Tuesday, June 01, 2010

Hyperwage Is The Solution to the Budget Deficit

Question: Can Hyperwage address the issue of budget crisis that our country is said to be facing, considering a budget crisis would possibly hamper Hyperwage's implementation especially in the government sector?
Answer: Hyperwage is the answer to the budget deficit.  First, assume a Keynesian multiplier of 5 given a marginal propensity to consume of 80%. Please read the Hyperwage book on how this multiplier is derived.
Let us have some back-of-the-envelope calculations.
For an income of P2,000 per month, after the multiplier effect, the income to the economy becomes P10,000 per month. Subject this to an assumed income tax of 20% and the remaining 80% (P8,000) will have to be spent anyway, subject to a VAT of 12%.
P10,000 per month x 20% = P2,000 income tax per month
P8,000 x 12% = P960 VAT per month
The total tax collected per year is P2,960 x 12 = P35,520 per year
For 30 million workers, this could be P1,065,600,000,000 or P1.065 trillion

Under a Hyperwage minimum wage of P20,000 per month, then after the multiplier effect, the economy earns P20,000 x 5 = P100,000 per month. The tax collected will be:
P100,000 x 20% = P20,000 income tax per month
P80,000 x 12% = P9,600 VAT per month
Total tax collected per year is P29,600 x 12 = P355,520 per year.  (That’s P355T vs only P35T in taxes)
For 30 million workers, this could be P10,665,600,000,000 or P10.65 trillion
These are theoretical multipliers and taxation leakages are not accounted for.
Conclusion: Without Hyperwage, both income tax and VAT for 30 million workers is expected to be P1.065 trillion while under Hyperwage it is 10x higher at P10.64 trillion.
It is very clear, that the budget deficit will be reduced, and the fiscal position of the government will be increase. Again, reminder, the costs will not necessarily move up in the same proportion (the principle of non-linearity).
While the exact amounts are subject to refinement, the economic principles behind the calculations are the same.
Now, can you see why and how countries like Singapore have GDP higher than the Philippines despite their tiny land areas and zero natural resources?
High wages are the source of taxes, source of fiscal income, and source of deficit reduction, and source of high GDP.

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