to the serial blowing of asset bubbles: massive distortions from a tax regime which promotes share buybacks financed by leverage.

Philip Coggan under the pen name Buttonwood at the Economist articulates Apple as an example

WHAT a crazy world. Apple, a company with $145 billion of cash, is issuing some $17 billion of debt to buy back its own shares. Why doesn't it just use its cash to do the same thing? First, because a lot of that cash is overseas, and bringing it back to America would incur a tax charge. Second, because interest rates are low and debt interest is tax-deductible, making this look a great arbitrage.

But think of it from the point of view of the hard-working American taxpayer. Apple's money will still sit overseas and not be invested at home to create jobs. Apple's tax bill will fall, as it offsets the interest payments against its profits. The buy-back will probably push up the share price in the short term*, boosting the value of executive options; profits from those options will probably be taxed at the long-term capital gains tax rate of 15%, lower than the rate many workers pay. Organising a bond issue, rather than using a company's own cash, incurs costs in the form of fees to bankers on Wall Street; the same bankers taxpayers helped support five years ago

In short, the incumbent complex tax structure basically rewards debt accumulation and the principal-agent problem.

The latter or conflict of interest dilemma means that the same tax policies induces a fissure between the economic interests of the shareholders and of the option holders, held mostly by corporate officers.  Such has mostly been channeled through the tilting of the balance of incentives that encourages short term outlook and actions at the expense of the long term.

Buybacks and dividend issuance has accounted for a substantial share of the gains in the S&P.

Dr. Ed Yardeni notes that both has totaled “$2.1 trillion for the S&P 500 since stock prices bottomed during Q1-2009 through Q4-2012--has been driving the bull market since it began”.

Yet the distortions from tax incentives that promotes debt funded buybacks has not only been a bane via a conflict interest in corporate relationships particularly between between shareholders and corporate managers, but has also been materially affecting the real economy through the diversion of resources to speculation rather than to investments.

Notes analyst Martin Spring in his latest outlook (no link)

One reason why prices continue to rise despite sluggish growth in corporate profits is the contractionary impact on supply from share buybacks, which are rising towards to levels last seen in 2007.

“The motivation,” reports CLSA Asia-Pacific’s Christopher Wood, “appears to be primarily to boost earnings per share – a formula on which so many corporate executives’ remuneration is based.”

He adds: “The pick-up in commercial and industrial lending in America over the past two years has been primarily driven by the desire to finance financial engineering exercises such as share buybacks, rather than to fund new investment.”

Essentially, the money bubble is being used primarily for speculation rather than stimulating economic activity, its supposed intention.

Government policies whether via taxes or central bank policies or administrative policies (e.g. homeownership) have all been synched or engineered to promote leveraging and debt accumulation.  

Debt is the essence of the paper money system.

Since the world’s monetary system shifted away from the gold standard, debt has increasingly been a tool to promote statistical “growth”.

Thus the increasing recourse to debt also means the increasing frequency of financial-banking crises.

Going back on how tax distortions promote systemic fragility, again Mr. Coggan

In short, the whole deal is linked to tax distortions; the treatment of repatriated cash, debt versus equity and capital gains versus income. The ideal tax system, as we have argued many times, is neutral between sources of income. The tax deductibility of interest played its part in creating this mess, both in the corporate and mortgage markets. Why should the taxpayer want to encourage higher leverage, when high leverage is the root of financial crises?

Well, the answer to that is that debt or leverage mainly works to the interest of the banking-welfare warfare state-central banking cartel, who use debt to finance their intertwined interests. The incumbent political architecture in turn gives voters and taxpayers access to debt, via the above policies. Thus, the boom bust cycles.

That which is unsustainable, won’t last.

Video: Halloween Day Tax Lesson

Comedian Tim Slagle shows how to teach taxes to kids using the Halloween Day celebrations (hat tip Professor David Henderson)

Video: Why Tax Increases Are Wrong (and Immoral)

Here is an eloquent video from Center for Freedom and Prosperity which shows why tax increases are baneful to an economy.

Note: these has universal application which means that the enumerated factors applies to the Philippines as well. (hat tip Dan Mitchell)


To add, taxation isn't just harmful, they are essentially immoral.

Ludwig von Mises (Human Action): [emphasis added]

It is important to remember that government interference always means either violent action or the threat of such action. The funds that a government spends for whatever purposes are levied by taxation. And taxes are paid because the taxpayers are afraid of offering resistance to the tax gatherers. They know that any disobedience or resistance is hopeless. As long as this is the state of affairs, the government is able to collect the money that it wants to spend. Government is in the last resort the employment of armed men, of policemen, gendarmes, soldiers, prison guards, and hangmen. The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. Those who are asking for more government interference are asking ultimately for more compulsion and less freedom.

To draw attention to this fact does not imply any reflection upon government activities. In stark reality, peaceful social cooperation is impossible if no provision is made for violent prevention and suppression of antisocial action on the part of refractory individuals and groups of individuals. One must take exception to the often-repeated phrase that government is an evil, although a necessary and indispensable evil. What is required for the attainment of an end is a means, the cost to be expended for its successful realization. It is an arbitrary value judgment to describe it as an evil in the moral connotation of the term. However, in face of the modern tendencies toward a deification of government and state, it is good to remind ourselves that the old Romans were more realistic in symbolizing the state by a bundle of rods with an ax in the middle than are our contemporaries in ascribing to the state all the attributes of God.

Murray N. Rothbard (Tax Day):

The first great lesson to learn about taxation is that taxation is simply robbery. No more and no less. For what is "robbery"? Robbery is the taking of a man’s property by the use of violence or the threat thereof, and therefore without the victim’s consent. And yet what else is taxation?

Those who claim that taxation is, in some mystical sense, really "voluntary" should then have no qualms about getting rid of that vital feature of the law which says that failure to pay one’s taxes is criminal and subject to appropriate penalty. But does anyone seriously believe that if the payment of taxation were really made voluntary, say in the sense of contributing to the American Cancer Society, that any appreciable revenue would find itself into the coffers of government? Then why don’t we try it as an experiment for a few years, or a few decades, and find out?

But if taxation is robbery, then it follows as the night the day that those people who engage in, and live off, robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.

Cartoon of the Day: Tax on Education

The following enlightening caricature from Heritage Foundation underscores how taxes impact the cost of education.

I just hope that there would be a Philippine version for this.

How Americans Voted With Their Feet From The Recent Recession

Here is an interesting graphic about the recent population mobility trends in the US, following the recent crisis or an illustration of how people reacted to the recession by voting with their feet.

personal finance – Mint.com (for a crisper view click here to mint.com)

From mint.com, ``In times of plenty, relocating for work usually means a better job or a higher standard of living. But in today’s tough economy, many are finding that they just can’t find work or maintain their standard of living where they currently live. It’s especially bad in New York and California, two places where the economy is suffering and the cost of living remains high. Many of these financial refugees are ending up in Texas, a place where the cost of living is low. And many of those that are relocating are in the very lowest income bracket, a further indication that money is their motivation for moving." [emphasis added]

The Wall Street Journal has a better perspective:

``But first the biggest loser, which was Michigan for the fourth year in a row. More than two families left the state for every family that moved in. The fall of GM and Chrysler has obviously hurt. But two-term Governor Jennifer Granholm has also made her state the test case for the policy mix of raising taxes on higher incomes, increasing regulation, and steering taxpayer money at favored programs like job retraining and renewable energy. It hasn't worked for Michigan, even with the auto bailouts.

``Ms. Granholm continues to be a regular economic policy adviser to the White House. Yikes.

``The next two biggest net losers were Illinois and New Jersey, while California and New York also continued to have far more departures than arrivals.

``Ten states gained net arrivals: Oregon, Arkansas, Nevada, Wyoming, Idaho, Colorado, Georgia, New Mexico, Texas and North Carolina. Of those, only Oregon sways decidedly to the political left and it has benefited from the economic refugees fleeing California.

``Six of the eight states with no income tax were magnets for families, while eight of the 10 highest income tax states had more people packing. Democrats in state capitals and Washington have convinced themselves that "soak the rich" tax policies can help balance budgets, but the main effect seems to be to stimulate bon voyage parties.[unintended consequences of taxation-Benson]

``As for the biggest winner, well, our readers won't be surprised to learn that it was Washington, D.C. by a large margin. United Van Lines moved nearly seven families to the federal city last year for every three it moved out. As always when the feds gear up the income redistribution machine, the imperial city and its denizens get a big cut of the action.

``As in ancient Rome, the provinces are being required to send tribute to subsidize those living in the capital, which produces few services save transfer payments. No wonder the provincials are starting to rebel—even in Massachusetts."

My comment:

-Low taxes benefits from migration inflows
-High taxes suffers from population loss
-like maggots, political lobbyists, fast expanding government bureaucracy, and other political entities throng to the center where political favors are dispensed.