Random thoughts on taxes, TRAIN, and governments

 

The controversial TRAIN (Tax Reform for Acceleration and Inclusion) proposal is now law of the land  since this year’s beginning.  At least, TRAIN 1, that is.  From what I have heard and read, there’s a TRAIN 2, 3, 4, and 5.

The supposed focus of TRAIN 2 is a further reduction in corporate income taxes.  But what is this I also hear that not one senator is willing to sponsor said measure?  Until known Duterte ally and newly minted Senate President Vicente “TitoSen” Sotto III agreed recently to be the proposal’s champion.

Why the new reluctance compared to the earlier alacrity among legislators to be associated with TRAIN 1?  I believe the principal reason is, rightly or wrongly, TRAIN 1 is blamed for the unprecedented inflation that gripped the economy since the beginning of 2018.

 

Politicians, being politicians, know how to behave specially if elections are near.  Sotto is quite bold since he is not up for re-election in May 2019.  Senators up for re-election next year like Senator Sonny Angara, who sponsored TRAIN  1, was candid enough to admit that he will not touch TRAIN 2 with the traditional ten-foot pool given the 2019 elections.

Nobody loves taxes and the tax collectors. The latter were often killed and robbed in the ancient days.

Woe to the politician who campaigns for or is associated with a tax increase.

 

Senator Ralph Recto aka Mr. Vilma Santos

 

 

 

Exhibit A: Senator Ralph Recto, who was not re-elected at some point as he was strongly associated with the increased VAT.

 

 

In the final analysis, a tax is an extortion since nobody will pay taxes voluntarily. People have to be coerced to pay taxes and reduce their disposable income. For that reason, Charles Tilly and other scholars of European state building cynically observed that there is not much difference between a neighborhood toughie–who threatens to break a window if the shop-owner does not hand over some cash for ‘protection’–and the state who imposes and collects taxes.

 

TRAIN Tax Law: Guidelines and Sample Tax Computations

 

 

Both the toughie and the state are ‘selling’ the same (public) good–security of life and property–in exchange for money. Both ‘sales’ are involuntary and force (or the threat to use force) underpin them.

In that sense, taxation is an exchange transaction. In exchange for the payment of taxes, citizens get to enjoy public goods.

The capability to free ride is one reason why individuals will not pay taxes if payments were decreed to be paid on a voluntary basis.

While it is indeed an exchange transaction, it is not a straightforward (kaliwaan) one unlike sales involving private goods.

To enjoy a burger, a consumer must first pay before he can have the first bite of the juicy sandwich. That is not the case with taxes.

 

Charles Tilly

 

There’s an obvious time lag between the payment of taxes and the ‘consumption’ of a public good. This time lag is another reason why people want to avoid paying taxes.

In addition, taxation may not be a pari passu (equal footing) arrangement. The taxpaying public may not enjoy or obtain the full value of their money since government officials retain the ability to determine the quantity and quality of public goods they will supply.

For example, a concrete road may be built but it may be lacking in the promised length, or built with sub-standard materials, or built over an extremely long period.

Another reason behind the citizens’ reluctance is the impact of taxes on consumer good prices. The payment of taxes already reduces their disposable income. If taxes were increased on key inputs such as fuel, electricity, water,sugar, food packaging, interest income, and the like, these increases will raise consumer goods’ prices and will thus further reduce disposable incomes.

For all these reasons, taxation should be understood as primarily a political act.

The collection of taxes are socially necessary for they fund socially necessary public goods. Without public goods, a human community cannot exist. Thus, the payment of taxes finance human community building.

Government officials, policy makers, and tax collectors must be fully aware of the collective action problems (CAPs) associated with taxes, specially in societies with pronounced poverty and wide income/asset disparities like the Philippines.

The time gap between the collection of taxes and the provision of public goods must be as short as possible.

The quality of public goods must be high and its quantity must be adequate for a growing population.

The collection of taxes must be equitable because none grates the ire of citizens more than the knowledge that some evade or do not pay the rightful amount of taxes.

Last but not least, we must all help develop a healthy tax culture in our country: that we must pay our taxes promptly and properly; that government must provide adequate and high quality public goods; and that both the tax burden and the supply of public goods must be equitable and judicious.

We must also be chastened by the truth that the ability to provide public goods is not the monopoly of governments. Non-state actors can and do provide ‘public’ goods in exchange for ‘payments’ that are akin to taxes.

 

NPA fighters in parade formation

 

 

 

The ‘revolutionary taxes’ collected by the New People’s Army (NPA) comes to mind in this regard.  The ‘kotong’ collected by erring police officers is of the same genre.  The Catholic Church and other charities are enabled by donations to provide public goods.  Governments must therefore make sure that the tax-public good exchange transactions with their citizens must be as equal and equitable as possible. 

 

 

post-politics truths

Political Photo-Poems

HELSINKI, FINLAND – JULY 16: U.S. President Donald Trump (L) and Russian President Vladimir Putin arrive to waiting media during a joint press conference after their summit on July 16, 2018 in Helsinki, Finland. The two leaders met one-on-one and discussed a range of issues including the 2016 U.S Election collusion. (Photo by Chris McGrath/Getty Images)

Post-politics truths

I dare say

are frozen incredulities!

Fake news

are news 

just the same!

Suspend disbelief

factor them in for they’re

the new game changers!

The fake news queen of the Philippines, PCOO Asst. Secretary Mocha Uson

©bongmallongamendoza 30 jul 2018

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nuclear arms and cold wars

Political Photo-Poems

Nuclear weapons do not

make war between states

impossible, implausible, or unwinnable

They only make wars

between Great Powers ‘cold’

rather than ‘hot’ shooting wars

Even if ‘cold’,

a cold war is a war

just the same!

Cold wars kill

they maim and silence

they produce orphans

and widows and refugees

They are uber-expensive

They are a great waste

They should be stopped even

if states want to wage them

just the same!

©bongmallongamendoza 28/30 jul 2018

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The political economy of the Marcos dictatorship, 1972-1986 (Part III)

In his prime, Marcos met Mao in Beijing with his family in tow

 

 

Before martial law

It must be pointed out that even before he became a dictator, Ferdinand Marcos was already quite adept in making (ill-gotten) money for himself and his family.  While he styled himself as a war hero and head of a swashbuckling guerrilla unit (later avowed by the US military as non-existent), Marcos was alleged to have profited handsomely from the buy-and-sell trade during the Japanese occupation of the Philippines.

In 1968, secret foreign exchange bank accounts were opened in Switzerland with Marcos using the pseudonym “William Saunders” while Imelda posed as “Jane Ryan”.   Alongside these secret accounts, several beneficial foundations and shell corporations were also established abroad for their benefit. 

 

 

 

 

Marcos’ transactions with Japanese suppliers and contractors

The irregular relationships between Ferdinand with several Japanese firms and suppliers vying for Japanese official development assistance (ODA)-funded projects in the Philippines are well documented and illustrates vividly how the dictator amassed ill-gotten wealth from a particular source.  A general picture of these illicit transactions emerged from several sources including testimony from former Marcos subordinates Baltazar A. Aquino (former Secretary, then Minister, of Public Highways during the Marcos administration, papers supplied by Oscar L. Rodriguez [former undersecretary of the Department (or Ministry) of Public Highways and who was appointed by Ferdinand as implementing officer of the Philippine-Japan Project Loan Assistance Program (PJLAP)], documents (part of the documents and effects seized by the US Customs from the Marcos party as they disembarked at the Hickam Air Force Base in Hawaii after their flight from the Philippines after his ouster) pertaining to the Angenit Investment Corporation (Angenit) headed by Marcos crony and former Batasan Pambansa Assemblyman Andres Genito Jr. (Mendoza 1992, In Tsuda and Yokoyama, pp. 10-30). 

 

The Marcos-Japanese relationship started with the Japanese Reparations Program, administered by the Reparations Commission headed by Marcos war buddy and fellow Ilokano General (soon to be Senator) Eulogio Balao.  It continued up to the last years of the Marcos dictatorship when the Overseas Economic Cooperation Fund (OECF) became the main conduit of Japanese ODA to the country following the end of the Reparations Program.   In general, Japanese ODA funds were to finance specific general infrastructure and development projects in the Philippines.  The equipment requirements of these projects were to be purchased from Japanese manufacturers/suppliers in the usual manner of so-called ‘tied aid’.  Ostensibly, the Japanese suppliers must compete with each other in an open bidding process wherein the qualified submitting the lowest bid price won the contract.  However, Marcos and his associates perfected a system where no Japanese firm could win a contract unless a 15 percent (of the total contract cost) ‘commission’ was handed over.  This 15% ‘commission’ would be included in the total contract price to be paid by the Philippine government out of the Japanese ODA monies to the Japanese firms.

Except for a particular instance (i.e., the Cagayan Valley Electrification Project) when they attempted to win contracts without paying any commission to Marcos, the Japanese firms acceded to the ‘commission’ system.  All qualified bidders, therefore, knew that they were expected to pay the ‘commission’ if they wanted to bag a contract.  They would still compete in the bidding process.  One cannot be blamed, however, for thinking that since all were willing players anyway, then contracts were judiciously apportioned to a select group of Japanese contractors in some sort of a queueing system.  This meant that if a Japanese contractor did not get a contract for a given project, it could still get one for another project.

The key Marcos aides involved in the operations were General Balao, Secretary Aquino, Undersecretary Rodriguez, and Assemblyman Genito.  Balao collected ‘commissions’ on projects financed under the Reparations Program.  Most of these projects were administered by Philippine government agencies other than the Department/Ministry of Public Highways.  Genito took Balao’s place when the latter suffered a stroke.  In a kind of a division of labor, Aquino collected ‘commissions’ on projects administered by the Department/Ministry of Public Highways and financed by the Overseas Economic Cooperation Fund (OECF).  Rodriguez, who was accountable only to Marcos, though technically Aquino’s subordinate, took care of the technical function of accepting and evaluating bids and recommending (to Marcos) the award of contracts to specific firms.  He could have been in charge of the ‘queueing system’ alluded to earlier.

The Japanese firms that paid regular ‘commissions’ to Marcos through Aquino included Sakai Heavy Industries, Sumitomo Corporation, Toyo Corporation, Nissho-Iwai, and Mitsui & Company.  Four representatives—Susumu Makino of Sakai, Yoshiko Kotake and a Mr. Hara of Toyo, and a Mr. Sato of Sumitomo—alternately handed over these payoffs to Aquino in Hongkong. 

 

From September 1988 to November 1989, the Sandiganbayan[1] conducted “perpetuation of testimony proceedings” of an ailing Aquino (who was 78 years old in 1989).  The proceedings were done in conjunction with the hearing of several civil suits against Marcos, his family and friends where Aquino was a prosecution witness.  Among the major revelations of these proceedings include:

1. On several occasions from July 1975 to July 1976, Aquino travelled to Hongkong to receive monies from Japanese representatives, particularly Makino of Sakai. He would then deposit the same amounts into a numbered account (No. 51960) with the Hongkong branch of the Swiss Bank Corporation.  As evidence of these deposits, a Swiss Bank Hongkong official named Mr. Barasoni issued deposit receipts in Aquino’s favor.  Upon his return to Manila, Aquino would immediately report to the Palace and hand over the same receipts to Marcos.  Marcos would in turn accept the receipts silently and store them.
2. Aquino testified that Marcos instructed him to keep his Hongkong activities secret and unknown even to Aquino’s wife. In response, Aquino wrote Marcos a letter dated May 25, 1977 promising to keep his mouth shut.
3. After General Balao’s death, Marcos expressed some worry that Genito was not giving a proper accounting of ‘commissions’ from the Japanese firms received through Angenit Investment Corporation. Undersecretary Rodriguez was asked to perform an audit and Rodriguez subsequently prepared a ledger of commissions received by Balao and Genito.  He found out that Genito was short of one hundred thousand US dollars (US$100000.00). For his part, Genito tried to ask Aquino to withhold the Rodriguez report on his shortcoming from Marcos.
4. Kotake of Toyo Corporation wrote Genito to advise Marcos not to use Aquino to collect ‘commissions’ due from the Japanese contractors. Kotake warned of the possibility of scandal (similar to the Lockheed affair that led to the imprisonment of former Japanese Prime Minister Kakuei Tanaka) considering that Aquino was a government official and was himself in charge of Japanese-funded Philippine infrastructure projects.

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Note

[1] The Sandiganbayan was a special court created by the Philippine government during the Marcos dictatorship to try graft cases filed against government officials.