How to Save PNoy’s and Mar’s Pyramid Scheme

October 10, 2015

by Hector Gamboa

So presidential candidate Mar Roxas (Mar), echoing President Noynoy Aquino’s (PNoy) refusal to lower income tax rates, claims that lower income tax rate would be detrimental to the Filipino people. He states that with a reduced collection in income taxes, many government programs where a lot of people benefit from would be compromised (e.g. PhilHealth, Social Security, 4Ps, etc.).While PNoy’s and Mar’s rationalization for keeping the income tax rates as high as it is at the moment may sound noble, unfortunately for them I wasn’t born yesterday. Even if I set aside (for now) the act that there are so many kleptocrats in government who would be pocketing the money collected from the taxes the government collects, the whole concept of investing our money right now (through taxes) to be used by the government to create something that would reap dividends for me later on is really a big pyramid scheme if you think about it. Besides, do we seriously think that government officials act with the public good at heart?

So why do I say that government taxation is a pyramid scheme? Well, in a pyramid scheme people who invest early would be paid dividends later on but not necessarily from a profitable or productive activity but by the money invested by new participants. The problem is that this scheme would not last forever because at some point there wouldn’t be enough new investors to support the earlier investors. The pyramid then collapses and the investors get fleeced. In Social Security, for instance, the money your retired parent or grandparent is receiving is not the money he or she paid in years ago. That money is long gone (it probably went to the construction of politican X’s third mansion years ago). The money is coming from people contributing into the system now. So what is the difference between Social Security and a typical pyramid scheme? Well a pyramid scheme is a scam but Social Security is perfectly legal. But that is pretty much the only difference. Government taxation for programs such as Social Security is mandatory and that is pretty much the only reason why these have survived while many pyramid schemes (which are not mandatory) have collapsed long ago. But even a mandatory pyramid scheme can collapse if it cannot have enough new contributors. How many people now have or are opting to move abroad to seek greener pastures elsewhere? How many people are not paying income taxes because they are either unemployed or underemployed? With lesser take-home pay for those who are lucky to have a steady job, there would be less money to spend on consumer goods, which means less profits for businesses, which means less money for businesses to sustain employees. Where does this lead to? A decreased tax base which means lesser participants to sustain the mandatory pyramid scheme the government is running! So in essence, while the government can force people into taxation, if there aren’t enough contributors to support the current beneficiaries, the pyramid would eventually collapse. Wouldn’t the country be better served by broadening the tax base by creating conditions leading to increased number of taxpayers by reducing taxes on current taxpayers, instead?

But what about the poor? How will they survive without pro-poor programs like the Conditional Cash Transfer dole-out program? This is the problem with getting suckered into thinking that government, under “righteous” government officials like PNoy and Mar, would act with the public good at heart and will create good things for the people (especially the poor). First of all, it is absurd to think that the government is being generous when it gives money to this or that poor person. The government has no money of its own because it merely takes money from private individuals or private enterprises. One good question to ask is: Would private individuals or private businesses have done better things with the money the government takes from them? I would argue that yes, they would. Not convinced? Well, think about this – which would you rather use, a public toilet or a toilet at a private business facility?

It isn’t even about having “righteous” people running the government. We would be kidding ourselves if we think that such “righteous” people act with the public good at heart. Government officials act in self-interest just like the rest of us mere mortals! Take the case of pork barrel scam involving Janet Lim Napoles that rocked the nation.

The PDAF or Pork Barrel Scam involved the funding of “ghost projects” that were funded using the PDAF funds of participating lawmakers. These projects were in turn “implemented” through Napoles’ companies, with the projects producing no tangible output.

…

Napoles, who specialized in trading agricultural products, frequently used the procurement of agricultural inputs in the propagation of the scam. Either her employees would write to legislators requesting for funds for the implementation of a particular project (e.g. farm inputs), or a legislator would indicate to the DBM a particular recipient agency for his or her PDAF funds that would be pre-selected by Napoles. Once received, this is forwarded to the DBM, which would then issue a Special Allotment Release Order (SARO) indicating the amount deducted from the legislator’s PDAF allocation, and later a Notice of Cash Allocation (NCA) given to the recipient agency. The NCA would then be deposited in one of the foundation’s accounts, and the funds withdrawn in favor of the JLN Group of Companies. The funds would then be split between Napoles, the lawmaker, the official of the DA responsible for facilitating the transfer of funds and, for good measure, the local mayor or governor. The JLN Group of Companies offered a commission of 10-15% against funds released to local government units and recipient agencies of PDAF funds, while a legislator would receive a commission of between 40-50% against the total value of his/her PDAF.

So because the money available for the lawmakers to appropriate isn’t the lawmakers’ own money to begin with, they never showed utmost concern on where this money will be going. Some lawmakers even claimed that it is not their responsibility to check the authenticity of the projects or NGOs where the money will be going to. If the money was theirs, do we think they would have been as careless as they were?

Another case to ponder on is with the disgraced former MRT3 general manager Al Vitangcol. Investigations revealed that:

…Vitangcol used his power and authority, as the MRT’s general manager, chief end-user, head of the negotiating team and BAC member all rolled into one, “to dictate the proponents invited for the preliminary negotiations” of the maintenance services, and “intentionally hid his (affinitive) relationship with Soriano, which would have automatically disqualified PH Trams.

So essentially he picked a bidder not necessarily because the bidder offered the best deal for the government but because of the bidder’s close affinity to Vitangcol. If the MRT 3 were Vitangcol’s property or from his own investment, wouldn’t he have picked a bidder that would offer the best deal for his own money? The fact that the money he is playing with isn’t his makes him less concerned about the return on investment. This is essentially how government works (with or without corruption), it doesn’t spend money as carefully as those who actually earned them.

Now even if we say that not all people in government are crooks, it is in how the system works that leads the way to inefficiency and waste. Congress appropriates the money collected from taxes and then the government bureaucracy rears its ugly head. Unlike in the private sector, government bureaucracy does not deal with bottom-lines. Their motivation is to spend all the money collected and budgeted or they will lose it the following year. So the tendency is to use the money on half-baked ideas just for the purpose of keeping the appropriations going. So such a system will not change by electing “righteous” politicians. It will only change if the motivation at spending for the sake of not losing what could have been appropriated diminishes by limiting the money taxpayers give the government to play with. On this tax issue I agree with Senator Sonny Angara when he said:

It is always better to plow money back in circulation, where it can stimulate the production and consumption of goods. Sometimes, instead of government doing the spending for the people, let the people do the spending themselves.

Afterall, no one spends money as carefully as he spends his own. So it isn’t about electing “righteous” people but a matter of narrowing government responsibilities. If people are left with more choices on how to spend more of their own money we could see better results. Good government also means less government. If income tax rates get lowered resulting in a broadened tax base, it may even save the pyramid scheme the government wants to perpetuate.