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“Flat-Tax” Senatorial Bet Vs. Statist Quackonomist Winnie Monsod

April 10, 2013

Monsod Failed Logic_01

A Facebooker named John posted a very interesting YouTube clip on my Facebook site. The video features a senatorial candidate named Greco Belgica, a pastor-businessman and Manila councillor, who is running on a somewhat controversial political platform. This senatorial bet proposes a 10-percent flat-tax to be imposed equally on all Filipino taxpayers regardless of income.

A flat-tax system is unknown to most Filipinos. The Philippines adopts a progressive tax system that imposes higher tax rates on– or penalizes– those who earn more. The more you earn, the more you are taxed, and the progressives call this system ‘just fair’.

In a televised ‘job interview’ hosted by GMA7, public economist and Keynesian Winnie Monsod cast doubt on Belgica’s flat-tax proposal, claiming “research” shows that the politician’s  flat-tax bill would only benefit the rich who wouldn’t be obliged to pay capital gains tax and other taxes. So, basically Mrs. Monsod asked the religious senatorial bet how he plans to “reconcile his pro-poor stance with his pro-rich flat-tax bill”.

Here I must add that the complete term is “flat INCOME tax”. Monsod is wrong to claim that a flat income tax system would exempt the rich from paying capital gains tax. A country may impose a flat income tax and still retains capital gains tax and other taxes. Also under this system certain exemptions may also be retained and imposed. It’s just a system, which means that any country may change or modify it according to its political and economic agenda.

Honestly I had to stop watching the video after hearing Monsod’s poor versus rich rhetoric. But before seeing the whole video I posted my response to John who said that Mr. Belgica “is really worth voting as he understands the inequity in our rigmarole of tax system with its graduated rates, double taxation, and endless rules and regulations.”

I posted the following reply:

Laffer curve works. A 15-percent flat-tax system is enough to improve revenue collection… It worked/works in Russia (which implemented a 13-percent flat-tax rate).Wait! A 15-percent flat tax could boost revenue collection IF…

  • The country is not saddled with protectionism, or at least as open as Russia;
  • Which means foreign investors can freely invest in the Philippines;
  • There are not too much regulations.

I used Russia as a comparison because it implemented a 13-percent flat-tax ten years ago. Studies show that Russia’s revenue collection improved visavis its collection years before the tax cut.

In which John made the following comment: “I forgot to say that he is not only advocating for a flat

Senatorial bet Greco Belgica

tax, his platform also includes minimizing government intrusion. Btw, there’s some things I don’t like about him, one is his religious biases which stems from him being a pastor, but apart from that I think he understands the concept of a free market well and the other thing is his nearly impossible chance of winning, at this point I’m just hoping that he won’t be discouraged to run next time.”

Then I made the following commentary:

That prompted me to watch the video. However, I stopped when that scumbag Winnie unleashed her usual pro-poor, pro-rich rhetoric. Flat tax is pro-rich? Is she even an economist? Why does a tax system have to be pro-poor or pro-rich? Why insert class warfare rhetoric into the tax issue?

A ten or 15-percent flat tax is not just pro-rich; it is also PRO-POOR. It is pro-rights and pro-man. A tax system that benefits the man who is responsible for creating jobs and wealth also benefits the man who is jobless or unproductive. A progressive tax system punishes the successful and hard-working people. It’s as if Winnie is trying to imply that the rich must be taxed more because they earn more. But why do they earn more in the first place? And why does the government need to punish successful and hard-working people? 

Well, Winnie might argue ‘It’s because there are more poor people in this country and that the rich keep getting richer.’ The problem is that our pol-econ system is flawed at root, as it benefits the politically connected and the economically established. 

If a flat-tax system is pro-rich, then it follows that it is anti-poor. Perhaps Winnie believes that if the government imposed 75% tax on the income of the top-earning pinoys, that would be pro-poor and would benefit the least advantaged members of our society. A flat-tax system is consistent with the equal protection clause, and the principle that everybody must be equal before the law.

John: “Good thing you stopped with her rhetoric-disguised-as-a-follow-up-question as even though Belgica gave a logical and rational answer, her facial reaction was very irritating as she obviously didn’t agree or maybe didn’t even think that someone would have the nerve to make free market principles a part of his platform. Countries like France are the reason why investors are flocking towards us, the Fitch report basically said that since the situation was so bad overseas, they would really look stupid if they didn’t give us an investment grade rating. The note was a good touch though, I’d like to be able to say that to a socialist at least once in my lifetime.”

Vincenton (ME): “I stopped and then posted my third comment… But I managed to finish the whole clip. I absolutely agree with the candidate. Our confusing, very complicated tax system and tax exemptions benefit high-income-earners. We need a flat-tax system and then abolish all exemptions. We need a very simple (or simplified) tax code. Our progressive tax system also encourages tax evasion by the rich. Instead of investing their surplus money, the top-earners are obliged at gun point to remit a substantial portion of their income to the State. Winnie talks about the possibility of the government not being able to meet its welfare spending. Well, it’s time to cut spending. Too much spending justifies taxation or higher tax rates.”

[End of Facebook conversation]

But wait! What research is Monsod talking about? She talked about unnamed European countries that had financial crisis and everything. What I find very much alarming is that Winnie Monsod, who is considered one of the most popular Filipino economists (because she’s on TV), is that it seems she doesn’t even know that the Welfare States in Europe went broke due to their unsustainable welfare programs, government spending, and regulations.

It seems to me that Mrs. Monsod didn’t do her own research again. This reminds me of her Inquirer column wherein she claimed that dismantling our protectionist system is “not necessary”, because apparently she read an UNKNOWN study published online. In that hilarious opinion piece, Monsod lifted all of her flawed, inaccurate information from a so-called study that covered years ranging from 1987 to 1986, and then she claimed that foreign direct investment “played only a minor role in the growth of most high-performing Asian economies”. [Please read this blog post to see what I'm talking about.]

What I know– and what every rational and intelligent economist– know is that Laffer curve works. Like any punitive government policies, taxes affect people’s behaviour. A punitive progressive tax system would only encourage people to commit tax evasion, bribery, or any kinds of private-government irregularities. Also a progressive tax system with lots of loopholes and exemptions would only “benefit” high-income earners and the self-employed.

A reasonable flat-tax rate– say, a 15%, 13% or 10% tax rate– would not only encourage people to pay their taxes accurately, properly and responsibly; it would also encourage more investment and more economic activities. And as we all know, more investments mean more jobs and employment opportunities.

It’s a good thing that Mr. Belgica mentioned the case of Russia. Russia’s 13% flat tax was implemented by President Vladimir Putin, former chief of the Soviet KGB, in 2001. That was the year U.S. President George W. Bush adopted tax cuts to American families. Russia’s miraculous flat tax reform did not only lead to economic growth and increase in personal income tax revenues; it also reduced cases of tax evasion.

However, with our protectionism, welfare state and regulations still in place, I don’t think a 10% or 13% flat-tax rate would provide us a Russian “roulette” toward economic success. Russia’s 13% flat-tax propelled the country’s economy due to less protectionism.

The following are the differences between the Philippines economic policies and Russia’s economic policies:

  • The Philippines has a 60-40 protectionist law that limits foreign ownership and investment. Russia does not impose the same policy.
  • The Philippines totally bars foreign investment and ownership of land and public utilities. From 2001 up to 2007, Russia allowed foreign investors to own media, energy, aerospace, among others. It was only in 2008 that the Russian government moved to limit foreign investment in 42 strategic sectors.
  • We totally ban foreign professionals (e.g., doctors, lawyers, engineers, nurses) from working in the Philippines. Russia does not have the same policy.

Apart from advocating a reasonable flat-tax system, Mr. Belgica should also promote free market reforms, including constitutional reform, which is the only way to dismantle our protectionism and unsustainable welfare system. However, I have yet to hear from Mr. Belgica’s pro-poor stance. Is his pro-poor agenda “socialistic” or “welfarist”? I’d like to know.

https://www.youtube.com/watch?v=hDkK2sPbhzk

This site shows where Mr. Belgica stands on various issues:

  • On pork barrel – He supports is the abolition of the pork barrel. He said the fund should be converted to the Tuition Fee Voucher System wherein students can get a voucher and bring it into any school where they want to study. He said the system will ensure quality education and create competition among schools by lowering tuition fees while offering the best program.
  • On the Sabah issue –Belgica said we should fight for Sabah and Filipinos in the area should be protected. While exercising all diplomatic efforts, he said the government should prepare to develop the best military and be ready for war at any given time.
  • On campaign funds – Belgica challenged that candidates should prove that they are not using government resources for their election campaign. He added that a list of campaign donations that a candidate receives should be made public, so the public will know who bankrolled their candidacy.
  • On the Freedom of Information bill – He is in favor of FOI.
  • On political dynasty – He wants to end political dynasty.
  • On same sex marriage – He opposes same sex marriage. “Same sex couples could live together, but could not be wed in church.”
  • On divorce law – He is opposed to the divorce. Belgica emphasizes that the government should not intervene with the affairs of Church.

I strongly disagree with his stand on the Sabah issue. I believe we should respect the Sabahans’ right to self-determination. On ending political dynasty, the best way it is to have a well-informed electorate. I disagree with his stand on same-sex marriage, which clearly reveals his religious bias. Nobody– not even the government– should have the right to infringe upon anyone’s right to marry or to contract. Same with his stand on divorce law, I believe the State should have no power at all to interfere with certain family matters.

Here’s the senatorial candidate’s position on other issues:

  • On the 60-40 foreign ownership law – Belgica believes in free trade. “If we give the capital to the people themselves, this would raise their standard of living and the only way to do this is investors see that we are open to trade.”
  • On the election code – He believes that localized elections are better. “The government is a country composed of people representing the people. Localized elections can give opportunity to those underprivileged to represent their sector and to know the candidates very well.”
  • On gender equality – “Although everyone was made equally, opportunities are not. Decentralize government could provide equal opportunity to all.”

What this country needs is a limited Republican government

Screenshot_2013-04-16-19-39-18-770906003

  • Source: MYTH AND REALITY OF FLAT TAX REFORM: TAX EVASION AND REAL SIDE RESPONSE OF RUSSIAN HOUSEHOLDS (Gorodnichenko, Martinez-Vazquez & Peter, 2007).

SECOND UPDATE

While writing this blog post I had this hypothesis that reasonable flat tax system works well in free economies, like Hong Kong and Singapore, and that it would not produce the desired results in protectionist and grown-up welfare states like the Philippines. This is because one of the main purposes of this system is to encourage investment and job growth. The desired goal is to have more taxpayers and to cut unemployment and dependency rates.

I had this notion that a reasonably low flat tax rate (of say, 13 to 15%) must be effectively supported by proper reforms and government downsizing. Such reforms might include deregulation, lower government spending, privatization, abolition of redundant government bureaus and offices, repeal of protectionist laws and environmental controls, among others. This makes a Flat Income Tax system more compatible with freer economies with limited government and liberal economic policies.

However, the Philippines is certainly not a free economy. It is a mixed economy with high level of protectionism and more controls and regulations. We impose the 60-40 protectionist policy that limits foreign investment. We also totally ban foreign professionals from becoming part of our economic Team. This is why I had to compare our policies with those of the Russian government.

Winnie Monsod’s reaction to senatorial bet Greco Belgica’s flat tax proposal is not surprising since she is known as a welfare/Keynesian economist. Perhaps she believes that more government spending is the only way to solving our economic and social problems. Well, that’s how some UP economists think. That’s how NEDA head Arsenio Balisacan thinks.

If a flat income tax system were implemented in the Philippines, the government had to lower spending, cut certain welfare programs, deregulate, and open our country to foreign investors, otherwise we would face huge budget deficit and possible economic and political chaos. Just as an obese human being cannot go on a crash diet, so our over bloated Welfare State can also not go on a “crash” economic cut and downsizing without first doing the required preparatory, precautionary steps. This means that we have to revise first our protectionist, regulative, oligarchic Charter. We need a constitutional reform to prepare our cancer-stricken country for the required ‘medical’ operation. Our country is sick, thus it needs proper medical treatment and attention.

Adopting an extremely low flat tax rate without opening our economy to foreign investors, deregulation, and embracing economic freedom would be both economically and politically disastrous.

A reasonable and extremely low flat income tax system is not for everybody! It is more compatible with free and relatively freer economies.

Now there is this study that investigated whether a flat tax is feasible in “grown-up Welfare States“. This 2007 study explored the economic impact of various flat tax reform scenarios for Germany in terms of equity and efficiency.

The research findings are as follows:

Screenshot_2013-04-10-23-35-23-1

The basic idea is that an extremely low flat tax system in a protectionist state (like the Philippines) would end up benefiting the rich, the oligarchs and cronies. This is because the strong political barrier to foreign investment is still in place. That is why I argued above that it would be extremely politically dangerous and economically disastrous to implement a 10% or 15% flat income tax rate without revising first our Constitution to allow foreign investors and professionals to be part of our team. These reforms must also be supported  by government downsizing, lower spending and deregulation.

The adoption of flat-tax system must be effectively anchored on strong political and economic objectives/goals.

WHY: Why do we need to adopt a 13% or 15% flat tax?

WHAT is the Main Goal: To improve our economy and reduce dependency on the government.

HOW: To see to it that the following institutions are properly in place–

  • Investment- and business-friendly economic climate and environment
  • Strong economic freedom and liberalization
  • Strong rule of law
  • Consistent laws and dependable economic policies 
  • Impartial and independent courts
  • Strong property and IP rights laws
  • Limited, non-intrusive government
  • Clear and objective foreign investment rules
  • Less intervention and regulations

Supporting mechanisms: Lower government spending, gradual reduction of welfare programs, and government downsizing.

Immediate goal: Create jobs and provide more employment and economic opportunities to people.

It is important to understand that the Philippine society is ADDICTED to, or is HEAVILY DEPENDENT on, welfare. The solution is gradual withdrawal or gradual reduction of addictive welfare services in order to minimize or eliminate the withdrawal symptoms associated with the massive dependence on such services.

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85 Comments leave one →
  1. GabbyD permalink
    April 10, 2013 3:38

    Cite ONE PAPER that purports to prove that a flat tax will raise total tax revenue or Economic growth.

    JUST ONE.

    • April 10, 2013 3:38

      This one contains several papers. Have you ever heard the term ‘Laffer curve’? Also, I can cite papers that investigated punitive tax increases that led to lower collection as well as reduced GDP and consumer spending.

      http://fvdb.wordpress.com/2013/01/03/depardieus-exit-and-russias-flat-tax-what-rps-central-planners-and-academics-might-learn/

      • GabbyD permalink
        April 10, 2013 3:38

        ” Also, I can cite papers that investigated punitive tax increases that led to lower collection as well as reduced GDP and consumer spending.”

        great. cite ONE.

        your previous link doesnt have any. in fact, in the comments, I put a link to an NBER paper, saying flat tax in russia is NOT working.

      • April 10, 2013 3:38

        Perhaps you read a different paper… or you just didn’t understand the whole context of the study.

    • April 10, 2013 3:38

      Here’s why you’re a lazy or somehow inattentive/weak-minded reader. I never said the purpose of flat tax is to ‘raise total revenue’. Where did I say that?

      I think I need to re-post what I wrote because you’re not just a lazy reader; it seems you’ve got abnormal brain functioning as well.

      I said: “The desired goal is to have more taxpayers and to cut unemployment and dependency rates.”

      I also advise you to re-read the whole blog and try to use your brain most of the time.

      You might add these to your reading list and then go back to your village professors…

      Tax increase bad for GDP and economic recovery

      http://www.forbes.com/sites/charleskadlec/2012/04/23/christina-romer-knows-tax-hikes-will-kill-the-recovery/

      Others…

      http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates

      • GabbyD permalink
        April 10, 2013 3:38

        neither of those are about FLAT TAXES btw…

        Let me say it again: CITE ONE, just ONE, research that shows the effectiveness of the flat tax.

        JUST ONE.

      • April 11, 2013 3:38

        Lol! You must be deluded. Those are not about flat taxes. Those are about tax increases that led to reduced GDP and bad econ recovery.

      • April 11, 2013 3:38

        Like I said, you’re a lazy or somehow inattentive/weak-minded reader. I never said the purpose of flat tax is to ‘raise total revenue’. Where did I say that?

        But since you’re demanding, I won’t only give you one but several papers, and then go back to your village idiot professors.

        http://www.indiana.edu/~spea/…/duncan_economic_impact_flat_tax.pdf —Economic Impact of a “Flat” Tax. What have we learned from the Russian Experience?

        Excerpt: “Real PIT revenues grew by 26 percent in 2001, 21 percent in 2002, and 12 percent in 2003. This was a dramatic improvement over the previous three years, which saw two years of decline followed by one year of growth. A similar pattern was observed for PIT revenue as a share of gross domestic product (GDP), indicating PIT revenues grew faster than GDP. The significant and immediate impact on tax revenues led many to view the reform a success and is believed to have been the catalyst for the subsequent spread of the flat tax, especially in Eastern Europe.”

        http://www.ncpa.org/pub/ba452 — The Flat Tax in Russia and the New Europe

        During its first two years, Russia’s 13 percent flat tax exceeded all expectations. As the figure shows:

        In 2001, the first year under the flat tax, personal income tax revenues were 28 percent higher than in 2000, after adjusting for inflation, and rose another 20.7 percent in 2002 compared with 2001.

        For the period January to June 2003, compared with the same period last year, personal income tax revenue increased 31.6 percent.
        After adjusting for anticipated inflation of about 15 percent annualized over 2003, real rubles from the personal flat tax increased 16.6 percent year-over-year.
        Revenue for personal income taxes also rose relative to other revenue sources:

        The share of tax revenue from the personal income tax rose from 12.1 percent in 2000 to 12.7 percent in 2001.

        In 2002, the flat tax generated 15.3 percent of total tax revenue.

        http://www.forbes.com/sites/nathanlewis/2011/09/29/the-rise-of-the-flat-tax-gives-us-morning-in-albania/ —- The Rise Of The Flat Tax Gives Us Morning In Albania

        The average increase in revenue was 17.7% (when excluding outlier Estonia, which had an 81% increase). Even Slovakia, with the biggest decline in revenue/GDP, had a revenue increase of 6.1%. Mongolia, with their 10% flat tax replacing a system with rates up to 40%, experienced a 33% increase in revenue!

        http://rense.com/general36/flat.htm — Russia’s Flat-Tax Miracle By Daniel Mitchell, PhD

        Excerpt: “Over the last two years, inflation-adjusted income tax revenue in Russia has grown 50 percent. Why? Because people are willing to produce more and pay their taxes when the system if fair and tax rates are low — exactly what Ronald Reagan predicted when he triggered America’s economic boom with lower tax rates 20 years ago. Ironically, the former communists in Moscow now understand supply-side economics, yet liberals in Congress are still relying on the politics of hate-and-envy.”

      • GabbyD permalink
        April 11, 2013 3:38

        “I never said the purpose of flat tax is to ‘raise total revenue’.”

        uhm, that is the laffer curve alll about… if u have a lower, uniform tax, it raises total revenue.

    • Kiram S. permalink
      April 11, 2013 3:38

      ^^^ this guy obviously never heard the term laffer curve.

      • Megatonton permalink
        April 11, 2013 3:38

        Keep moving the goal post. You’ll get there eventually.

    • Ricky G. permalink
      April 12, 2013 3:38

      “Cite ONE PAPER that purports to prove that a flat tax will raise total tax revenue or Economic growth.
      JUST ONE.”

      GabbyD, Am I right to assume that you think that flat tax will definitely lead to lower tax revenue collection? Please enlighten me… Thanks!

      • GabbyD permalink
        April 12, 2013 3:38

        @ricky

        my position is I dont know what will happen, and if it does rise/fall (whatever), WHY it rose/fell.

        thats important when thinking about policy, and replicability of results.

        i asked for ONE paper, because its easier to talk about specifics, rather than generalities.

      • Ricky G. permalink
        April 14, 2013 3:38

        of course you don’t know because you’re too clueless. what policies are you talking about?

        so you think 13% was not that low?

    • Booboo the Bear permalink
      April 24, 2013 3:38

      @GabbyD anong paper paper pinagsasabi mo jan ha??? Libro kamo! Magbasa ka ng Wealth of Nations ni Adam Smith para maintindihan mo!

      Cf: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.” Nasa Introduction yan o di kaya sa Book I. Basahin o kada letra at memoryahin para di mawala sa kokote mo!!!

  2. April 11, 2013 3:38

    Interesting exchange. I can almost guess that GabbyD’s next move is to dismiss those cited studies and demand more studies. That’s understandable.

    However, to satisfy his demands, I believe the blogger should just have cited countries that had increased revenue after imposing flat tax. Those papers or articles mentioned countries like Russia, Albania and many others that experienced flat tax success. Perhaps the guy’s looking for peer-reviewed papers filled with technical jargons, numbers and statistics.

    The only question is: did flat tax led to increased revenue in the country where it was implemented. Now since GabbyD is obsessed with more revenue collection, the only thing to do is to see whether revenue increased a year after the effectivity of the flat tax. If it did, then, the answer is in the affirmative. Flat tax can lead to revenue increase. That’s how simple it is!

    So, when Russia’s 13% flat tax took effect in 2001 revenue increased. Need more evidence? It’s not 20% flat tax but 13%! Revenue did not drop but instead increased. Need more evidence? Of course, I agree with what the blogger said that flat tax is not for every country. Now GabbyD may cite the most protectionist or regulated economies to prove that flat tax doesn’t work. Like if North Korea imposed flat tax expect that nothing good will happen…

    • GabbyD permalink
      April 11, 2013 3:38

      RJ

      its not really, the NUMBER of studies, but whether we can show tax revenue rises or not, and how/why.

      seeing tax revenue rise after the reform doesnt mean causality either, or universality. however, this prima facie evidence is a good start. i’m glad froi is starting to embrace evidence is a good start.

    • GabbyD permalink
      April 11, 2013 3:38

      @RJ

      “I believe the blogger should just have cited countries that had increased revenue after imposing flat tax.”

      i agree with you! but froi says: “I never said the purpose of flat tax is to ‘raise total revenue’.”

      so you dont agree with the blogger….

      • April 12, 2013 3:38

        What you said doesn’t make sense at all. There are countries and studies and reports that prove that lower flat tax increased revenue. That should have informed you that your assumption is wrong.

        Also, it seems you’re absolutely not aware that there are studies and countries that collected lower revenue after raising taxes. Yes, the blogger mentioned laffer curve, but as i see it, it is not the focus of the entire blog. You’re simply reading between the lines. Sometimes you need to have a common sense… ;-) cheers!

  3. GabbyD permalink
    April 11, 2013 3:38

    Look at this study from the IMF: http://www.imf.org/external/pubs/ft/wp/2005/wp0516.pdf

    “This paper asks whether
    the strong revenue performance of the PIT was itself a consequence of this reform, using
    both macro evidence and, in particular, micro-level data on the experiences of individuals
    and households affected by the reform to varying degrees. It concludes that there is no
    evidence of a strong supply side effect of the reform. Compliance, however, did improve
    quite substantially—by about one third according to our estimates—though it remains
    unclear whether this was due to the parametric reforms or to accompanying changes in
    enforcement.”

    so, look, to know why is happening, you have to follow individual tax payers, and try to hold other aspects constant. some studies are better at this than others.

    • April 12, 2013 3:38

      So, are you saying that when Russia imposed a very low 13% flat tax, it collected very low revenue? Let’s just talk about facts and you can shove all your studies up your ass. Facts reveal that Russia’s revenue collection increase after imposing a 13% flat tax. Unless you have your own facts.

      Here’s my question: Did Russia’s tax collective improve after imposing a 13% flat tax? YES or NO.

      • GabbyD permalink
        April 12, 2013 3:38

        thats not in question.

        the thing we arent sure of is CAUSALITY, and the underlying mechanism.

        correlation is not causation.

      • April 12, 2013 3:38

        Well, you asked the blogger to cite just ONE PAPER that imposed flat tax that led to revenue increase. That means you were thinking that if a country imposed a very low flat tax that would lead to decreased or lower revenue collection.

        The flat tax is 13%, and it was considered by economists as radical enough.

        Again, you’re really unaware that there are many countries that imposed very high tax rates and failed to realize their projected revenue collections. One of them will be France.

        You can’t answer my very simple question, right?

        You can’t!

      • April 12, 2013 3:38

        Plus, I don’t think you’re a critical thinking reader. Many studies show that the 13% flat tax in Russia reduced tax evasion cases and led to more taxpayers paying their taxes. Like one cited study stated, the 13% flat tax changed people’s behavior. That’s one CAUSALITY. You don’t even know the meaning of causality.

        I think you’re too dumb and too crooked to admit you were thinking that a very low flat tax would lead to decreased tax collection. That’s your sincerely held belief. Well, let me tell you this, YOU’RE STUPIDLY WRONG!

  4. GabbyD permalink
    April 11, 2013 3:38

    the best study froi cited is the one by duncan, from indiana….

    however, since the link isnt really an study, but a summary, he makes this pronouncement:

    “there is also strong empirical evidence that behavioral responses to the lower tax
    rates played a significant role”

    great! what is this strong empirical evidence. note that he doesnt really tell us, or cite other studies that show this “strong” evidence.

    interestingly, he cite the gorodnichenko et al paper i linked to in the other blog entry. THAT paper said there was NO supply response either….

    so, where is this strong evidence?

    • April 12, 2013 3:38

      I think you only need to answer my question above.

    • April 12, 2013 3:38

      “great! what is this strong empirical evidence. note that he doesnt really tell us, or cite other studies that show this “strong” evidence.”

      Wow! That proves you have cognitive difficulty processing things that you read. Or did you even read the paper. I just re-read it.

      Duncan said: “Revenue could have also increased through compliance (income shifting), i.e., lower evasion. Although compliance increased for all groups, there was a greater increase among taxpayers who experienced the largest declines in tax rates.”

      The researcher is merely stating a fact. There was a greater increase among taxpayers who experienced the largest declines in tax rates! This is a fact. Do you even know what a study is? You only need to interpret facts. You don’t create your own facts!

      Read the whole paper.

      Again, were you thinking that a very low (13%) flat tax would absolutely, automatically lead to reduced revenue collection? That’s how I read your responses here. You’re one of the ignoramuses who think that lower tax rates would lead revenue drop.

      • GabbyD permalink
        April 12, 2013 3:38

        Right! if you summarize the lit on russia, in russia, compliance rose, but supply side responses are small.

        now, in the philippines, key question: is there a compliance issue for personal income taxes? is it the same kind of compliance issue for russia?

      • Econ Major permalink
        April 14, 2013 3:38

        GabbyD, I only need to ask you one question:

        Was Russia’s 13% flat tax followed by higher revenue collection and economic growth?

        The answer to that question is only YES or NO. Just keep your nonsense, baloney opinion…

  5. GabbyD permalink
    April 13, 2013 3:38

    Here is another study on flat taxes. http://ftp.iza.org/dp3721.pdf

    Let me quote from its literature review:
    “Only two actual reforms have been examined in the literature: the 2001 Russian reform
    by Ivanova et al. (2005) and the 2004 reform in the Slovak Republic by, among others, Brook
    and Leibfritz (2005). In the Russian case, the reform was followed by signiÖcant real growth
    in personal income tax revenue, but there was no strong evidence that this was caused by the reform itself or by improved law enforcement, nor could any positive labour supply responses be identifed.2 The Slovakian reform was expected to be revenue neutral, to increase the level and efficiency of capital formation and enhance the incentives of unemployed workers to seek work. However, no evidence apart from revenue-neutrality has been reported yet. While it is true that most real world reforms have been very recent, research on their e§ects is probably also limited due to the lack in those countries of high-quality (micro-)data for the pre-reform period”

    Note how the lit review frames the evidence in the correct way.

    • April 14, 2013 3:38

      Stupid people can always claim, without evidence, that the Russian growth after the implementation of 13% flat tax was not caused by the reform.

      But what you’re refusing to consider is the very simple fact that a 13% flat tax is a form of radical reform. It was very low compared to Russia’s previous progressive tax rates, and many economists cautioned or even warned that such reform would cripple the Russian economy.

      Again, was Russia’s 13% flat tax followed by economic growth and higher revenue collection? The answer is YES. It was 13% flat tax, not 20%, stupid!

      Plus, your study is so outdated. There are more recent studies.

      • GabbyD permalink
        April 14, 2013 3:38

        great! what are these more recent studies?

    • Econ Major permalink
      April 14, 2013 3:38

      That stupid guy cited an IMF paper. LOL! He doesn’t even know the biggest creditor IMF opposes any form of radical tax reforms, including flat tax! It also opposes tax havens. Epic fail!

      No use arguing with him.

  6. Econ Major permalink
    April 14, 2013 3:38

    To idiot GabbyD,

    Do you even know how to read and understand econ papers? Someone must study how your brain functions/works.

    While those alleged researchers cast some doubts on Russia’s 13% flat tax, what is clear is that the tax reform had behavioral effects.

    Here’s a study conducted by Ivanova, Keen & Klemm (2005) titled “Russia’s Flat Tax”…

    “This is not to say, however, that the reform did not have significant behavioural effects. For the evidence also points to a marked increase in tax compliance following the reform, with an increase of around 17 percentage points in the proportion of their income declared by those affected by the reform. Though the precise estimate should be treated with great caution, there are clear signs of a significant effect.”

    The problem with this study is that the researchers made a lot of claims and assumptions without backing them with solid proof and empirical evidence.

    Do you even know how many millions a lot of government sspend to secure proper compliance? Compliance is everything. The reason why punitive, high tax rates result in lower revenue collection is because of poor compliance.

    A number of more recent studies investigated Russia’s 13% flat tax on compliance and tax evasion. You should also read this studies. But I don’t think you’re intelligent to understand complicated econ studies.

    • GabbyD permalink
      April 14, 2013 3:38

      yes! i agree — in Russia, it raised compliance on the personal income tax.

      next, question: will a flat tax raise compliance in the philippines? What is the reason compliance is low in the philippines (vs russia)

      • Econ Major permalink
        April 14, 2013 3:38

        That question is utterly nonsense. You don’t even know what’s wrong with your stupid question. It depends upon your flat tax, stupid!

      • Econ Major permalink
        April 14, 2013 3:38

        GabbyD- “yes! i agree — in Russia, it raised compliance on the personal income tax.”

        this guy must have kept his empty brain somewhere. then that answers every silly, baloney thing you posted here. how can you claim russia’s revenue raised was not influenced by its 13% flat tax when you admitted right there (^^^) the new system raised compliance as cited by various studies?

        are you stupid, clinically imbecile, or both? this should conclude this discussion!

      • GabbyD permalink
        April 14, 2013 3:38

        “ow can you claim russia’s revenue raised was not influenced by its 13% flat tax when you admitted right there (^^^) the new system raised compliance as cited by various studies?”

        because those studies DONT KNOW the mechanism (i.e. it couldve have been enforcement, and (second, also important), its not at all clear that the same non-compliance issues in russia is affecting philippines too!

        compliance is one thing– the other striking thing is that there are small/none supply side effects for a flat tax.

      • Econ Major permalink
        April 14, 2013 3:38

        *Facepalm*

        You’re hopeless man…

      • GabbyD permalink
        April 14, 2013 3:38

        “That question is utterly nonsense. You don’t even know what’s wrong with your stupid question. It depends upon your flat tax, stupid!”

        upon MY flat tax? sure buddy… whatever u want. :)

        hey, if u dont understand these studies, ask me a question, and i’ll answer whatever confusion u may have.

  7. GabbyD permalink
    April 14, 2013 3:38

    This is a study which investigates WHO evades PIT in russia, “A comparison of the Russian 13% flat rate PIT evasion stratified contributions and the US tax schedule”:

    “The empirical study of Russian Personal Income Tax (PIT) evasion proves the existence of middle-class high-income groups able to finance the state but which lack a sufficient tax compliant attitude. The size of their income almost functionally positively correlates with tax evasion preferences. Within the flat rate the largest contribution to the general evasion in terms of hidden income comes from the middle-class groups and not from the richest Russians or the upper-middle class. The flat 13% PIT rate compared to the US IRS progressive schedule, both in case of absence and presence of tax evasion, is less favorable in terms of budget revenue and social justice. It is concluded that a positive outcome of flat rate introduction can be only achieved if the tax discipline of 10% of the richest citizens improves considerably”

    so, its the 10% richest in russia that evades the most. is this the same in the philippines?

    • Econ Major permalink
      April 14, 2013 3:38

      Just realized dealing with a scatter-brained like you is impossible.

      GabbyD, I only need to ask you one question:

      Was Russia’s 13% flat tax followed by higher revenue collection and economic growth?

      The answer to that question is only YES or NO. Just keep your nonsense, baloney opinion…

  8. Marcial Bonifacio permalink
    April 16, 2013 3:38

    I have long contemplated such a similar tax sa RP for quite some time. Either a flat tax or the fair tax, which would replace the income tax and VAT as advocated by Gov. Mike Huckabee (https://www.youtube.com/watch?v=gm4YG-xhLpM) would be favorable to economic growth. Syempre, repealing or lifting the protectionist clause sa Saligang-Batas would be ideal, nguni’t naisip ko foreign investments would still increase after such legislation were implemented. It’s just a question of how much and whether or not such newly created revenue would compensate for the lost revenue ng ating current sistema ng mga buwis.

  9. Marcial Bonifacio permalink
    April 16, 2013 3:38

    Gabby, ito ang ibang reference:

    http://www.cato.org/policy-report/julyaugust-2007/global-flat-tax-revolution

    The Cato Institute has stated the following:

    “Nations that have adopted flat tax systems generally have experienced very positive outcomes. Economic growth increases, unemployment drops, and tax compliance improves. Nations such as Estonia and Slovakia are widely viewed as role models since both have engaged in dramatic reform and are reaping enormous economic benefits. Policymakers in other nations see those results and conclude that tax reform is a relatively risk-free proposition. That is especially important since international bureaucracies such as the International Monetary Fund usually try to discourage governments from lowering tax rates and adopting pro-growth reforms.”

    Naiinitindihan mo ang iyong punto tungkol sa dahilan ng economic growth ng Russia. Talaga, it could be any number of variables of which the flat tax is just one nguni’t an important one. Economic liberalization (deregulation or decentralization) and adherence to the rule of law also play a part as Froi has emphasized sa blog. Gayunman, it would be most difficult to implement all favorable variables simultaneously. Samakatuwid, naisip ko a flat tax or fair tax could be a good start followed by a repeal of protectionist policies and deregulation. We need only make adjustments on the tax rate according to its effectiveness or ineffectiveness, nguni’t we will never know precisely unless we make such an endeavor.

    • April 16, 2013 3:38

      the simpler the better….there are so many avenues for corruption if the system remains complicated

    • April 16, 2013 3:38

      Russia’s miraculous flat tax reform did not only lead to economic growth and increase in personal income tax revenues; it also reduced cases of tax evasion.

      A 2008 study that looks into the effect of Russia’s flat tax reform on tax evasion made the following conclusion:

      “We find that, ceteris paribus, the consumption-income gap decreased by 9 to 12% more for those households that experienced a reduction in marginal tax rates. That is, the most significant reduction in tax evasion was for taxpayers that experienced a decrease in tax rates upon introduction of the flat tax. We also find that this decline in tax evasion was likely due to changes in voluntary compliance, as opposed to greater enforcement efforts by the tax administration authorities.”

      …”[I]f an economy is plagued by ubiquitous tax evasion, as was the case in Russia, then a flat rate income tax reform may lead to substantial revenue gains via increased voluntary compliance. At the same time, a strong evasion response suggests that the efficiency gains from the Russian tax reform perhaps are smaller than previously thought. Using observable responses of consumption and income to tax changes, we find that the tax-evasion-adjusted deadweight loss from the personal income tax is at least 30% smaller than the loss implied by the standard method based on the response of reported income to tax changes. While a flat tax offers tangible efficiency gains, its reduction of tax evasion may be most important.”

      • GabbyD permalink
        April 16, 2013 3:38

        yup, like i said, for perhaps 3x now,

        the question is WHY evasion fell. the gorodnochenko study doesnt know. it could be enforcement.

        the next question also ought to be: who evades taxes in the philippines? do the rich evade? or the professionals?

        The bir has consistently said that most of these evaders are professionals.

      • Ricky G. permalink
        April 16, 2013 3:38

        gabby’s style is hilarious. he asks for studies and then claim the researchers don’t know whatever. then why not create your own study.

        who evades in the philippines? lucio has been tagged as the biggests tax evader here. did you see the names of top taxpayers? what professionals are you talking about? those employed? here’s news for you. their tax contribution is withheld, stupid. do you know what withholding tax is and who pay withholding tax? do the rich pay withholding tax?

        kindly show us one link or study or bir official statement that professionals are the biggest evaders in the philippines? and do you even know why they evade? do you know?

      • Ricky G. permalink
        April 16, 2013 3:38

        gabbyd, i have only four questions for you. this is to test whether you’re prepared for this ;-)

        1. do you know russia’s tax rate in 2000?

        2. do you really think extremely low flat tax could lead to reduced revenue?

        3. what do you think is the definite, absolute flat tax rate that could prima facie lead to reduced tax rate?

        4. did the 2001 tax reform on russia lead to increased revenue at least two years after its implementation? yes or no.

        please answer these very simple questions.

      • GabbyD permalink
        April 16, 2013 3:38

        @ rickyg

        i think we agree! there is a dearth of ACTUAL RESEARCH on the philippines and tax evasion. i wonder why — i might actually attempt it.

        the problem is probably data. the longitudinal study that they have in russia is not available in the philippines.

        about professionals: they are hired for services, but not employed.

        but i heard are professionals and business owners are big tax evaders. but this is only thru news articles and interviews.

      • Ricky G. permalink
        April 16, 2013 3:38

        you’re really hilarious, man! you said- “the bir has consistently said that most of these evaders are professionals?” you said not the rich. who are the rich? now you’re including business owners in your list of tax evaders. do you even know what you’re talking about?

        i asked you at least one piece of evidence. don’t give me hearsay. do you know the meaning of hearsay?

        lack of studies? then ask winnie monsod. why do you need studies? can’t you use your own brain? ah i know. you don’t have brain at all. ;-)

        plus, are you going to answer my 4 questions above or are you going to ignore them, too? why can’t you answer them?

      • GabbyD permalink
        April 16, 2013 3:38

        “why do you need studies? can’t you use your own brain?”

        no you cannot use your own brain! thats we have studies, to PROVE what our brain tells us!

        as to the answers, they are in the studies we have been linking to.

        there are numerous studies about russia now. most (if not all), dont know why collections rose.

        also, in slovakia, collections were “revenue neutral”.

        is it possible for collections to go down? YES! see the studies again.

        if there is something in the studies you dont understand, point to the exact page/paragraph, so we can discuss it.

      • Ricky G. permalink
        April 16, 2013 3:38

        that’s why you can’t answer my very simple 4 questions. that explains it, i think. Even if you have studies, the problem is you don’t have brain ;-). it’s useless, man.

  10. Drew permalink
    April 16, 2013 3:38

    waiting for GabbyD. Go!

    • April 16, 2013 3:38

      He can’t move his goal post any further…

      • April 16, 2013 3:38

        Actually, I also have some “you name it experience” argument with this GabbyD dude –

        http://getrealphilippines.com/blog/2011/07/a-call-to-president-noynoy-aquino-to-ditch-the-color-yellow/

        His MO is to make you tired arguing your points.

  11. GabbyD permalink
    April 16, 2013 3:38

    @marcial
    the cato institute generally has no real analysis, just correlations.
    take a look at slovakia: “Slovakia has maintained a flat tax rate for nearly nine years. Originally introduced with the aim of stimulating investment and to show the world it had moved on from its former communist economy, it has now been abolished by the country’s newly re-elected government. Andreas Peichl analyses the effects of the flat tax since 2004, and what the results of the government’s move to a more progressive tax system might be. He also concludes that, despite the lack of data on its effectiveness, the remaining countries in Europe that still use a flat tax are unlikely to abolish it.”

    there is a dearth of research on eastern europe.

    but see this:

    “The idea of a flat tax, a tax levied at a single rate, has become an increasingly discussed and implemented fiscal strategy across Europe and the rest of the world. Estonia, Latvia, and Lithuania adopted flat tax systems in 1994 and 1995, making them the first modern countries to adopt flat tax structures. They subsequently experienced unprecedented economic growth, shocking the world as they emerged as “Baltic Tigers” at the turn of the century. Russia adopted a flat tax regime in 2001, and more than a dozen countries currently maintain some sort of flat tax structure today. However, the actual effect of the flat tax rate on the Baltic countries’ economic growth remains debated.
    Though there is clearly timing a correlation between the Baltic States’ economic growth and the implementation of the flat tax, the current economic analysis on the effect of the flat tax rate is largely confined to Russia. Additional research and analysis needs to be completed before determining whether the success of the “Baltic Tigers” can, and if so, to what extent, be attributed to their flat tax policies. The Baltic States are an appropriate laboratory for a number of reasons: they have the longest history for examination, and have many similarities between them including, economy, geographical location, and relationship to Europe. These similarities allow the analysis to control for unique factors in the individual countries and isolate the effect of a flat tax.
    Looking at revenue, GDP, and labor supply data, this paper attempts to analyze the effect of the flat tax on these three Baltic states. Using the analysis on these countries, this paper attempts to discuss whether a flat tax rate is an effective and potent growth strategy for transitional economies. The findings of these analyses DO NOT (MY EMPHASIS) indicate that the flat tax has any definitive positive impact on growth, equity, or labor supply. However, without the simplicity of the flat tax such growth may not have been able to occur in the early years of the Baltic states’ independence.”

    • Ricky G. permalink
      April 16, 2013 3:38

      why not show us your real analysis, mr. zero?

      kindly answer my questions above. thanks.

  12. GabbyD permalink
    April 16, 2013 3:38

    there is another paper on how russians evade taxation, google:

    “TAX AVOIDANCE BY CITIZENS OF THE
    RUSSIAN FEDERATION: WILL THE DRAFT
    TAX CODE PROVIDE A SOLUTION?*”

    and start in page 150.

    is this the kind of evasion that exists in the philippines?

    • Ricky G. permalink
      April 16, 2013 3:38

      irrelevant. how many stupid posts are you gonna make before you answer my 4 questions?

      • GabbyD permalink
        April 16, 2013 3:38

        not irrelevant since non-evasion is the BIGGEST MOST SIGNIFICANT reason for tax revenue rising in russia post-flat tax.

        in fact, its the most important thing to think about, as the authors of multiple studies have said that if there is ANY change, its a change in compliance.

      • Ricky G. permalink
        April 16, 2013 3:38

        then if tax evasion was still rampant in russia despite the 13% flat tax, then why the 26% increase in revenue in 2002?

        that’s why you need to answer my 4 questions above. why are you trying your best to evade it?

      • GabbyD permalink
        April 16, 2013 3:38

        huh? the study above is in 1997.

        it will give clues as to the kinds of evasion russians practice, which were reduced by the package of reforms in 2001.

      • Ricky G. permalink
        April 16, 2013 3:38

        that’s why you’re autistic. but… if tax evasion was still rampant in russia despite the 13% flat tax, as you claimed, then why the 26% increase in revenue in 2002?

        you’re not really gonna answer my very simple questions above, right?

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        HAhahaha! Gabby’s response really cracked me up. He’s as interesting as a zoo creature. ;-)

        He posted a 1997 study that talks about rampant tax evasion in Russia . THat study claims that the tax reform to be implemented in 2001 would fail becaus of proven cases of tax evasion. Then he posted a 2007 study the didn’t even read. FYI, that 2007 study says that the flat tax led to lower cases of tax evasion and thus higher revenue.

        The funniest thing is GabbyD thinks he makes sense…

      • Ricky G. permalink
        April 16, 2013 3:38

        gabbyd is obviously a ‘sisa’. may sira sa utak hahahaha!

      • GabbyD permalink
        April 16, 2013 3:38

        @paul

        “THat study claims that the tax reform to be implemented in 2001 would fail because of proven cases of tax evasion”

        the reason i posted that was to examine in depth as to how russians evade taxes.

        there are details here that need to be looked at BEFORE using the policy in the philippines.

        if filipinos and russians evade income taxes the same way, then that would be a strong case for replicability.

        without it, its not clear that it would work in the philippines.

      • GabbyD permalink
        April 16, 2013 3:38

        “THat study claims that the tax reform to be implemented in 2001 would fail becaus of proven cases of tax evasion. ”

        if you read that 1997 study, it refers to a different reform, the one in 1998. NOT the flat tax reform.

        geez, read the links!

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        You better read your own links, Mr. Bobo… ;-)

  13. Paul "Pogi" Santos permalink
    April 16, 2013 3:38

    Apparently this loonie GabbyD missed the study posted above– MYTH AND REALITY OF FLAT TAX REFORM: TAX EVASION AND REAL SIDE RESPONSE OF RUSSIAN HOUSEHOLDS (Gorodnichenko, Martinez-Vazquez & Peter, 2007).

    The study said tax evasion decreased significantly after 13 percent flat tax.

    • GabbyD permalink
      April 16, 2013 3:38

      paul,

      I posted that. before froi even did.

      read the comment threads paul.

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        Oh you did? Then how come you didn’t see this?

        “That is, the most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.”

        “The paper also offers several contributions to the public finance literature. First, we provide strong evidence of a positive relationship between (lower) tax rates and (lower) tax evasion.”

        I thought you have the ability to analyze studies?

      • Ricky G. permalink
        April 16, 2013 3:38

        gabbyd is obviously autistic ;-)

      • GabbyD permalink
        April 16, 2013 3:38

        @paul

        yes! note that gorodnochenko doesnt tell us why voluntary compliance rose. they shy away from that.

        thats why i’m trying to take this to the nature of russian tax evasion, and if their evasion is SIMILAR/SAME to how filipinos evade taxes.

        so, we have to more deeply understand russian tax evasion before having confidence that the same effect will happen in the same magnitude in the philippines.

        did u read the paper on russian tax evasion. what does it say?

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        Hahaha! It’s in the paper. That’s the paper’s overall finding. It’s because of the lower tax rate and not because of enforcement!

        Will you show me at least one passage or statement that supports your claim that they didn’t tell why voluntary compliance rose?

      • Ricky G. permalink
        April 16, 2013 3:38

        don’t take him seriously. the guy is obviously unhinged. may sira sa utak hehe. hindi niya naiintidihan ang pinagsasabi niya. he’s making claims without presenting evidence. like when he said the bir stated many times filipino professionals are the biggest tax evaders in the philippines, not self-employed businessmen. and then he included businessmen in his tax evading list. who are these rich now? lol! he’s got no proof at all.

      • GabbyD permalink
        April 16, 2013 3:38

        @paul

        thats all they said: voluntary compliance rose… but why? and for who?

        they did not say “It’s because of the lower tax rate”. go ahead, search the paper, and they never assign causality to lower tax rates.

        there are all unanswered questions.

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        Honestly did you read the paper? Did you see this statement: “First, we provide strong evidence of a positive relationship between (lower) tax rates and (lower) tax evasion.”

        Again, will you show me at least one line or paragraph that proves your assertion?

      • Paul "Pogi" Santos permalink
        April 16, 2013 3:38

        GabbyD– “thats all they said: voluntary compliance rose…”

        That’s not what they said. That’s the biggest proof you didn’t read or do not have the ability to analyze a very simple study.

        Here’s what they said: “We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting.”

        They also said, and I posted this above: “That is, the most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.”

        Will you show me at least one proof to support your assertion.

      • Ricky G. permalink
        April 16, 2013 3:38

        ano na naman kayang nakakatawang pasulot at kasinungalingan ang sasabihin ni gabbyd?

        abangan… :-)

    • Ricky G. permalink
      April 16, 2013 3:38

      gabbyd. just answer my 4 questions above.

      plus, where’s your one proof that professionals are the biggest tax evaders in the phillippines, not business owners and the rich. you know nothing, man. and you’re funny, too.

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