Abolish the personal income tax…period

DID you ever try to have a serious conversation with someone, and they gave answers that were off topic? That is what is happening in the discussion with politicians about lowering the personal income-tax rates.

The people are trying to have a discussion about income taxes based on two ideas. Why can other regional nations have lower income-tax rates, particularly on average wage earners and the Philippines cannot? Have lower tax rates over the years created an environment for greater economic growth in those countries?

The politicians are not responding to those ideas. One presidential candidate recently said something along the lines of “Yes, we can begin lowering the income-tax rate but then, where does it end?” The implication is maybe the income-tax rate would go to zero.

Perhaps, a history lesson is in order for the person who wants to be the next Philippine president. Personal income tax rates started at zero and have been going up ever since. It is the people that are saying “Where will it end?”

Here is the “strongest” politician’s argument for keeping taxes as high as the people can bear. If income-tax rates are lowered, government spending programs are going to have to be cut. The people will “suffer.” That reminds me of the child who says “If you don’t, buy me ice cream, I will hold my breath until I die and then you will be so sorry.”

Instead of working out ways to reduce the personal income-tax burden, the government response is that this is not in the best interest of the country. And of course, the politicians are smarter than the people even if they have not tried any reasonable alternatives to the current tax system.

We are told an important reason that we have higher taxes in the Philippines is because not enough people are paying their proper taxes. Yet, which candidate has ever put forth a collection system to insure that the tens of thousands of sari-sari store owners are properly taxed? Of course, doing that might be bad at election time. Saying the government will go after erring doctors and attorneys is good for getting votes even if it is easier to evade taxes at the sari-sari store.

Not wanting to tax the brainpower of the government with this matter, here is the most reasonable solution: abolish the personal income tax completely.

Before any heads start exploding, let’s look at the facts and the reality of the situation. According to the Bureau of Internal Revenue, the government took in P294 billion from personal income taxes (PIT) in 2014. The Philippine government budget for 2015 is P2.606 trillion. Therefore, even assuming that PIT would be P350 billion in 2015, PIT would account for less than 14 percent of the national budget.

We certainly do not want the next president walking the halls of Malacañang late at night trying to figure out how to cut wasteful spending from the budget by 14 percent. Where can we get the P350 billion, or $7 billion, at a 50 (just to be conservative) to 1 US dollar exchange rate?

The total domestic and foreign debt of the Philippine government is about P5 trillion, or $100 billion. Therefore, we would need to increase the total amount of debt by 7 percent to make up the P350 billion shortfall.

The government could take advantage of its credit rating and go borrow the $7 billion in the international market now at 4 percent interest rate as it did in January 2015. At that time, foreign lenders were offering to buy $13.5 billion of Philippine government 25-year bonds at 4-percent interest.

Even with this new loan, the government would still have one of the best debt-to-GDP ratios on planet Earth.

However, the annual interest payment on that loan would be approximately P15 billion. Where would that money come from?

Assuming Filipinos would spend the extra P350 billion in tax savings and not bury it in the ground, it should generate P50 billion in corporate profits, which would be taxed at 30 percent equaling P15 billion in revenue to the government to pay the debt interest payment. Further, a portion of that P350-billion spending would also be subject to the current value-added tax, generating more revenue.

The conventional argument is that lowering taxes might cause problems with the government’s balance sheet, requiring more borrowing to cover the budget deficit, thereby, limiting economic growth. But this does not apply to the Philippines, which also has one of the lowest budget deficit to GDP ratios in the world at a negative 0.6 percent. Malaysia’s is negative 3.5 percent, with Thailand at minus 2.5 percent.

Abolish the personal income tax. Borrow the money to make up the budget shortfall. Pay the new debt from increased economic activity. Let the president get a good night’s sleep while making the people and the
country richer.

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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
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source:  Business Mirror Column of John Mangun