Author: Hafiz Noor Shams

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[2427] Are telcos actually raising prepaid rates?

Post author By Hafiz Noor Shams
Post date Friday, September 9 2011
1 Comment on [2427] Are telcos actually raising prepaid rates?

Consider a tax imposed on a producer in a transaction with its customer. In other words, the producer pays the tax. Does the tax burden fall on the producer exclusively? Or is it shared? Or really, is it a tax on the consumer?

This refers to the controversy regarding the passing of the 6% service tax from telecommunication companies to consumers of prepaid telecommunication services. Telcos have been absorbing the tax previously and now they have decided not to do that anymore. The service tax was supposed to be paid by the consumer anyway. It is a service tax, which is a consumption tax.

What does economics have to say about the passing? What is the welfare effect?

Laypersons might find the answer outrageously shocking: it does not matter who pays what. Whoever the taxpayer, the actual tax burden share between the producer and the consumer is unchanged.

There is a concept in microeconomics called tax incidence. According to it, regardless who pays it, the actual burden depends on elasticity. In layman terms, the most desperate between the producer and the consumer will suffer the larger burden of taxation.

Here is a clearer explanation. While the telcos officially pay for the tax and if the consumer is insensitive to price change relative to the telcos, the truth is that telcos are passing the tax to the consumer in form of higher prepaid service price. If it is the telcos which are insensitive to price change, then the telcos will actually suffer the larger tax burden.

But there is a problem here, I think.

If the tax is passed to the consumer without change in elasticity, the new rate for prepaid service should be cheaper to account for tax incidence. This assumes that the rate prior to the passing already accounts for the absorption of the service tax, which it should in my opinion. So, RM10, for example, should be able to buy the same amount of minutes before and after the passing.

But if not, if customer will have to pay more for the same minutes after the passing (meaning, the rate for prepaid service remain unchanged after the tax is passed), then it is possible that the telecommunication companies are taking advantage of the situation by actually raising its price stealthily.

That has to be it. Think of it. The tax incidence theory has to hold. The government will receive the same amount of tax but the consumer will have to pay more overall. Somebody is gaining something.

That is right. I am suspecting that the telcos are not only passing the tax (which the passing itself is superficial according the tax incidence concept), they are raising the prepaid rates as well.

Tags tax incidence

Sports

[2426] This is Michigan

[youtube]BMIGJ2W6nvc[/youtube]

Brady Hoke said, “This is Michigan, for God’s sake.”

Tags football, University of Michigan

Economics

[2425] I don’t think the second half will be stellar

Post author By Hafiz Noor Shams
Post date Thursday, September 8 2011
4 Comments on [2425] I don’t think the second half will be stellar

There is an expectation that the second half of the year will boost the annual GDP growth for Malaysia to make up for the relatively weak first half. That was a reasonable expectation to have in the first half of the year but with only less than four weeks to go before the final quarter of 2011 is here, it is becoming increasingly untenable.

The basis for the optimistic second half expectation has been the planned construction boom as a result from the Najib administration’s Economic Transformation Program. A friend told me that it is to rival the construction boom of the 1990s.

From casual observation, there is a slow start to the boom. If the casual observation proves correct, the boom may yet pick up full steam in the fourth quarter but I doubt the fourth quarter alone will be sufficient to bring respectability to the whole year growth number, at which I define respectability as at least meeting the minimum target of 5% set by the Najib administration.

When the boom actually begins, there will be a question of lag. The economic expansion arising from multiplier effect will be even slower to hasten growth, adding to the issue of lag. Even if the boom had actually begun, the length of the lag is unclear and it is possible that the lag is still ongoing. It is hard to know this conclusively before November, when the actual third quarter result of the Malaysian real GDP will be released.

There are question marks on both domestic and foreign demands. Foreign demand on domestic goods is substantial. It is so substantial that I have made the case that the Malaysian recession and the subsequent recovery has been primarily caused by the global economy before.

The global economy is not doing so well at the moment. If there was a global central planner, then that planner had yet to make up his mind whether to grow or contract the world’s economy. There have been renewed talks of a double dip but truly without projecting the future, I think current statistics are giving confusing signal at the moment. Some statistics are performing worse than before and expectation. Others are doing better.

I myself have done some rudimentary forecasts for the Malaysian real GDP. It ranges from 4.60% to 5.15%. Okay, those are the only two rough forecasts that I have calculated through two slightly different but still simple methods. There is much work to be done to improve the model and I am not very satisfied with it. It does give me a general view nevertheless.