Batuhan: A Train derailed?

TRICKLE down economics, a policy popularized by the great GOP president Ronald Reagan, is enjoying a huge resurgence of late. Then called “Reaganomics” in reference to the president who made it such a big part of his economic policy, it is now also the weapon of choice for the man who would be “The New Reagan” – Donald Trump.

One of Trump’s claimed legislative victories is the passing of his tax cut bill, which effectively lowers the top corporate rate from 35 percent to 21 percent -- from one of the highest, to overnight one of the lowest tax rates for businesses in the world. Old Reaganites are happy, claiming that tax cuts are what stimulate the economy, and gives consumers more choice in terms of goods and services that the savings from lower taxes would afford business organizations.

Indeed, benefits from the lower tax rates are already evident, even with those working in the Philippines. Many American companies, flush with the cash that Mr. Trump has gifted them, in turn gave out one-time bonuses to their employees. Those workers, even those who are located outside the United States, were beneficiaries of a late Christmas gift – all thanks surprisingly to an unlikely Santa Claus in Mr. Trump.

In the Philippines too, we also had our own version of tax reform, trumpeted as the Tax Reform for Acceleration and Inclusion (Train) program of President Rodrigo Duterte. The headline feature of the package was eliminating (or greatly reducing) tax to many employees earning at the lower end of the salary scale, making hordes of BPO workers, for example, happy recipients indeed of a late Christmas gift from the maverick leader. Some of these workers were doubly gifted – getting a one-time bonus from their companies owing to the Trump windfall, and getting those bonuses and their salaries taxed lower, from Duterte’s Train program. Happy days all over then, it seems?

Well, maybe not so fast. At least not yet.

The one aim common among all tax reform plans is that it will stimulate the economy. The only difference is – which lever is being used to do the stimulation. Tax-cuts fuel the so-called “supply side” of the economy, the C in the basic C + I + G equation of GDP. In the Train version, the goal is to boost the economy through increasing the G, through the Build, Build, Build program.

So is there a problem then?

In the Trump bill, the cuts give more money to the hands of the private sector. More money for them means money they can use to produce more goods and services, and in turn provide more “supply” to the consumer, increasing the amount spent for consumption.

In the Philippine situation, no money gets to the corporate sector. In fact, cost of business is arguably made more expensive, through the removal of incentives, additional taxes being levied on certain consumer goods and manufactured items, etc.. What may end up happening is that with the same amount of “supply” (and maybe even more expensive “supply”) around, the money at the hands of consumers after the tax cut just ends up causing inflationary pressure, with more money chasing after the same amount of goods and services.

But the most uncertain part of all is the fact that it is the G part of the equation that is being favored here. Government expenditure will increase dramatically, driven by the Build, Build, Build program, which was the reason in the first place for the whole Train initiative.

And guess what? Our experience with government spending has not been good. Very bad, in fact, is more like it. Which means that this Train has every likelihood of coming off the rails, before it even gets to the station.

(http://asbbforeignexchange.blogspot.com & http://twitter.com/asbbatuhan)
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