High productivity from lower taxes

For most economists we respect, it’s what works. It is embodied in the Laffer Curve – a graphic model central to most Libertarian economics often advocated by politicians vying for a popular mandate based on change.

Anyone familiar with the centerpiece financial mod­el under Finance Secretary Carlos G. Dominguez III will readily recognize its macro­ economic foundations with regard to compelling both ag­ricultural and manufacturing productivity and inclusive eco­nomic development. Note the attendant agenda to aggres­sively spend liquidity surplus­es to eventually lower spend­ing to optimal levels, and the proposal by the Department of Budget and Management (DBM) to increase acceptable fiscal deficits. Both are part of the deal, however, consciously recognizing that lowered taxes have direct costs.

For those following the presidential elections in the United States, the same is central in the attempt by Pres­ident-elect Donald J. Trump to compel American manufac­turing back to the mainland and create enough gaps in a profit-and-loss statement to allow for greater employment, on one end, or higher per-cap­ita wages, on another. It all has to do with internal-revenue management, optimization and a healthy dose of incen­tives from generated taxes.

Reducing one of the highest income-tax rates in the world works. It is non-Keynesian and it allows for the kind of breathing space where government steps aside and provides business greater legroom even in matters where the government traditional­ly provides as Adam Smith›s iconic « invisible hand» from private enterprise surrogates where government might not.

Especially coming from one of the highest income-tax rates in Asia, and perhaps even among high-income global economies, halving the tax burden would, indeed, unbur­den the long victimized.

Allow us to first view the prospect of lowered taxation on the broad macro-economy, especially given the most ob­vious shortcomings inherited from the previous administra­tion.

First is our anemic perfor­mance compared to neighbor­ing economies in attracting high capital and labor-induc­ing foreign direct investments that would have translated our high growth GDP into one more inclusive and poverty alleviating. The largely hostile taxation regulatory environ­ment and the prevalence of high, if not predatory, taxes in the last administration led not simply to second, third and even fourth thoughts on investing in the economy, but for some manufacturing oper­ations already invested here to consider either slowing down or, in some radical cases, di­vesting.

A rationalized and effec­tively equitable tax structure comparable to most in the re­gion would attract FDIs. From this, alone several downstream benefits branch out. The low­er tax rate improves overall competitiveness and leads to long-term growth. It provides for effectively higher wages and employment. It unbur­dens the greater lower-income public from having to prop up the bureaucracy, thereby in­creasing their own standards of living and induces them to consume more for themselves, thus entering a productivity cycle where such consump­tion boosts real GDP growth.

Now allow us to view this with even more specificity.

The proposed Duterte tax-reform program under Secretary Dominguez actually contains two specific and sa­lient features that should be easy enough to understand, as far as promoting inclusive growth is concerned, differ­entiating the current taxation effort under this administra­tion against one that had led nowhere near economic in­clusivity.

The most obvious is to provide the majority of the tax-paying public greater re­lief through the rationalization of an archaic bracketing system – something that the previous administration had not only refused to consid­er, but its anointed successor had cavalierly brushed aside as an election-campaign issue, reducing what research and study behind the initiative into nothing more than gimmick­ry.

Affecting lower to medi­um wage earners, a rational­ized tax-bracket system seeks to provide greater disposable incomes that should readily translate to heightened con­sumerism, thus propelling household consumption, the latter, an integral component not only of the GDP growth formula under the expense method but also one that leads directly to inclusive de­velopment.

Note the synergisms be­tween the bracket reform initiative and the proposed 15-percent corporate-tax sys­tem. The other objective of the tax- reform agenda was to spur growth in real foreign direct investments where the previous dispensation had failed miserably, as FDI flow­ing to our economy was not even a significant percentage of the substantial amounts flowing to neighboring econ­omies, ironically with lower GDP growth rates. Deliber­ately allowing FDIs higher after-tax returns is a critical competitive incentive. Obvi­ously taxes are far more crit­ical investment catalysts than are disembodied growth sta­tistics.

As a final note, because the government is an ineffi­cient spender, its bureaucrat­ic costs often bloated and its corrupt re-channeling of pre­cious taxpayers funds to polit­ical pockets, the net benefits of a tax cut might even be great­er than we’ve imagined here. On the possibility of denying crooks money to steal, that alone makes lowering taxes an attractive proposition.