Asia taxation and state coercion

* This is my article in BusinessWorld on July 18, 2017.

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“I hope we once again have reminded people that man is not free unless government is limited. There’s a clear cause and effect here that is as neat and predictable as a law of physics: as government expands, liberty contracts.”

— Ronald Reagan, former US President

Perhaps the first intellectual in China and the world who championed individual liberty was Lao Tzu (600 BC). He was born more than 2,000 years before Adam Smith wrote and called for a “simple system of natural liberty.” Here, Lao Tzu wrote referring to government:

The more restrictions and limitations there are, the more impoverished men will be…

The more rules and precepts are enforced, the more bandits and crooks will be produced. Hence, we have the words of the wise (the sage or ruler):

Through my non-action, men are spontaneously transformed.

Through my quiescence, men spontaneously become tranquil.

Through my noninterference, men spontaneously increase their wealth.

The “restrictions and limitations” that Lao Tzu mentioned are now what we call regulations, permits, licenses and taxes. The “bandits and crooks” that he mentioned are now the various officials and bureaucrats in government, elected or appointed. While the “noninterference” that he mentioned refers to a minimal and limited government that intervenes and taxes the least.

And talking about taxes, especially Dutertenomics’ TRAIN, the numbers below should be a good reminder that it is largely a train for more government coercion and interventions.

A short definition of these concepts: (a) Total taxes (TT) are the sum of corporate income tax + labor taxes + other taxes; (b) Total tax rate (TTR) = TT/private enterprises’ net and taxable income, in percent (see table).

Total tax rates in East Asia, % of commercial profits

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Source: Price Waterhouse Coopers (PWC), Paying Taxes  annual reports 2009, 2012, 2015, 2017.

Based on these numbers, we both have good and bad news.

The good news is that the Philippines has a declining TTR, from almost 51% in the 2009 PWC report to nearly 43% in the 2017 report. Other economies with declining TTR are Brunei, Singapore, Laos, Indonesia, Myanmar, Taiwan and Japan. Only Malaysia has a deteriorating or rising TTR.

The bad news is that the Philippines has the highest TTR in the 10-country ASEAN, higher than socialist Vietnam, also higher than developed Hong Kong, South Korea, and Taiwan. Only welfarist Japan and socialist China have TTRs higher than the Philippines.

These are the more controversial aspects of Dutertenomics’ TRAIN — (a) hike in excise tax for oil products and new cars, (b) introduction of additional tax on sugar-sweetened beverages, and (c) expansion of VAT coverage to more sectors including business process outsourcing (BPO).

To help dispel the ugly label of “Philippines having the highest TTR in the ASEAN and other East Asian economies,” tax proposals (a) and (b) should have been abandoned, and 12% VAT (highest in the ASEAN) should be reduced to only 6%, probably even 8% and cover more sectors including BPO. The main reason why many sectors lobbied for exemption from VAT is because 12% is high.

To help fund Dutertenomics’ build-build-build plan without those new taxes and tax hikes, the government should cut spending on some agencies and bureaucracies whose welfarist goals and mandates overlap with other agencies. Then rechannel the savings to more infrastructure spending. But this is now wishful thinking as the TRAIN is on a fast track of legislative wreckage.

The issue of more state coercion and taxation will be tackled in the inaugural “Philippine Students for Liberty Conference” this coming July 21-22, 2017 at the Hive Hotel in Quezon City. The event sponsor is the Students for Liberty Philippines (SFL-PH) and the theme will be “live freely, live fully.”

SFL-PH President Joseph T. Bautista has invited me to be one of the speakers on Day 2 of the event and I gladly accepted the honor. SFL CEO Wolf von Laer will give the keynote address. Other speakers will be Thomas Laughlin, CEO of Amagi; Luis Sia, president of UpStart; Shahab Shabibi, CEO of World by Machine Ventures; Mahar Mangahas, president of Social Weather Stations (SWS); Imantaka Nugraha of SFL-Indonesia, and Markus Löning of Friedrich Naumann Foundation for Freedom (FNF).

I will talk about state coercion and legislations in the energy sector, infrastructure, and fiscal policies during the SFL conference.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a SEANET Fellow. Both are members of Economic Freedom Network (EFN) Asia.

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PPP vs. ODA, Part 3

* This is my article in BusinessWorld on June 30, 2017.

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This is a continuation of two earlier pieces I wrote about that compared two funding schemes of government infrastructure projects in the Philippines — through public-private partnership and official development assistance.

In this vein, I wish to correct the numbers I previously cited in my second piece, entitled “PPP vs. ODA: Part 2.” I wrote that “Vaughn Montes cited the big contrast between ODA-funded SCTEx and the PPP-funded TPLEx. SCTEx… cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.”

Recently, Dr. Bong Montes sent me his presentation during a Management Association of the Philippines (MAP) meeting. The correct numbers about SCTEx are: Cost overruns are from P18.7B to P32.8B; Cost per kilometer is P349M vs. TPLEx P274M. Thanks for this, Bong.

The same presentation indicated a summary of the delineation of risks and values between Public Private Partnership (PPP) funding and government funding (see Table 1).

The main beef of PPP project funding therefore is the transfer of significant risks to the private sector. The shared risks for both private and government are bankability and force majeure.

The “hybrid PPP” plan of Dutertenomics is to award the construction of many big infrastructure projects via foreign aid or Official Development Assistance (ODA) mostly from China, or the annual General Appropriations Act (GAA), then invite local private operators later for the operation and maintenance (O&M).

This plan will invite big current and future controversies for the following reasons.

One, private O&M operators will not take over a facility that they did not design and construct without prior intensive due diligence. If project quality is poor and thus O&M will be high, then bidders will demand high prices for the O&M. The government-contracted construction company (from China) may have undercut the design and quality to maximize profit and potential kickbacks and leave the headache of high maintenance costs to the separate O&M operator/s.

The most optimal scheme is a straight, integrated PPP funding from design and construction to O&M. The private party mobilizes its internal financial muscle and borrows to fund capex, and make sure that construction is of high quality so that O&M will be lower. As a result, the public and the taxpayers benefit, which also means a lower tax burden to pay for the project cost. Moreover, frequent users of the facility will pay every time they use it and taxpayers from far away provinces and regions who seldom or do not even benefit from it will not be burdened.

Two, Dutertenomics’ sudden pivot to China ODA is highly anomalous because China is not exactly a good source of foreign aid even in the recent past. Its share in total ODA in 2014 and 2015 (latest data available from NEDA) is miniscule, only $123M out of total $30.08 billion (see Table 2).

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Only ODA with at least $70M in two years are included here. Other sources of ODA at smaller amount are Austria, Spain, Norway, New Zealand.

Three, PPP projects are generally the fastest way to do things compared to ODA funding, especially China ODA. Project development to groundbreaking takes 27 months through the PPP, 37 months through Korean ODA, 38 months through Japanese government funding, and 40 months on Chinese aid.

The most famous tollway in the Philippines, the North Luzon Expressway (NLEx) was built via World Bank ODA in the 1970s. O&M is private, currently the Manila North Tollways Corp. (MNTC). The independent design checker and certification engineer on its rehabilitation is Norconsult Philippines, probably the first Norwegian company to do business in the country since the ’70s. NLEx toll fee of around P2.50/kilometer from Sta. Ines to Balintawak is the lowest among the many tollways in the country.

State central planning vs Household decentralized planning

* This is my article in BusinessWorld last week.

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“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design… Planning leads to dictatorship because dictatorship is the most effective instrument of coercion and the enforcement of ideals and, as such, essential if central planning on a large scale is to be possible.”— Friedrich Hayek

The bigger the socioeconomic unit like a state, the less central planning should be. And the smaller the socioeconomic unit like a household, the bigger the planning should be. The family is a good example of this. Parents take care of their children until they grow up. Once the kids feel they are independent enough, they move out of the house. And moving out is an expression or an attempt at independence of the kids from the nitty-gritty of support and intervention by the parents or guardians.

In contrast, in many countries including the Philippines, as the population expands and as the needs and aspirations of the growing population further diversifies, the state bureaucratizes further and regulates and imposes more taxes. Meaningful decentralization and federalism is muted by high taxes and regulations from the central or federal government so that the states, provinces, and cities are left with little leeway for tax adjustments and regulations.

2017061563250The current tax reform program of Dutertenomics known as TRAIN (Tax Reform for Acceleration and Inclusion) is generally based on envy. While its income tax cut for the low income earners is good and commendable, its tax hike for upper middle class and the rich is not. And the government will hike the taxes of many other products and services including those consumed by the poor and lower middle class — cars, petroleum products, sugar-sweetened beverages, more services that will be covered by VAT.

This government therefore, its politicians and bureaucracies, feel that they have more entitlement to the income and wealth of the upper middle class and the rich. The implicit message is that if people aspire to become upper middle class and rich, the state will go after them, demonize them if they resist paying more taxes. And this is where the advice of Friedrich Hayek above becomes appropriate.

During the BusinessWorld Economic Forum last May 19, 2017 at Shangri-La at the Fort, one of the impressive speakers in the afternoon session was Ms. Vicky Abad of Kantar. She discussed what are the income ranges of upper and lower middle class households and their aspirations. Below is the income class differentiation she made. ONCR means Outside of the National Capital Region (NCR) or Metro Manila (See table).

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Three things are worthy of note in Ms. Abad’s presentation.

One, middle class households in C1, C2, and D classes comprise some 72% of the population or nearly three out of four households. Those in D should include previously bicycles- or jeep-riding people who now drive motorcycles or second, third-hand cars.

Two, while middle income class C1 and C2 are big consumers of fast-moving consumer goods (FMCG) or consumer packaged goods, the class D households drive about 62% of the FMCG market in value contribution.

Three, the key, constant driver of middle class aspirations is being able to provide for the needs of family. Family basic needs, health, and savings are the top three concerns. Followed by friends/bayanihan, car and house, value of work, and social status/rewards like travel.

Many of these things are not sufficiently provided by the government. There is public education, yes, but many middle class including government officials and personnel bring their kids to private schools and universities. There is public health but these people go to private hospitals and clinics when they are unwell. There is public peace and order by the police but these people employ lots of private security agencies to secure their villages, schools, shops, banks, buildings. There is public welfare department but many people still dig deep into their pockets and savings to help their fellow Filipinos struck by severe natural calamities.

With this wide gap between government taxation and low quality of public services, and the rising aspirations of the people, government central planning should decline, and households should be given more leeway, more take home pay via deep income tax cut across the board. Household planning should prevail over state central planning.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a SEANET Fellow. Both are members of Economic Freedom Network (EFN) Asia.

Asia stockmarkets the past year

Stockmarkets, one year. PH, ID, TH and MY, respectively. Is PDu30 inspiring to business or not? Data from http://markets.wsj.com/asia

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CN’s Shanghai, Shenzhen, HK, TW, respectively. Stocks sentiment in PH seems similar with CN. Could be one reason why Du30 loves

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SG, JP, KR and IN, respectively. In these 11 economies, PH and CN are the laggards for the past 12 months.

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Investors see political and business instability in both CN and PH. Instability in the leadership of Xi and Du30, distrust in the lack of rule of law in these two countries.

Sugar tax and nanny state

Why the DOF’s sugar tax bill in Congress is lousy.

  1. The state is further addicted to tax-tax-tax mentality and policy.
  2. This 2-tier taxation (higher tax for imported sugar) is anti-WTO rules, DFA is correct.
  3. State nannyism (‘protect public health’ alibi) is fuelling more state interventionism. Tax alcohol, tobacco, soft drinks, juices. Soon it will tax litson baboy, litson manok.

See this report from BusinessWorld last week.

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That the state has hiked the tax on alcohol and tobacco products is generally accepted by the public. But taxing further soft drinks, powdered juice drinks, etc. is OA state nannyism. People own their body, not the state and politicians, not the health NGOs, etc. Simple joys by the poor like drinking powdered juice, the state will make these products become more expensive, and certain sectors like health NGOs, medical groups are clapping partly because they will get more tax money.

Earlier, a lady Senator wanted to file a bill banning unlimited rice (“unli-rice”) in restaurants. The usual alibi is “public health concern.” Trying-hard state nannyism, those politicians and state bureaucrats think they are so bright they can plan other people’s lives. Next they will penalize climbing trees and climbing roofs because they might fall and it’s bad for their health and it’s bad for public health budget.

The silent motive here is that Dutertenomics will need lots of tax-tax-tax because it will go into endless borrow-borrow-borrow from China. Improving public infra is good and there are many big private companies, local and foreign, willing to bankroll many infra projects, but this administration intends to please China — the communist dictatorial government, its banks and contractors.

PPP vs ODA, Part 2

* This is my article in BusinessWorld last week.

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“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
— Thomas Sowell (US economist and political philosopher)

This paper is a continuation of the same topic in this column last June 8. To summarize previous arguments:

  1. User-pay principle via public-private partnership (PPP) means only those whose the service or facility will pay for its construction and maintenance. As a result, the rest of the population in other parts of the country will be spared of such cost.
  1. All-taxpayers-pay principle means projects are paid by current taxpayers through the annual general appropriations act (GAA) or by future taxpayers through official development assistance (ODA). Taxpayers from Visayas and Mindanao will also pay for toll roads, dams, airports even if they hardly use these since these are located in Luzon.
  1. It is not true that infrastructure projects funded by official development assistance (ODA) and/or taxpayers through the GAA are more beneficial to the public than PPP-funded projects. Iloilo Airport — which was funded by ODA — took longer to build and incurred cost overruns compared to the PPP-funded Mactan-Cebu Airport, which remains on schedule despite initial delays.
  1. There are inherent problems and risks to the public under GAA- and ODA-funded projects since ODA funding normally has strings attached. Thus, a project funded by China ODA may require the government to hire Chinese contractors, suppliers, managers, and even workers.

We now add more reasons why the Dutertenomics’ shift from PPP to ODA (mainly from China) funding of its build-build-build plan is unwise and risky.

  1. In a Management Association of the Philippines (MAP) forum two weeks ago, finance expert Vaughn Montes cited the big contrast between ODA-funded Subic-Clark-Tarlac Expressway (SCTEx) and the PPP-funded Tarlac-Pangasinan-La Union Expressway (TPLEx). SCTEx took seven years from government approval to completion, two years delayed, and cost nearly twice at $32.8 billion vs. the approved budget of $18.7 billion or P341 million per kilometer. TPLEx cost only P61 million per kilometer.
  1. Investor confidence in the Philippine economy has gained momentum compared to some of our neighbors in the region and it is not wise to constrain such confidence by ditching many PPP projects and shift to ODA and GAA funding.

The expansion of FDI in the Philippines from 2000 to 2009 (last year of the Gloria Arroyo administration) was not significant (less than twice). However, during the same period, FDI expanded almost five times in Singapore, about four times in Indonesia and Vietnam, about three times in Thailand, Cambodia, South Korea, and Taiwan.

But from 2009-2015 or just six years, FDI in the Philippines expanded two and a half times while there was only two times expansion in Singapore, Indonesia, Vietnam, and Myanmar; and less than two times expansion in Thailand, Malaysia, Hong Kong, South Korea, and Taiwan. It is this kind of investor confidence and momentum that can greatly propel the Philippines into more investments and job creation, faster growth and infrastructure buildup.

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  1. The government’s PPP Center noted that “most PPP bids received in recent years have come at lower than the approved government costs. If in the instance that actual project costs turned out higher than approved government costs, the private sector partner assumes or shoulders cost overrun risk.”
  1. 201706146745fThe China government is the least trustworthy source of ODA funding considering that it is acting belligerently and aggressively in bullying the Philippines and other ASEAN neighbors that have claims over the many islands and islets in the South China Sea or West Philippine Sea (WPS). Note also that recent China-funded projects in the country were notoriously scandal-ridden — North Rail and National Broadband Network (NBN)-ZTE projects.

The insistence of the Duterte administration to compromise the income and savings of Filipino taxpayers — even if there are many big private investors, local and foreign, that are willing to shoulder the costs and risks of infrastructure projects — may result in shenanigans and large-scale corruption.

And its consistent pronouncement of relying more on the money and contractors of the bully state across the WPS would further weaken the Philippines’ territorial claims to those islands and exclusive economic zone and weaken the rule of law.

Honest minds in the Duterte Cabinet should remind the President of the economic and political dangers that it is treading on.

US and China stockmarkets, huge divergence

One year until yesterday, US vs China stocks, below.

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What does this mean: that global investors have rising trust of the US economy but flat or rising distrust of the China economy? More trust in Trump policies but less trust in Xi policies?

I checked CNN and BBC’s business sections, seems they did not make any report of this. NYT has one. https://www.nytimes.com/…/19reuters-usa-stocks.html

CNN, BBC, NYT, others are among the top anti-Trump media outlets.

The report says it’s the tech and health companies that were the main attractors,  http://www.foxbusiness.com/…/wall-st-hits-record-highs

Then there’s this news, “Oil falls to seven-month low on more signs of growing crude glut.” This could mean that US shale producers are gaining the upperhand over OPEC countries, so back to low world oil prices. I’m waiting for sustained below $40/barrel in the coming few weeks or months. http://www.foxbusiness.com/…/oil-falls-to-seven-month

I checked Hong Kong’s Hang Seng index, while the China stocks are declining, HK’s are rising, faster than the growth in US stocks actually.

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I am a non-finance guy so I asked several friends about this development, including my friend in HK, Andrew S. if this means that there is a growing divergence in investor trust between the economies of the mainland and the HK SAR.

Andrew offered a different perspective. He said that “Of the 10 biggest companies that make up the hang Seng index.  Probably less than 5% of their combined revenue/profit comes from Hong Kong.  The Hang Seng Index is of zero value as a reflection of HK’s economy.”

I’m inclined to believe that the HK stock market has a positive, non-zero value to the overall HK economy because there is more rule of law, more policy stability in HK market than say, the PH or TH or ID or MY markets.

Mr. Trump has been making plenty of economic, fiscal, energy policies that almost reverse the 8-yrs policies of Mr. Obama. I am curious if Trump’s policies were factored in positively by investors in the US stock market. Like the recent decline in world oil prices as reflection that Trump’s energy policies are doing positively for the US. Shale oil frackers, coal producers, they are improving. And manufacturing, transport firms that are energy-intensive like airlines.

From a WSJ oped last week, June 15:

“Remember the “energy independence” preoccupation of not so long ago? The U.S. is now emerging as the world’s energy superpower and U.S. oil and gas exports are rebalancing global markets. More remarkable still, this dominance was achieved by private U.S. investment, innovation and trade—not Washington central planning.

Thanks largely to the domestic hydraulic fracturing revolution, the U.S. has been the world’s top natural gas producer since 2009, passing Russia, and the top producer of oil and petroleum hydrocarbons since 2014, passing Saudi Arabia.

Trump’s reversal of Obama energy policies is a big contributor to this. More shale gas and oil, more coal, production and exports. To surpass Russia in gas production and surpass Saudi Arabia in oil production is one big achievement.

From the reports, biggest gainers yesterday were some pharma firms since Trump is trying to get rid of Obamacare. Like United Health Group, up 14.5% since Nov 6 2016.

Meanwhile, China’s market is “very very expensive for a long while” according to another friend, Peter A. This means the bubble is slowly crashing already? Hard to predict because China’s communist government will never allow Freedom of information, will hide the real data.

More globalization means more mobility of capital, labor and technology to markets worldwide that have more rule of law.