In economics, one of the ways that the government earns income is through citizens spending their money. It's not just spend it for the sake of spending it -- but spending it on registered institutions and get that income properly declared. When citizens spend their money and this income is declared and collected -- that means more money for the government.
How do we increase the spending power of Filipinos so they can give income to the government? A stupid old fool mentioned that it will be through his beloved 4Ps as his solution to increase spending power. True it does increase the pocket money of people but how can he account for the spending? Also, isn't 4Ps just rotating the money? Government gives money to people, people spend and money returns to government but how sure are you the money returns to government? That's what those 4Ps advocates fail to account for -- where was the money spent? If the money was spent on shabu and gambling then that money doesn't return at all to the government.
So how do we define the Marginal Propensity to Consume?
First, we need to define what marginal propensity to consume is and how to compute it. Here's what Investopedia says:
The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line- a sloped line created by plotting change in consumption on the vertical y axis and change in income on the horizontal x axis.
The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.
From the same source, here's the breakdown that should help you understand:
Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500). This also means that your marginal propensity to save will be 0.2 ($100 divided by $500).
If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500). The other side of marginal propensity to consume is marginal propensity to save, which shows how much a change in income affects levels of saving. Marginal propensity to consume + marginal propensity to save = 1.
Given data on household income and household spending, economists can calculate households’ MPC by income level. This calculation is important because MPC is not constant; it varies by income level. Typically, the higher the income, the lower the MPC, because as wealth increases, so does the ability to satisfy needs and wants, so each additional dollar is less likely to go toward additional spending.
According to Keynesian theory, an increase in production increases consumers’ income, and they will then spend more. If we know what their marginal propensity to consume is, then we can calculate how much an increase in production will affect spending. This additional spending will generate additional production, creating a continuous cycle. The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment.
Decreasing income taxes to a reasonable level for Filipinos would be the start of increasing their MPCs
I remembered writing a page on my basic understanding on Tax Reform. Do you remember the old tax table? Here it is assuming you don't remember or don't want to remember it:
We can see this is the income for every Filipino. How do you think the MPC here could increase if people keep getting taxed over and over. Let's say that Filipinos have PHP 10,000.00 for their monthly salary. That means they lose PHP 500.00 because it went to TAX. The person only gets to enjoy the PHP 9,500.00 never mind that there's still bills to pay, right?
Now let's take a look at the new personal income tax at the TRAIN Law. Some will say Filipinos will suffer under TRAIN tax law but I don't see it. Here's the reality that we can see under TRAIN. You can see the big difference here where people who earn PHP 250,000.00 and below get to keep the money. Now let's see the earnings in the old vs. the new system.
Old system we get for a net income of PHP 250,000 the following for taxes collected:
PHP 22,500.00 + (0.25)(PHP 250,000. - PHP 140,000) = PHP 50,000.00
In the new system, an extra PHP 50,000.00 is added into the household's income expenditure. This means that those who are earning PHP 250,000.00 and year will end up paying taxes through the excise tax. This would make people think twice about unnecessary expenses and minimizing their sugar intake. The new tax system will increase household purchasing power which will in turn give more income to businesses because there will be more customers.
Here's more sample computations that shows how individual households can have more spending power:
For an income of PHP 400,00.00:
Old tax system = PHP 50,000.00 + (PHP 400,000.00 - PHP 250,000.00)(0.30) = PHP 95,000.00
New tax system = (PHP 400,000 - PHP 250,000)(0.20) = PHP 30,000.00
Added income after taxes of PHP 65,000.00 in the new tax system
For an income of PHP 800,000:
Old tax system = PHP 125,000.00 + (PHP 300,000 x 0.32) = PHP 221,000.00
New tax system = PHP 30,000.00 + (PHP 400,000 x 0.25) = PHP 130,000.00
Added net income after taxes of PHP 91,000.00 in the new tax system
For an income of PHP 2,000,000:
Old tax system = PHP 125,000 + (0.32 x PHP 1,500,000.00) = PHP 605,000.00
New tax system = PHP 130,000 + (0.32 x 1,200,000.00) = PHP 514,000.00
Added net income after taxes of PHP 91,000.00 in the new tax system
For an income of PHP 8,000,00.00:
Old tax system = PHP 125,000 +(0.32 x PHP 7,500,000.00) = PHP 2,525,000.00
New tax system = PHP 490,000 + (0.32 x PHP 6,000,000.00) = PHP 2,410,000.00
Added net income after taxes of PHP 115,000.00 in the new tax system
One could argue that certain items are indeed taxed but these are items that are causing so much problem. For instance, do you know one reason why the Philippines is getting so much traffic? It's because almost everyone gets a car. Worse, some people buy cars but can't afford gasoline. The Philippines is a diabetic country so adding more taxes on sugary products such as soft drinks and refined sugar is a plus. Also, overuse of gasoline and other petroleum related products should be a call to limit their use -- too much gasoline and the like will also help increase air pollution. This would teach people not to overspend -- because if you spend too much then what will you use to spend on without incurring liabilities in the future?
Some can argue, "But doesn't that mean that the government will have less money?" Good question. Here's the issue of the super high old tax system. It's like running a business where you sell your prices twice or thrice the price of your competitor -- all the while your quality isn't any better. It reminded me of someone who opened a rent-a-car business who gave twice the rates of her competitors in hopes of getting easy money. Guess what? It failed miserably. Do you know that one of the advantages of business is the price? True, giving a higher price gives you income but giving occasional discounts and giving more for less also helps you gain more money. The same can be true for the old vs. new income system.
Why do you think tax evasion in one form or another is so high? It's because of the excessive income taxes. Who wants to earn an income of beyond PHP 500,000 and above if the government will just punish your achievements with a 32% of excess plus PHP 125,000.00? It would just encourage people to be lazy, wouldn't it? What's the use of achieving something if you have to give that much of a huge slice of the pie to people who don't deserve it? After all, what's the use of encouraging people to spend when all the while they're overtaxed?
Opening the Philippines to Foreign Direct Investors will also help increase MPCs of Filipinos
It's more than time to stop believing in all the paranoia you hear about FDIs such as they are invaders and one of such idiots is Hilario Davide and the others belong to Filipino activists groups such as Migraine International, Bayad Muna and Kabobohan Partylist to name a few. What's worse is that the same stupid people is that they ignore that economic liberalization is needed to increase the minimum wage. It's stupid to hate the idea of opening the Philippines to FDIs but go to work for countries where FDIs are very much welcome by default.
Why do many Filipino's Small and Medium Business Enterprises stay the way they are? It's not just a problem of management. The competition gap is too huge. What can a small or medium business do against the oligarchy? If there's a lack of investors then there's a lack of potential suppliers, service providers and customers. How can a business grow if the choices for whom to sell and whom to get suppliers, service providers and not to mention customers are very limited? But think if there were more FDIs then you have the bright side -- more service providers and customers than just the existing ones in the Philippines. If your customer has competitors then get those competitors to be your customers too and expand your business through them!
FDIs will help generate employment and fill the huge supply-demand gap for employment. You can't employ so many jobless Filipinos who just a few Filipino businessmen, right? FDIs on the other hand will be registered in the Philippines, they will be subjected to Filipino laws and they are mandated to employ locals in the places where they do business. That means FDIs will not only have to pay taxes but follow the mandates given by labor laws. This will mean that FDIs hiring Filipinos will mean more Filipinos with jobs. In turn, Filipinos with jobs rather than handouts will have higher MPC in the long run than those who just rely on handouts given to them by 4Ps.
What we may also realize is that FDIs will provide more choices for consumers so there will be more to spend on. How can you increase spending if choices are too little? You can't have it. There must be more choices to spend from. The problem is limited choices. The law of supply and demand dictates that when supply is low and demand is high -- naturally prices of the supply will go high. FDIs will soon help fill that supply/demand gap which will naturally causes prices to lower down.
How do we increase the spending power of Filipinos so they can give income to the government? A stupid old fool mentioned that it will be through his beloved 4Ps as his solution to increase spending power. True it does increase the pocket money of people but how can he account for the spending? Also, isn't 4Ps just rotating the money? Government gives money to people, people spend and money returns to government but how sure are you the money returns to government? That's what those 4Ps advocates fail to account for -- where was the money spent? If the money was spent on shabu and gambling then that money doesn't return at all to the government.
So how do we define the Marginal Propensity to Consume?
First, we need to define what marginal propensity to consume is and how to compute it. Here's what Investopedia says:
The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it. Marginal propensity to consume is a component of Keynesian macroeconomic theory and is calculated as the change in consumption divided by the change in income. MPC is depicted by a consumption line- a sloped line created by plotting change in consumption on the vertical y axis and change in income on the horizontal x axis.
The marginal propensity to consume (MPC) is equal to ΔC / ΔY, where ΔC is change in consumption, and ΔY is change in income. If consumption increases by 80 cents for each additional dollar of income, then MPC is equal to 0.8 / 1 = 0.8.
From the same source, here's the breakdown that should help you understand:
Suppose you receive a $500 bonus on top of your normal annual earnings. You suddenly have $500 more in income than you did before. If you decide to spend $400 of this marginal increase in income on a new business suit and save the remaining $100, your marginal propensity to consume will be 0.8 ($400 divided by $500). This also means that your marginal propensity to save will be 0.2 ($100 divided by $500).
If you decide to save the entire $500, your marginal propensity to consume will be 0 ($0 divided by 500). The other side of marginal propensity to consume is marginal propensity to save, which shows how much a change in income affects levels of saving. Marginal propensity to consume + marginal propensity to save = 1.
Given data on household income and household spending, economists can calculate households’ MPC by income level. This calculation is important because MPC is not constant; it varies by income level. Typically, the higher the income, the lower the MPC, because as wealth increases, so does the ability to satisfy needs and wants, so each additional dollar is less likely to go toward additional spending.
According to Keynesian theory, an increase in production increases consumers’ income, and they will then spend more. If we know what their marginal propensity to consume is, then we can calculate how much an increase in production will affect spending. This additional spending will generate additional production, creating a continuous cycle. The higher the MPC, the higher the multiplier—the more the increase in consumption from the increase in investment.
Decreasing income taxes to a reasonable level for Filipinos would be the start of increasing their MPCs
I remembered writing a page on my basic understanding on Tax Reform. Do you remember the old tax table? Here it is assuming you don't remember or don't want to remember it:
We can see this is the income for every Filipino. How do you think the MPC here could increase if people keep getting taxed over and over. Let's say that Filipinos have PHP 10,000.00 for their monthly salary. That means they lose PHP 500.00 because it went to TAX. The person only gets to enjoy the PHP 9,500.00 never mind that there's still bills to pay, right?
Old system we get for a net income of PHP 250,000 the following for taxes collected:
PHP 22,500.00 + (0.25)(PHP 250,000. - PHP 140,000) = PHP 50,000.00
In the new system, an extra PHP 50,000.00 is added into the household's income expenditure. This means that those who are earning PHP 250,000.00 and year will end up paying taxes through the excise tax. This would make people think twice about unnecessary expenses and minimizing their sugar intake. The new tax system will increase household purchasing power which will in turn give more income to businesses because there will be more customers.
Here's more sample computations that shows how individual households can have more spending power:
For an income of PHP 400,00.00:
Old tax system = PHP 50,000.00 + (PHP 400,000.00 - PHP 250,000.00)(0.30) = PHP 95,000.00
New tax system = (PHP 400,000 - PHP 250,000)(0.20) = PHP 30,000.00
Added income after taxes of PHP 65,000.00 in the new tax system
For an income of PHP 800,000:
Old tax system = PHP 125,000.00 + (PHP 300,000 x 0.32) = PHP 221,000.00
New tax system = PHP 30,000.00 + (PHP 400,000 x 0.25) = PHP 130,000.00
Added net income after taxes of PHP 91,000.00 in the new tax system
For an income of PHP 2,000,000:
Old tax system = PHP 125,000 + (0.32 x PHP 1,500,000.00) = PHP 605,000.00
New tax system = PHP 130,000 + (0.32 x 1,200,000.00) = PHP 514,000.00
Added net income after taxes of PHP 91,000.00 in the new tax system
For an income of PHP 8,000,00.00:
Old tax system = PHP 125,000 +(0.32 x PHP 7,500,000.00) = PHP 2,525,000.00
New tax system = PHP 490,000 + (0.32 x PHP 6,000,000.00) = PHP 2,410,000.00
Added net income after taxes of PHP 115,000.00 in the new tax system
One could argue that certain items are indeed taxed but these are items that are causing so much problem. For instance, do you know one reason why the Philippines is getting so much traffic? It's because almost everyone gets a car. Worse, some people buy cars but can't afford gasoline. The Philippines is a diabetic country so adding more taxes on sugary products such as soft drinks and refined sugar is a plus. Also, overuse of gasoline and other petroleum related products should be a call to limit their use -- too much gasoline and the like will also help increase air pollution. This would teach people not to overspend -- because if you spend too much then what will you use to spend on without incurring liabilities in the future?
Some can argue, "But doesn't that mean that the government will have less money?" Good question. Here's the issue of the super high old tax system. It's like running a business where you sell your prices twice or thrice the price of your competitor -- all the while your quality isn't any better. It reminded me of someone who opened a rent-a-car business who gave twice the rates of her competitors in hopes of getting easy money. Guess what? It failed miserably. Do you know that one of the advantages of business is the price? True, giving a higher price gives you income but giving occasional discounts and giving more for less also helps you gain more money. The same can be true for the old vs. new income system.
Why do you think tax evasion in one form or another is so high? It's because of the excessive income taxes. Who wants to earn an income of beyond PHP 500,000 and above if the government will just punish your achievements with a 32% of excess plus PHP 125,000.00? It would just encourage people to be lazy, wouldn't it? What's the use of achieving something if you have to give that much of a huge slice of the pie to people who don't deserve it? After all, what's the use of encouraging people to spend when all the while they're overtaxed?
Opening the Philippines to Foreign Direct Investors will also help increase MPCs of Filipinos
It's more than time to stop believing in all the paranoia you hear about FDIs such as they are invaders and one of such idiots is Hilario Davide and the others belong to Filipino activists groups such as Migraine International, Bayad Muna and Kabobohan Partylist to name a few. What's worse is that the same stupid people is that they ignore that economic liberalization is needed to increase the minimum wage. It's stupid to hate the idea of opening the Philippines to FDIs but go to work for countries where FDIs are very much welcome by default.
Why do many Filipino's Small and Medium Business Enterprises stay the way they are? It's not just a problem of management. The competition gap is too huge. What can a small or medium business do against the oligarchy? If there's a lack of investors then there's a lack of potential suppliers, service providers and customers. How can a business grow if the choices for whom to sell and whom to get suppliers, service providers and not to mention customers are very limited? But think if there were more FDIs then you have the bright side -- more service providers and customers than just the existing ones in the Philippines. If your customer has competitors then get those competitors to be your customers too and expand your business through them!
FDIs will help generate employment and fill the huge supply-demand gap for employment. You can't employ so many jobless Filipinos who just a few Filipino businessmen, right? FDIs on the other hand will be registered in the Philippines, they will be subjected to Filipino laws and they are mandated to employ locals in the places where they do business. That means FDIs will not only have to pay taxes but follow the mandates given by labor laws. This will mean that FDIs hiring Filipinos will mean more Filipinos with jobs. In turn, Filipinos with jobs rather than handouts will have higher MPC in the long run than those who just rely on handouts given to them by 4Ps.
What we may also realize is that FDIs will provide more choices for consumers so there will be more to spend on. How can you increase spending if choices are too little? You can't have it. There must be more choices to spend from. The problem is limited choices. The law of supply and demand dictates that when supply is low and demand is high -- naturally prices of the supply will go high. FDIs will soon help fill that supply/demand gap which will naturally causes prices to lower down.
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