“I believe it’s because people love to be deluded. After all, it feels so warm and fuzzy compared to the harshness of reality. Just as people get the governments they deserve, they also get the charades they deserve — and want.” Robert Ringer
In this issue
Four Reasons Why R.A. 10963 or the TRAIN (Tax Reform) Legislation Will Be Derailed
-Personal Anecdotes: Price Spikes From the Tax Reform Legislation
-Debunking the DOF’s Debunking of Tax Myths
-Learning from Japan’s Catastrophic Consumption Tax Hike
-Four Reasons Why TRAIN Will Be Derailed
-Phisix: Mounting Volatility is Symptom of Speculative Excess or Instability
Four Reasons Why R.A. 10963 or the TRAIN (Tax Reform) Legislation Will Be Derailed
Myth #3: Fares and commodity prices will skyrocket because of the proposed increase in oil excise.
DOF: No, prices of basic goods and public transportation will not skyrocket. In fact, inflation will be additional 1.5% at most. Our estimate shows that food prices may increase by additional 1% in the first year of implementation while transport price may increase by additional 2%
But we are not taking chances. If Dubai crude oil price exceeds 100 USD per barrel, we will stop increasing excise tax to provide relief to everyone.
Myth #5. The tax reform bill is regressive and anti-poor.
DOF: Our proposed tax reform program is pro-poor are progressive. It simplifies the system and makes it fairer and more equitable by restructuring the personal income tax, removing unnecessary VAT exemptions and adjusting the excise tax rates on petroleum products and automobiles
In our proposal, 83% of individual taxpayers including minimum wage earners (P250k and below) will be exempted from paying income tax. The revenues generated from this reform will fund infrastructure, health, education, and social services.
Implemented together with proposed social protection mechanisms, the overall impact benefits the poor and the vulnerable sectors.
Personal Anecdotes: Price Spikes From the Tax Reform Legislation
Our neighborhood probiotic health drink Yakult sales agent told me that their selling price of a pack (5 units) would increase from Php 40 to Php 45 or by 12.5% next week.
I was startled to know that selling prices of a 1.5 liter of Coca-Cola spiked from Php 50 to Php 65 per bottle or whopping 30% increase! I also learned from my neighborhood sari-sari store that the biggest price increased were in cigarettes. Cigarette increases were imposed in December 2017.
For instance, a ream of Philip Morris, which previously sold at Php 77, had now been priced at Php 110 for a remarkable 42.8% surge!
The sari-sari store owner told me that recent price increases involved a broad range of goods, but the scales of price changes were variable. Many had incremental or modest increases. Nonetheless, the owner confided their concerns over the effects of price increases on the consumers which may affect their sales.
That should be the initial impact from the recently enacted Republic Act No. 10963 or the “Tax Reform for Acceleration and Inclusion (TRAIN)”.
Nota Bene: The above account involves one store only, which scale may or may not be representative of NCR dynamics. Although, I am quite sure this has been widespread. Why? It has been in the news!
In politics, definition matters. What goods should comprise basic goods? How would these be measured? How will prices be classified as skyrocketing?
The use of the internet for me is a basic good. But that doesn’t seem to be the case in the context of the government or for statistical collectors.
Since my values and preferences differ from the rest, how can a statistical aggregation be representative of every individual?
Nevertheless, in the BSP’s basket of consumer goods CPI, tobacco carries a .99% weight and non-alcoholic beverages 2.69%. Food items constitute the biggest weight with 36.29%.
If the price increases percolate into the Food, then the CPI will spike beyond the DoF’s estimates. The present price increases come mostly from the impact of the tax aspect alone. There is yet the BSP’s free money to the banking system to account for.
Debunking the DOF’s Debunking of Tax Myths
Allow me to skip the prices for the meantime and focus on the supposed pro-poor benefits from the exemption from paying income tax of the 83% of individual taxpayers.
Based on the BIR’s 2016 Annual Report, there had been 15,176,959 compensation income earners in 2016 which had been up 8.2% from 14,026,929 in 2015. To suppose the same rate of increase in compensation income earners in 2017, this would amount to 16,421,469.
Thus, the 83% whom would exempt from paying income taxes would total 13,629,820 people. Let us call this the “income tax stimulus”.
The general idea is here is to shift the tax burden from income to consumption.
The other implicit precept here is to generate populist approval through smoke and mirrors policies: the mirage of handing more money to the people but at the same time taxing them away through indirect means
But here is one unstated problem. The labor force is way much larger than the coverage of the BIR. According to the Philippine Statistics Authority’s “2017 Annual Labor and Employment Status” (bold mine)
The preliminary results of the Annual Labor and Employment Estimates for 2017 based on the average of the four (4) LFS rounds (January, April, July and October) reported an annual labor force participation rate of 61.2 percent out of 69.9 million population 15 years old and over. This is equivalent to about 42.8 million economically active population comprising of either employed or unemployed persons. The annual employment rate in 2017 was estimated at 94.3 percent; annual unemployment rate was 5.7 percent; and annual underemployment rate was 16.1 percent.
The total employed persons was approximately 40.3 million in 2017. Employed persons were grouped into three broad sectors, namely, agriculture, industry and services sector.
Only about FORTY percent of the labor force has bankrolled the BIR through individual income taxes. Even if we assume compensation income earners to be 100% exempted, that brings about 60% of non-income tax paying employed people. Thus, the TRAIN’s “income tax stimulus” would partially offset price increases for the 40%, but the 60% will suffer from reduced purchasing power through higher prices.
News headlines fixate on the taxpayers and nary on the consumers.
Since increased tax collections pay, not only for touted populist political programs, but also for the sustenance of the political institutions, the claim that TRAIN is “pro-poor and progressive” stands on very flimsy or tenuous ground.
Reducing the citizenry’s purchasing power to the benefit of the government hardly constitutes “pro-poor”.
The current conditional cash transfers would most possibly be insufficient to cover the spate of price increases brought about by the distortions from the tax reform. Thus, there would be populist clamors to increase such welfare redistribution.
The ramification of which would be a vicious feedback loop of prices increases, bigger welfare and higher taxes!
Moreover, such tax program strengthens the political power of the National Government as against the Local Governments. Well, action speaks louder than words. Or, the nature of tax program, being a centralized framework, hardly supports the political platform being pushed to justify a constitutional amendment: “Federalism”.
I would leave politics behind and instead focus on the economic effects of TRAIN
Learning from Japan’s Catastrophic Consumption Tax Hike
I would use Japan’s 2014’s increase in consumption/sales taxes as an example.
Part of PM Shinzo Abe’s Abenomics included increases in consumption/sales taxes from 5% to 8% in 2014, the first batch and the second batch, from 8% to 10% in October of 2015.
To save money, the Japanese consumers frontloaded demand ahead of the consumption/sales tax increase. This frantic buying ahead of price increases spiked retail sales and household spending which also boosted statistical inflation.
The imposition of the consumption tax immediately aggravated inflation. However, the ensuing collapse in retail sales and household spendingbasically counteracted the price increase!
As a result, PM Shinzo Abe deferred imposing the second batch of tax hikes to October 2019.
Abe is desperate not to introduce another drag on consumer spending as doubts rise over his economic programme – a combination of monetary easing, fiscal stimulus and structural reform known as Abenomics.
“We have no other options but to postpone the sales tax increase,” Hakubun Shimomura, an Abe aide, said in a TV interview. “If the increase means a decline in tax revenue for the government, that would threaten our ability to achieve the goals of Abenomics.”
The above provides us a blueprint of what could happen.
Four Reasons Why TRAIN Will Be Derailed
Let me cite reasons why Duterte’s TRAIN will derail.
First, the government thinks in the context of statistics. The new tax regime has been calculated based on such static figures. Numbers are just substituted or replaced in the assumption that markets will operate under the same setting but with a new tax regime in place.
As Professor Donald J. Boudreaux explained*
Economics shows that higher excise taxes will practically always yield less revenue than the revenue figures you get by merely multiplying the dollar value of the taxes by the quantity of the good or service regularly bought and sold before the taxes are implemented or raised. Economics also shows that the price of the taxed good or service will indeed rise because of the tax, but practically never by the full amount of the tax
Second, fundamental economic laws are given little importance. The government seems to have ignored the pricing system’s sine qua nonfunction as coordinating mechanism of economic allocation in the marketplace.
For instance, the view is that price increases will readily be offset by ‘economic growth’. Hence, prices changes from the new tax regime will have neutral effects on consumers.
For them, statistical G-R-O-W-T-H would dominate the ‘law of demand’!
That is to say, people’s preferences, value scale and economic calculation won’t impact prices.
Third, there seems to be sparse understanding of the changing profile of the Philippine economy.
The current economic backdrop has been pillared by credit growth rather than by productivity growth
The incumbent easy money policy regime has worked wonderfully as an invisible transfer mechanism to the National Government (NG) and to politically favored groups. But easy money’s sweet spot in 2013 and 2014 has long been gone.
Even under the current record emergency policies of BSP’s subsidies to the NG and record low-interest rates, the task of achieving significant negative real rates appears to be elusive.
Last year, negative real rates had been a specter of its 2013 and 2014 appearance. (upper window)
Even more, the evolution of the economic structure has been profound. Increasing amounts of resources have been channeled into the consumer market even as the consumer’s role has been diminishing. The retail and real estate industry continues to expand at a rapid pace to acquire a significant share of the GDP pie. On the other hand, consumer share of the GDP continues to fall. (middle window)
The contrasting directions of economic activities highlight the intensifying risks of concentration, and most importantly, overcapacity issues
Consumption taxes, which penalize consumption, will likely aggravate the current conditions.
That’s not all. The BIR’s tax collection has increasingly become dependent on BSP’s policies. Changes in credit growth have dovetailed with changes in government tax revenues. (lower window) Or, credit growth has driven the BIR’s tax revenues.
This fragile relationship could likely be the unstated principal reason behind the TRAIN: To shift credit-based economic dependence away from the private sector into the government.
Haven’t you been noticing? The National Government has rapidly been expanding its presence in the economy.
This week public school teachers were the receiving end of the President Duterte generosity. Public school teachers had been promised of substantial increases in wages. Considering the institution of the free college education, increased demand for free lunches would entail massive additions to public school teachers.
This week the DICT also announced that it is targeting to install 250,000 WIFI spots in the public by 2022.
There will be massive costs for all these free lunches.
The NG’s spending binge has brought upon thundering twin deficits: 11-month fiscal deficit and trade deficit. The latter, having been a result of stagnant export growth (1.6%) in the phase of booming import growth (18.5%), partly from the build, build and build.
Fourth, the tax reform legislation operates on the supply side premise of having to tax consumption only; thereby the massive increases in excise taxes (auto, oil, energy and extractive minerals, sugar-sweetened beverages), reduction in the exemptions in the coverage of expanded VAT and the income tax cuts and exemptions.
There seems to be scant understanding of how such policies would spawn material distortions and dislocations in the economic system
The great dean of Austrian school of economics Murray N. Rothbard** elaborated, (italics original, bold mine)
A partial excise, on the other hand, penalizes certain lines of production. 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.
Everyone in the market suffers as a result of an excise tax. Nonspecific factors must shift to fields of lower income; since the discounted marginal value product is lower there, specific factors are hit particularly hard, and consumers suffer as the allocations of factors and the price structure are distorted in comparison with what would have satisfied their desires. The supply of factors in the taxed industries becomes excessively low, and the selling price in these industries too high; while the supply of factors in other industries becomes excessively large, and their product prices too low.
In addition to those specific effects, the excise tax also has the same general effect as all other taxes, viz., that the pattern of market demands is distorted from private to government or government-subsidized wants by the amount of the tax intake…
In sum, an excise tax (a) injures consumers in the same way that all taxes do, by shifting resources and demands from private consumers to the State; and (b) injures consumers and producers in its own particular way by distorting market allocations, prices, and factor revenues; but (c) cannot be considered a tax on consumption in the sense that the tax is shifted to consumers. The excise tax is also a tax on incomes, except that in this case the effect is not general because the impact falls most heavily on the factors specific to the taxed industry.
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
Applied to the current setting, the excise tax on oil and energy will likely increase business operating costs. With little room for a pass-through to the consuming public, profits will shrink thus, reducing output. The diminishment in output will lead to increases in prices if demand remains constant. However, if demand falls, prices will likewise follow.
The substantial increases in excise taxes on oil and energy will also affect consumption significantly. While the income tax stimulus will ease part of the burden of the taxpaying minority, in general, the reduction of purchasing power will translate to diminished disposable incomes. With spending power atrophied, the race to build supply industries catering to consumption spending is bound to get hit.
The tax regime provides an interesting feature. Since excise taxes will drive out the marginal players from the affected industries, such tax regime would virtually entrench existing players. The other way to say this is that the tax reform legislation serves as a protective moat for the big players against the competition.
My bet is that the smoke-mirror policies will barely work. Duterte’s TRAIN will be derailed.
And if I am right, where the NG miscalculates from its overestimations, the peso will suffer a meltdown. Aside from debt, devaluation will be used to finance the propensity to overspend.
And in a not so distant future, taxes will rise even more. Perhaps, exemptions in personal income tax will be reversed or reinstituted.
After all, there is no such thing as a free lunch.
Use periods of the US Dollar-Philippine peso (USD-Php) weakness to accumulate.
Phisix: Mounting Volatility is Symptom of Speculative Excess or Instability
A short note on the Phisix
While global stocks have run amuck, the Phisix has been partying wildly with them.
The difference between global stocks and the Phisix have been on how prices are determined.
For the week the PSEi was up by 44.62 points or by .51%. On the other hand, the end session pumps accounted for 75.98 points or .86% which means the entire gains of the week had been derived from marking the close!
The degree of end session price fixing has become more blatant as time goes by.
On Thursday, when the Phisix was down by about 1.8%, GTCAP was stunningly pumped by a staggering 4.99% in the market intervention interval phase! Helped by pumps on the majors as SM, AC, BPI and JGS to suddenly pare down the deficit to 1.2%! GTCAP closed the week up 4.6%, mainly from the Thursday’s push.
Remember, what can’t be priced in the regular session is being forced on the close. That’s not how markets are supposed to work.
Furthermore, price volatility has only been intensifying. We are not talking about 2 to 4% price movements. The biggest gainers for the week had gains ABOVE 5%! In particular, LTG +12.46%, Puregold +8.08%, Robinsons Retail +6.27% and San Miguel +7.5%! The banks which drove the index higher were eclipsed: SECB +3.82% BDO +3.06% BPI +2.64% and MBT +2.72%. The average gain of the 30 issues was at .96%!
The buildup of volatility can’t be seen as a sign of a healthy uptrend but one of speculative excess.
Here’s another tip: With gold prices surging past $1,320, depressed domestic mines could be ripe for the picking. Old entrenched mines should benefit from the Tax reform moat. Buy the gold mines!
