Monday, 5 January 2009

Why THEY should pay PIT now

A recent news reported that: "The permanent committee of the National Assembly decided not to change the time which the (newly passed) Personal Income Tax Law to be effective, because the alteration was considered as out of legitimacy of the body." The decision means that from Jan 1st this year, those who have incomes fall into a certain threshold are required to pay this tax (myself is not included, sure!). Needless to say, as the budget deficit is worryingly increasing while tariff tax and revenues from oil have been significantly reducing due to regional and international commitments as well as disadvantages in global oil market, an alternative source must be found to finance that deficit. Some plans for a postponement or partly reduction/exemption are assumed to be submitted to the Politburo. Following the emergence of the fashionable stimulus package introduced some weeks ago, some high profile commentators argued that the delay of PIT should be supplemented as a component of the package. However, both theoretically and empirically, it may not work. The curious readers of this blog are suggested to read the literature on the Ricardian - Barro Equivalence which says that, simply by cutting current tax, aggregate demand, then output can not be expanded as expected, because at some point in the future, the budget deficit must be financed by increasing tax. Of course, this new classical tenet contains its own weaknesses, which are regularly attacked by New Keynesian theorists. Beside explicit or implicit unrealistic assumptions of a perfect capital market, the fixed path of government expenditure, or the inter-generational concern, the argument seems not having enough consideration on the political consequences of such populist policy. In this dooming days, such a news may be a possible tranquillizer for us to survive before the storm is over. The beneficiaries are just limited to those who have relatively high income. But wait, who would be the potential victims? Simply the answer is you, and me. We unavoidably have to pay this tax (or debt), with full interests and principal. And if you are old enough (or if you get married sooner than me, my buddies!,) your children may be directly or indirectly imposed the tax. One foreseeable circumstance is that new schools may not be constructed due to insufficient public budget. Which one do you prefer, a tax cut for well-beings (I know for sure that I am myself not the case and presumably so is majority of my buddies ) or a threat of being uneducated facing your children in the not-so-far future?

Disclaimer: Those written above are exclusively dedicated for myself and my friends
. But my idea is unchanged: The PIT tax cut policy should be seriously considered because it seems to do more harm than good.

Some notes for further discussions:

1/ According to Tim Harford of FT, an empirical study carried out by Shapiro and Slemrod concluded that most US citizens used a 2001 windfall to payoff their debts, leaving more money available to pay future taxes - Ricardian equivalence in action.

2/ A broad picture of the current budget deficit and the potential impacts of a suggested stimulus package was drawn in a hot study made by CEPR of Dr. Atula.

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