by Alex Roldan
It’s just like one of those love-hate relationships. You may hate it, yet you know you can’t live without it. Taxes are necessary for the country to survive. Without taxes there’s no government, no country, and none among us can claim being a citizen.
That is how important taxes are. And this is the very reason why the government is bestowed the power to impose taxes and punish those who fail or cheat on such obligation. Government has no better source of income than taxes. It is the easiest way to accumulate money by the millions. Nay, by the billions. All the government needs to do is to compute and collect. The burden is on the people!
Though we are obliged to pay what taxes are due from us (or else!), we have the right to question the amount of tax and where it is going. We have to understand that one of the main sources of budget deficit is actually their self-formulated budget. They project the needs of the country where many of the budget line items are based on hypothetical grounds such as the type of programs and services they want implemented, the pet projects of lawmakers who are willing to wage war to get it – as if their constituencies cannot survive without it, and insert figures in the budget of many agencies for their other so-called “special” projects. The inevitable debate is always on whether government should raise more taxes or improve collection thereof. Everyone will that government should opt for fiscal tightening.
I believe that P-Noy’s government should rather cut unnecessary spending than heed new calls from some lawmakers to raise taxes.
There is a wealth of academic evidence on the effects of taxes and government spending on economic growth and deficit reduction which point to the following conclusions;
One, that higher taxes reduce economic growth. Studies in countries that are members of the Organization for Economic Co-operation and Development (OECD) conclude that a one percentage point increase in tax/GDP ratio reduces output per capita by 0.03%, or 0.6 to 0.7% if the effect on investment is taken into account.
Second, it is not true that lower government spending, especially government consumption spending, would stunt economic growth. Studies show otherwise – that lower government consumption spending would, in fact, increase economic growth. The 2008 European Central Bank study showed that a one percentage point increase in the spending/GDP ratio reduces output by 0.12 percentage points for the OECD countries.
In 2007, it was found that a one percentage point increase in the share of government consumption in GDP reduces the equilibrium GDP growth rate by 0.216%.
And finally, effects of fiscal consolidation that result in lower government spending are more durable than those largely comprised of higher taxes.
The International Monetary Fund in its report stated that “evidence from OECD countries shows that although changes in revenue and expenditure contribute to closing the fiscal gap, expenditure restraint brings about longer and lasting and larger adjustment episodes, which are more successful in achieving a debt stabilizing fiscal position. Expenditure reduction demonstrates a firmer commitment to feasible and substantial consolidation, and may trigger lower interest rates and boost private demand.” (IMF Staff Report on the UK Economy, 2008)
Increasing taxes reduces GDP growth, which makes deficit reduction harder, while reducing government consumption increases economic growth, making deficit reduction easier. While the reality is somewhat more complicated, with successful economic recoveries and fiscal consolidations depending on many more factors than we have discussed, the broad trends are clear. It is better to reduce borrowing by cutting spending than by increasing taxes. #
For comments, e-mail to roldanalex@yahoo.com.
