In Part 1, we sought a 3% wealth tax on the country’s richest to end Philippine poverty. In Part 2, we showed that a wealth tax is feasible, addressing technical and political obstacles. In this concluding part, we enumerate the steps by which the wealth tax can be collected.
A billionaire can oppose a wealth tax by saying that most of her assets are tied to illiquid investments such as stock shares or securities, and that she does not have enough cash to pay a wealth tax. At the same time, a successful liquidation is likely to undermine the basis of her wealth itself since the sale of a huge volume of shares of stock usually causes a drop in the valuation of those same stocks.
The assets need not be sold in the capital markets. Instead, the equivalent share is transferred to government as tax payment. The government can then decide to liquidate it and transfer the cash raised to the Treasury. This is not a new thing; the BIR is known to confiscate forfeited properties, which they then auction off. Hence, an alternative option would be for a wealth tax law to allow the transfer of the share or security directly to its agencies, local government units (LGUs), government financial institutions (GFIs), or state universities and colleges (SUCs) as endowments or subsidies subject to proper congressional authorization.
The best strategy, however, is to allow the transfer of said shares or securities to a Sovereign Wealth Fund owned and controlled by the national government. This provides some stability in the ownership structure of major firms, and therefore some stability in the performance of these firms.
In short: a wealth tax to build a wealth fund.
Such a Sovereign Wealth Fund has more advantages than simply facilitating tax payments without destroying wealth. Consider, for instance, that even as we can mitigate capital flight through exit taxes, there is also a risk of a “capital dry-up”, especially in the absence of regional or international wealth tax agreements. Investments will simply favor nations without wealth taxes where they can accumulate capital unimpeded.
The wealth tax can be used to improve the productivity of labor and capital of the Philippine economy, so in the long run, investors will still find it favorable to locate her. Nonetheless, the short-run effects of a capital dry-up are significant, especially since we are yet to recover from the lost capitalization of the pandemic recession.
This is where Sovereign Wealth Fund will be useful. Even before it receives funds and capitalization from the wealth tax, we can already use it to mobilize the capital we already have. For instance, the Gross International Reserves (GIR) under the control of the Bangko Sentral ng Pilipinas (BSP). These reserves have already reached $107.9 billion as of October 20211, thanks to decades-worth of inflow of OFW remittances. A huge part of the GIR was accumulated due to the blood, sweat, and tears of overseas and migrant workers.
We therefore also propose a one-time $50 billion BSP endowment from the GIR to the Sovereign Wealth Fund. The endowment can either be taken from GIR’s currency reserve or from foreign investments which can either be liquidated or used as a continuous source of annual surplus to supply foreign-currency-denominated loans in order to channel capital to capital-starved sectors in the event of capital flight and investment drop. Specifically, we propose to continue our policy of providing capital to MSMEs, in line with an industrial strategy.2
What kind of an industrial strategy? Again, necessity and sustainability will be our guide, defending against acts of artificial scarcity by increasing the general productivity of the economy.
Ensure that the Sovereign Wealth Fund investments in particular sectors will be made with the objective of maximizing production in sectors that produce goods and services demanded by working-class households, especially food, housing, transportation, and other urban amenities. The expected increase in production can be empirically estimated from the consumption behavior of households across income increments3, and can be transformed into production quotas. Particular firms receiving subsidies must then agree to a negotiated production quota.
To summarize, we propose to allow wealth tax payments via financial assets, which will then go straight to the Sovereign Wealth Fund. The Fund will be initially financed by capital from BSP’s GIR, and will be mobilized to address the expected short-term capital dry-up as well as to increase the productivity in sectors where inflation is expected.
A possible loophole in our proposed scheme: by allowing payments through other means, billionaires may try a “pump-and-dump” strategy artificially inflating their assets before paying shares as wealth taxes. The response in this case is to allow only a transfer of assets subject to some constraints on the volatility and mean of the asset’s price during a 12-month period.4 The government will also be given a “holding period”, during which the government will reserve the option to return the asset to the payee in exchange for actual cash payment.
James Miraflor is a fellow at LEARN.
1See www.bsp.gov.ph/Statistics/External/Table 04.pdf.
2This one-time endowment can be eventually be recovered as foreign currency outflow is mitigated due to decreasing imports and increasing exports (in turn, due to improved production capacity).
3One can use the Family Income and Expenditure Survey (FIES) to calculate the “Engel Curve” of each consumer item.
4Existing capital estimation techniques such as the Weighted Average Cost of Capital (WACC) methodology can be used in this case.