A response to Prof. Hilbay

Yellow Pad

“There are not a few comrades doing inspection work, as well, as guerrilla leaders and cadres newly in office, who like to make political pronouncements the moment they arrive at a place and who strut about, criticizing this and condemning that when they have only seen the surface of things or minor details. Such purely subjective nonsensical talk is indeed detestable. These people are bound to make a mess of things, lose the confidence of the masses and prove incapable of solving any problem at all.”

— Mao Zedong,
Oppose Book Worship
May 1930

Some quarters have asked me to react to Prof. Florin Hilbay’s polemical rejoinder to my BusinessWorld column titled “Assessing TRAIN,” dated Jan. 8. I oblige not because I like debating with a comrade but because I see the imperative of correcting mistaken ideas and clarifying the method of thinking.

Wrong thinking or mistaken analysis is as dangerous as fake news.

I am not a Lenin who wishes to demolish all his points, which will unnecessarily prolong the discussion. But here is the meat of what Prof. Hilbay wrote on his Facebook account on Jan. 10:

1. “The problem with this aggregate thinking is that it hides the distribution of the burdens — who gets squeezed with the P90 billion [the net amount that package 1 of TRAIN or the Tax Reform for Acceleration and Inclusion will yield], and more important, can the segment of the population that gets squeezed afford that burden.”

2. “TRAIN is a series of amendments to the tax code meant primarily to generate revenues, not a detailed budget of how that money will actually be spent. That is why one cannot separate corruption and inefficiency in the forms of billions spent on intel funds, the war on drugs, use of troll armies, funding for charter change, etc. from TRAIN.”

3. “To equate more revenues because of taxation with strengthened macroeconomic fundamentals is plain tautology.”

4. “Apart from the doubtful sufficiency of the transfers, we have to grapple with the size of the net cast by TRAIN. The breadth of cash transfers is much smaller than the net cast by TRAIN, which covers everyone because everything is affected by fuel increases.”

So what’s wrong with Prof. Hiblay’s thinking and method of thinking?

He talks about the people being squeezed, about “the distribution of burdens,” and the like, but he does not back up his assertions with data or evidence.

On the other hand, to inform our analysis, we have the Family Income and Expenditure Survey (FIES), the Labor Force Survey, the National Nutrition Survey, and the other data from the Philippine Statistics Authority, Bangko Sentral ng Pilipinas (BSP), National Tax Research Center, Department of Trade and Industry, Department of Energy, Department of Health, etc.

To illustrate, we supply some figures below, drawn mainly from the latest FIES (2015).

The first graph clearly shows that the richer deciles, especially the richest 10% of households have the biggest fuel consumption. The following table (on fuel expenditure as a percentage of total expenditure and as a percentage of household income as well as taxes paid as percentage of fuel expenditure) similarly shows that the richer deciles spend more for fuel products and pay more fuel taxes than the poor.

The last table shows that despite the inflationary effect of the fuel taxes, the tax relief for the upper class, the middle class, and working class and the cash transfers for the poorer households result in a net gain in income or take-home pay for everyone. Only those with yearly income compensation of P8 million and above (or .01% of the population) will be adversely affected because the marginal rate for their compensation level increases from 32% to 35%.

In short, the data contradict Prof. Hilbay’s opinion. The data support our position.

Prof. Hilbay, too, misunderstands macroeconomics (although he quotes Keynes) when he says: “To equate more revenues because of taxation with strengthened macroeconomic fundamentals is plain tautology.” In a similar vein, he disparages “aggregate analysis.” For his enlightenment, sustained macroeconomic growth is a necessary condition to eradicate poverty. Sustained macroeconomic growth will also lead our country to prosperity in a generation. But macroeconomics is about aggregate demand. TRAIN’s import or relevance is expressed in the boost in consumption arising from the significant personal income tax relief and the unconditional cash transfers, the increase in government spending resulting from increased tax effort, and the rise in investments arising from the higher savings, credit upgrade, and lower interest rates.

Prof. Hilbay is also barking up the wrong tree when he blames TRAIN for the quality of government spending. TRAIN is about tax policy reform, not the General Appropriations Act. The point is, we must not throw out tax reform just because we fear the spending. The proper approach is to fight for the reforms on all fronts. Public opinion and collective action can also shape the expenditure side. For example, public pressure thwarted the attempt to reduce the budget of the Commission on Human Rights to one peso.

Prof. Hilbay sees the bad spending that of course we must oppose. But what about the good spending?

Without a good TRAIN, for example, we will not be able to fund the expansion of universal health coverage, which intends to secure 100% membership in PhilHealth, expand the primary care benefits, and reduce the out-of-pocket expenses of the poor. The cost is equivalent to an additional P90 billion in revenue annually for the medium term.

I admire comrade Hilbay for opposing extrajudicial killings. But blocking TRAIN means endangering the health and lives of the poor. As a close friend in the development work said, poverty is the main killer in the Philippines.

TRAIN has a safeguard to ensure that the revenue will be allocated to infrastructure, education, health and other social protection measures. National Academician Raul Fabella has argued that the soft earmarking for infrastructure and social protection is a form of credible commitment that the taxes will be spent wisely. Earmarking is acceptable under conditions of weak institutions.

Mr. Hilbay ends his argument by quoting Keynes’s most famous statement: “In the long run we are all dead….” I hope he is not suggesting that scholars like him are dismissive of the long run. Sustained growth and prosperity and building institutions are all about the long term. The reckless, the unwise, and the irresponsible are those who belittle the long run.

It is easy to Google Keynes’s statement and quote it. But does Mr. Hilbay understand it? Sadly, he misrepresents it. He distorts it.

When Keynes made that statement, he was railing against those who oppose reform; those who thought that intervention was unnecessary to address the problem of the conjuncture.

In Keynes’s time, putting in place activist fiscal and monetary policies was urgent to fight the stubborn recession. But the conventional view was that the economy or the market would eventually stabilize, its equilibrium restored, without policy intervention in the long run. In other words, Keynes wanted immediate action. He could not wait for the change to happen in the future precisely because by then, his metaphor that “we are all be dead” applies.

Keynes’s idea thus contradicts Prof. Hilbay’s argument. Mr. Hilbay does not want tax policy intervention like TRAIN, in spite of the tax’s system unfairness, complexity, and inefficiency. He does not want TRAIN despite the need to address the present financing constraints, provide the income tax relief, and finance AmBisyon 2040. Or does Mr. Hilbay want to deny our people AmBisyon 2040, a legacy of the Aquino III administration, which he was part of?

From this exposition, I show that Prof. Hilbay’s resistance to TRAIN lacks a “deeper explanation and a reasonable justification.” I can see why other groups or people are fighting TRAIN. Some are driven by ideology — either minimalist government and economic libertarianism or orthodox socialism — and by the politics of overthrowing Duterte. But whatever the motivation, my appeal is for comrades and professors to be guided by reason and enlightenment, and to be humble in the face of facts and evidence that disagree with them (see graphs).Fuel Data from FIES Welfare impact of TRAIN as of 14 January 2018

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