IBON Foundation: Yes to Wealth Taxing the Rich, No to Economic Reforms?

Some time ago, I wrote about why I don't trust the IBON Foundation as an "economic think-tank". I remember getting a lot of insults (and I've decided to block such people), telling me stuff like, "What have you done for the Philippines compared to IBON?" or "What about your mass base?" There's also that 88% survey result from Pulse Asia, which I heard has a very biased sampling size. Regardless, it's important to speak out facts and figures even if only one percent believes it and 99% doesn't! As I was looking to challenge myself in writing, I thought of challenging IBON's ongoing stance on the wealth tax. They had an article written in 2023. It's all about taxing the super wealthy. Is it good or bad? It's time to think about it. 

Differentiating income from net worth

Here's a sample of what IBON had written:

A billionaire wealth tax can substitute for many consumption taxes that disproportionately burden millions of Filipino families struggling with high prices and low incomes. It can also signal the reversal of government policy to make the tax system more regressive especially since the tax reforms started by the previous Duterte administration and being continued today.

The IBON Foundation's stance is rather shaky. They have targeted Ramon Ang in one of their posts because he currently has stakes at Petron, MIA, New NAIA, and San Miguel Corporation. But let's think about what they're targeting may not be as liquid as they think. 

I'd like to talk about two things about the difference between income and net worth:

Income: The Money You Make

Income is the money you earn – think of it as the stream of cash flowing into your life. It includes your wages, salary, tips, dividends, rental income, and any other earnings you receive. Income is typically measured over a specific period, such as monthly or annually.

While income is crucial for covering your day-to-day expenses and building a comfortable lifestyle, it doesn't tell the whole story of your financial situation. It's like the fuel that keeps your financial engine running, but it doesn't necessarily signify your long-term wealth or financial stability.

Net Worth: The Measure of Wealth

Net worth, on the other hand, represents the overall financial value you've accumulated. It's calculated by subtracting your liabilities (debts, loans, mortgages) from your assets (savings, investments, property, valuables). Net worth is an indicator of your wealth and your financial health.

Think of net worth as a snapshot of your financial picture at a specific moment in time. It provides a more comprehensive view of your overall financial standing because it takes into account both what you own and what you owe. Your net worth serves as a gauge of how effectively you've built your wealth and managed your financial resources.

If we must consider what makes up the assets. In the accounting statement, we can take a look at this sample balance sheet from the Principles of Accounting:

If we look at the sample balance sheet, we can see that the assets are listed as part of the total assets. We have the inventories, the land, the building, the equipment, and other assets. How are you going to tax that? In the principle of accounting, we need to take a look at this as the source of taxation for businesses:

Business & Plans

Now, take a look at this sample that I used in a post refuting a coffee shop meme. The proper procedure for taxation isn't taxing the sales but taxing the net profit before taxes. After revenue or sales, we must account for expenses such as the cost of selling goods, salaries for workers, salaries for administrators, depreciation expenses (e.g., repairs), interest expenses (e.g., loan payments), dividend payments (if any), and then we account for the taxable income. Taxes are derived from what's left after the revenues minus all necessary expenses. That's where we get the taxes. 

We must look at it that net worth doesn't equal wealth. Let's think about this situation. A billionaire can have a huge factory that's worth this amount, but it's illiquid. If we think about it, there's the Return on Investment period. The ROI of a business isn't all that instant. What IBON may be proposing is to tax everything because it's wealth. But again, wealth doesn't always equal liquidity. The business can be worth PHP one million, but the first year barely has a net margin. Has IBON even considered that they are already taxing people before income can be made? 

This might be the problem of #SahodItaasPresyoIbaba confusing revenues for profits. Do I need to emphasize that profits themselves are what's remaining after all the expenses are done? If we must apply the whole "profits belong to the workers" principle, we are bound to distribute money that could've been reinvested to improve the company. Has IBON even thought of that? 

What IBON Foundation may be at the verge of taking financial tips from the Sheriff of Nottingman School of Economics.  If the Philippines should expect more revenue from taxes, the solution isn't to study from the Sheriff of Nottingham School of Taxation. Instead, we need to look at the Laffer Curve to see why tax evasion is hard to combat. I'd like to share this insight from Investopedia:

The Interplay Between Tax Rates and Revenue on the Laffer Curve 

The Laffer curve follows certain logic because tax revenue does not always increase whenever the tax rate increases. Of course, the government collects no income when the tax rate is 0% but imagine a situation where the government collects 100% tax revenue. All earnings would then be remitted to the government so there would be no incentive for workers to remain employed.

Total revenue declines as shown by the downward part of the curve, even when the tax rate is highest on the x-axis. It may seem counterintuitive but tax revenue is most often not maximized when tax rates are highest due to extenuating circumstances.

The Laffer curve's theory is that it's more efficient and ideal for a government to set a rate somewhere between 0% and 100%. This may seem simplistic but finding the exact point where total revenue is maximized is subject to great political debate. The graphical depiction above shows it somewhere in the middle but the true ideal rate can be skewed in one direction or the other. Different circumstances for different countries will also yield different outcomes.

Instead, what's the solution then? 

IBON Foundation should've considered funding via FDI instead, but how do they understand FDI?

What can also never be denied is that their stance on foreign investment is shaky. In fact, I remember firing a shot at Jose Enrique "Sonny" Africa, a post that probably caused a Facebook troll to falsely accuse me of shooting Ad Hominem at IBON. Have their feelings been hurt? It probably did, but I'd rather share that hard truth. Now, it's time to look at this claim by IBON, which made me laugh too hard just reading it:

The Philippines actually has more foreign investment today than South Korea, Taiwan or China did in their respective periods of economic take-off – pretty much confirming that large amounts of foreign investment is neither necessary nor sufficient for development.

The largest part of FDI has historically been to manufacturing where there are no Constitutional restrictions – on average accounting for almost half (46%) of FDI into the country since the 1990s.

The stock of manufacturing FDI increased eight-fold from US$1.6 billion in 1990 to US$12.5 billion as of 2017, the latest year for which data is available.

IBON just said, but seriously, where is the source? They say that the Philippines had more FDI than South Korea, Taiwan, or China did, even before their respective take-off. Can they please tell me their sources cause they certainly don't align! Do they think that they have a monopoly on information over the Internet, not realizing that everything you upload on the Internet is subject to the scrutiny and debate of the netizens? Honestly, I laugh at that claim, especially if one can really read about South Korea, Taiwan, or China. In my case, I also read From Third World to First which also included Doi Moi, which makes me think, "Are you really serious, IBON?"

Malaya Business Insight

The late Neil Doloricon of IBON even tried to sell this one. Please, if you really knew profits, FDIs only take the net income after taxes. It doesn't take a doctorate in economics or business administration (and honestly, I've already decided not to pursue a PhD) to understand that. All it takes is to understand that FDIs still have to pay their bills and taxes like all investors. An FDI may earn millions of pesos per month (revenue), but they still have to pay stuff like:

• Cost of goods sold
• Salaries, general, and administrative expenses
• Depreciation expenses
• Their suppliers, especially if they buy on credit
• Interest expenses
• Taxes are computed based on what's left from the revenues minus all expenses before taxes

In reality, IBON is failing to look at FDI most pragmatically. If we want to start closing the gap, it's again a game of supply and demand. FDI can be bad if there are no regulations. However, it was through FDI (with reasonable restrictions) that progress was actually made. The nations didn't enrich themselves first before opening to FDI. For example, Vietnam implemented Doi Moi while it was still poor. Vietnam didn't wait for the country to be "rich first" before it opened up the economy. Instead, Doi Moi happened while Vietnam was still struggling from the many years of living in the Vietnam War economy.

Besides, I'd like to ask how IBON represents FDI in their articles. It's still retaining the same wrong ideas of what Filipinos believe FDI to be. Foreign debt? Finding a sugar daddy who's a foreigner or a foreign boyfriend? Once again, it's really no surprise that I couldn't take IBON seriously!