Friday, September 02, 2005

EVAT will push through after all

Finally the Supreme Court has ruled that EVAT is constitutional. So perhaps we are not a Mickey Mouse country after all.

It couldn't have come sooner for the fiscal agenda of the administration. The 2006 budget deficit was conditional on EVAT being upheld. If the Supreme Court had ruled otherwise, either the 2006 budget needs to be downsized, or a bigger deficit would have to be planned - further increasing the national debt and damaging our country's reputation further in the financial markets.

The country's tax effort (revenue as a ratio of GDP) has dipped in recent years, and EVAT seems to be the best bet to lift that up again, despite its shortcomings. I hate higher taxes just like the next guy, but I need to think beyond my own pocket when discussing real economics.

Expect the usual fuss and bluster from the motley crowd of EVAT detractors and grandstanders. (They have another 15 days to file a motion for reconsideration, as I gather.) I have a simple question for them: what's the alternative? If they start talking about cancelling debt payments again, ask them the specifics. How would they deal with the repercussions on financial markets? Hey, they have some sloganeering to deal with that - institute nationalist industrialization! Impose national self-sufficiency! Close the economy to foreign trade and investment! Then the economy will prosper!

This is about the closest you can get to magical economics.

7 comments:

Anonymous said...

I'm ambivalent about the whole EVAT issue. If we had really good leaders, I think they should go after the "spending" side rather than the revenue side. Unfortunately, we all know why they decide to focus on the revenue side. It's easier, plus, it provides more... let's say opportunities.

AT

Econblogger said...

I agree, the credibility of our leaders in raising revenue is diminished by the rampant practice of corruption. However we need to make a decision on the deficit NOW and NEXT YEAR, whereas stamping out corruption may take years. So we are faced with the stark choices in the short term: reduce spending, increase borrowing, raise revenue. I'm for the third.

f said...

the funny thing is the very same interest groups that oppose evat are the same that expect more out of the government in terms of social spending. they dont want the government to borrow (even suggesting suspending debt payments), but at the same time don't want it to raise revenue either. even households that live on a daily budget can understand such positions are not logical.

Econblogger said...

As I said f, they want magical economics - something for nothing.

Anonymous said...

The issue with raising revenue (ignoring politics for now) is that I would expect we'd hit the declining stage of the Laffer curve any minute now (if we haven't done so yet). It's not just eVAT that's going up.

While stamping out corruption completely may take years, I think that showing interim results (semi-annual/annual) will have a positive impact. We don't have to make it disappear overnight, just make the first few steps and have people get a sense of momentum. If we were to hypothetically find a leader who could do that, I would argue that borrowing is a better option in the short term as the corruption drive works in the medium/long term. While you do increase interest rates and crowd out some investment, you do save on the negative effects of the Laffer curve. Also, if people believe you will stamp out corruption, I think that would have a positive impact on the economy (e.g., people willing to pay tax, foreign investors/lendors more willing to lend money, interest rates may not be as high since political risk isn't as great, etc)

AT

Econblogger said...

The Laffer curve predicts that, when tax rates are very high, there is a negative relationship between tax rates and tax revenue. However at a moderate range, rising tax rates increase tax revenue.

Unfortunately there is no good evidence for such a negative portion of the Laffer curve. What is abundantly obvious is the normal, positively-sloped portion.

The question is timing. How soon do you expect these salutary effects of an anti-corruption program? Meanwhile the 2006 budget clock is ticking. Tick-tock, tick-tock...

f said...

at some degree it does not matter where the financing is going to come from. as long as government spending is constant, either borrowing or raising taxes should have the same long term effects. if you borrow today, the people know in the future they will be taxed to balance the budget, if you tax today, you take pressure off from borrowing today and then taxing tomorrow. although there is something to be said about increasing the taxpayer's confidence in the government's ability to efficiently make use of these tax revenues. but then again it is hard to separate pure tax evasion from just that.