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Economics Personal Politics & government

[2572] The bitterness of a financial conservative

I handle my finances conservatively. I spend very little for someone my age and my profile. In fact, I impose a sort of limit on my spending. I am conscious of it and get mildly nervous if my total spending grows too fast even when I can more than afford it.

I probably do buy too much insurance and I do save or invest a large part of my earnings. My credit card service provider probably hates me for having to finance me without getting the chance to charge me interest too often too much.

I can afford to save a lot partly because I do not have too many financial responsibilities.

The other factor behind my saving habit has a lot to do with my upbringing and education.

As a very young school kid, I never really needed to spend too much. Canteen food was clearly subsidized. I rarely asked my parents for expensive items.

The more important thing was that my parents did not give me a generous allowance when I was in primary school. My pocket money was very little. Not that I needed too much anyway but at that age, the limited pocket money effectively curbed any spending impulse I might have then. I was always mindful of my limits. It trained me to be financially prudent.

The same was true as I attended a boarding school in Kuala Kangsar; I rarely had expensive lunches or dinners. Meals were again subsidized and there was rarely a need to spend lavishly in a small rural royal town in Perak. While my allowance did increase, it was definitely less than that of my more well-off peers. I lived spartanly then. This continued during my undergraduate years in America. Formal lessons in economics further solidified my attitude towards personal finance.

During my time living abroad, I did learn to enjoy the finer things in life, but I rarely, if ever, overspent. I rarely overspend still.

So, I can say with certainty that I live by the morality of a financial conservative very strictly.

I think I can say without too much pretension that I am an economist. I understand the various reasons for fiscal deficits. Some of the causes for deficit are justifiable, and some are not. I do understand how the government is not a household in a way that the government can do certain things beyond typical household economics, the point which many defenders of the roles of government in society rush to in deflecting criticism against many facets of government spending. After six years of education in economics, I do not think I need too much schooling in that matter excessively.

Rather, put the economics aside and understand the psychology instead. Understand the worldview of a financially conservative taxpayer.

The state of federal government finance does not impress a person like me. Deep inside, I do feel something along the lines of ”if I can do it, why can’t Putrajaya?” It is a dismissive attitude towards the federal government. It is a damning judgment against a failure to adhere to certain brands of secular morality.

It is a kind of sentiment that is almost always in the background. It is the ever-present demand for financial discipline. Putrajaya violates this conservative morality so blatantly. Each violation accumulates further moral condemnation.

What further justifies the dismissive attitude is the inevitability that the indiscipline — add in the irresponsible economic populism that has happened throughout the year and earlier — will one day, one way or another, result in higher tax on the conservative, and everybody else, sooner or later. Whether I like it or not, I, will have to finance the fiscal indiscipline of Putrajaya.

That fuels my bitterness towards Putrajaya.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on July 26 2012.

Categories
Economics

[2571] Cars, duties, congestion, pollution, revenue and income effect

Several new points were raised with regards to my post on duties and cars yesterday. One was pollution, two was government revenue and three, in one way or another, income effect. It is not exactly income effect but close enough.

Concern number one is easy. But let us state the pollution concern. The concern is that there is already too many cars on the streets and there is a need to reduce pollution, which I take as carbon and other greenhouse gases emissions. I also take that as actually reducing the number of cars. But here is the thing, substitution to foreign cars may actual reduce emissions without having to reduce the number of car on the roads. The reason is that comparable foreign cars-European, Japanese and possibly Korean-have higher emission standard than locally-produced cars. With more competition, consumers have a chance to choose emission-efficient cars over relative gas-guzzlers without too much price variation. End result: less emission given the quantity of cars.

Concern number two deserves a very libertarian answer. Cut government spending instead. The duties on foreign cars were always meant as protectionist measure, not primarily for revenue-generating purpose. The revenue derived from the duties should really be considered as a bonus. Except that the government is so used to it, that it forgets. With the fiscal discipline, they need the bonus. One way to cut spending is to cut fuel subsidy. In fact, tax it. Yes, tax fuel purchase.

Concern number three is harder to address and I actually thought about it but ultimately decided to not touch it. As try to explain it below, you will understand why I decided against touching it.

Income effect (not exactly but close) or specifically, the new competitive environment may push prices down across the board. This may be true and I have alluded to this in an article I wrote for The Malaysian Insider earlier. In turn, this may increase vehicles on the road as more are able to purchase cars. Or it may not. There is a sound theoretical case for an increase, but there is also a sound theoretical case for the opposite.

Initially, I wanted to address this in terms of stickiness and temporally. In English, prices will adjust only slowly to a new reality. More technically, all-in prices of domestic cars are sticky and that of foreign cars are not.

Why do I apply stickiness on domestic cars but not foreign cars? It is because the abolition or the reduction of duties is easy to calculate. It is on top of the car price in the sense that pre-duties prices are associated with the way companies run their business. It is this pre-tax, pre-duties prices that are sticky.

Most of domestic car prices are made up of sticky components. For foreign-manufactured cars, a significant portion of its end prices are made up of non-sticky components, i.e. the tax and the duties. This is why I apparently apply stickiness only on domestic cars. In truth, I am applying stickiness on both domestic and foreign cars while taking into account domestic cars have significantly less portion of non-sticky components than foreign cars, within the context of import duties abolition.

Also, consider this. The net earnings of Proton in 2011 was not even 2% of its revenue. How much room Proton has for a serious price war? Not much in the near future. This, I think, is an indication that there is a price floor: there is not much incentive to push price of sedans down too much beyond whatever Proton is charging. Proton cannot charge less anyway.

So, in the short term, the specific income effect will not be present. And no traffic congestion issue.

The long term issue is hard to say. It depends on non-cooperation (it is quite possible for firms to achieve implicit understanding in price settings without getting into trouble with anti-trust law).

Ultimately, it depends on how efficient those under pressure can be. What is certain is that that takes time.

It also depends on how low prices would get. I have not done the calculation but I have a feeling, both Proton’s small margin and game theory will provide a floor how low prices can get. And foreign manufacturers definitely would not want to price their cars so low as to earn a loss. Furthermore, that would be dumping and they will get into trouble with that.

So, in the long run, it may, or it may not have effect on congestion.

Besides, if there would be worse congestion, it would be very naive to think there is no other accompanying policy to address it. I have one immediately in my mind: congestion fee within the cities.

Categories
Economics

[2570] Abolition of import duties on foreign cars will not increase congestion because there is substitution effect

I advocate the abolition, or at least a significant reduction of import duties (and other excessive taxes) on cars as well as the abolition of the approved permits system that blow up the prices of foreign-manufactured cars to an outrageous level. This should come at no surprise because I am a libertarian. I do generally support freer trade. Make no mistake, the policy on cars is a protectionist policy.

There is a concern that if duties on imported cars are slashed down significantly or abolished entirely, this will exacerbate traffic congestion in Malaysian cities. At first, this sounds like a very big and legitimate concern. It is not.

If one understands that the duties are imposed on foreign marques and that there is such a thing as  substitution effect, one will understand that the concern on worsening traffic congestion is misplaced. I suspect it is almost always raised by those without enough formal education in microeconomics.

Do understand that imposition of high duties are on foreign cars. This is the nuance. Too many talk as if it is applied across the board, including on Proton and Perodua marques. The peril of generalization is that you lose the nuance.

The duties make domestically-produced cars cheaper than foreign cars and this should be a no-brainer.

It is no coincident that a majority of cars on Malaysian roads are Protons and Peroduas. Malaysians buy Protons and Peroduas because those cars are cheap. There are not too many of those who can buy more expensive cars. If I recall correctly, the number of Protons and Peroduas and other locally-produced cars dwarf the number of foreign-manufactured cars in this country. I do not have the statistics at home but I do have it at the office. I will share it tomorrow and correct my assertion if it is proven to be incorrect.

If foreign cars are suddenly competitively priced after the abolition of various pre-exisiting duties imposed, new buyers will be tempted to purchase those foreign cars, which are many ways of higher quality than Proton at least. Perodua probably can stand up within its market niche.

Now, if the duties persist, these new purchasers would probably buy Protons and Peroduas.

Notice that there will be purchases of car anyway.

To put it in clearer terms, if the status quo remains, people will buy local cars. If it does not much to the benefits of Malaysian consumers, they will buy higher quality foreign cars. For those whom would have bought foreign cars anyway, it does not matter as far as traffic congestion is concerned. They would still buy their cars. It is not about discriminated duties that Malaysia has that I along with others like-minded persons want abolished.

So, the concern for traffic will exist as long as Malaysians purchase cars and it really does not matter whether the duties are abolished. The trend for greater quantity of cars on the road is really a secular one. It has to do with affluence growth and population growth more than anything, and the availability of a reliable public transport system within this context.

Those who argue that the traffic condition will worsen if those duties are removed just do not understand that those cars are substitute goods.

This does not mean the abolition of import duties do not matter. It matters in terms of welfare. It matters in terms of competition. It matters in a lot of other more important ways. But not in terms of congestion.

Categories
Sports

[2569] Historical revisionism and NCAA’s pretension

What Jerry Sandusky did was wrong. Although I am sympathetic of Joe Paterno, his failure to report Sandusky is a grave moral lapse. Sandusky deserves to be punished, and so too Paterno.

But I ultimately think the punishment meted against Paterno and Pennsylvania State University is just  too much. I agree with an opinion at UMGoBlog.com that the NCAA has stepped out of their authority to punish Penn State.

But out of all things, what I find most distasteful now is the attempt at historical revisionism.

There are several cases of revisionism. One was the removal of halo from a painting depicting Paterno. Second was the removal of a statue of Paterno. This appears to have caused a lot of grief among the students there. Three, the worst of all lot, is the stripping of wins by Paterno from 1998 and 2011. All those 112 wins and two Big Ten championships. With the stripping, officially, Paterno is no longer the winningest college football coach in NCAA history.

So, suddenly, all those wins mean nothing. The 2005 and 2008 championships are vacated and oh, to make it better, Ohio State University is now the sole champion for the respective year.

One just cannot lose a conference championship just like that and much less two.

You might as well remove all, statues, of, lion, at Penn State. Let us pretend that Penn State does not exist.

But people were there and they saw it. All the Big Ten school alums who watch football know what they saw. I remember Paterno. The wins did happen.

As somebody mentioned it on Twitter earlier, the stripping is a case of NCAA pretending that the wins did not happen.

Official NCAA record does a shit job at recording history. And right now, the unofficial history is the truth.

Categories
Economics

[2568] Will government revenue fall with tax relief associated with private pension fund?

The Prime Minister finally launched a private pension fund. I am supportive of the idea of private and voluntary pension fund, but I am not going to discuss that here.

What I find interesting rather is that contributors to the private fund are entitled to RM3,000 tax relief in a year. This raises one question: will that lower potential tax revenue for the government significantly in the future?

Consider a person that pays income tax of exactly RM3,000 in a year. Rather than pay that tax, it would be rational for him to put in RM3,000 in the private fund. The money remains his and he may even get extra returns from that. For the government, that is RM3,000 worth of potential revenue loss.

Now, the estimated 2011 income tax revenue derived from individuals was RM20.2 billion according to the Monthly Statistical Bulletin for May published by the Bank Negara.[1] According to a report by the New Straits Times, 2.5 million individuals were expected to file their 2011 taxes.[2] That means on average, a taxpayer paid approximately RM3,628 worth of income tax.

Of course, not everybody paid RM3,628 worth of income tax. According to the 10th Malaysia Plan, about 44% of house household earned less than RM2,5o0. Individuals within these household do not pay income tax. About 76% of household earn less than RM5,000. Households earning less than RM5,000 but more than or equal to RM2,500 may or may not pay income tax depending on who among them work. In short, the distribution of payment from taxpayers are skewed.

It is hard to link the household data to the 2.5 million expected tax filers. First, not all filers pay tax. Second, the household data assume each household has four persons in it. I would assume 2 working adults in the household. But that does not have to be the case in reality and this will affect calculation for income tax paid by the 76% household.

But, if we were to take the average blindly, if we all were rational and optimized our finances, if we were still in 2011 and if the private fund tax relief were in place in 2011, that would suggest that the government would have lost RM7.5 billion worth of income tax revenue. In 2011, the federal government suffered a fiscal deficit of RM42.5 billion, or 4.8% of nominal GDP. Without the RM7.5 billion, the deficit-to-GDP ratio would have been 5.7%.

One could take comfort that 5.7% deficit would be the maximum damage and the actual damage would be lower than that. But would still be higher than the actual 2011 deficit of 4.8% and that is the point.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — KUALA LUMPUR: AROUND 2.5 million Malaysians are expected to submit their taxes through e-Filing system this year. Inland Revenue Board public relations officer Masrun Maslim said this was an increase of 28.87 per cent compared with last year. [More taxpayers opting for e-Filing. New Straits Times. March 17 2012]

[2] — See the May 2012 Monthly Statistical Bulletin at Bank Negara Malaysia. Extracted on July 19 2012.