VAT INCREASE; A DEADLY TRAP TO OUR RECOVERING ECONOMY

It would be interesting to see how we will go from here - in terms of forecasted revenue and rebalancing of fiscal stimulus that the government is intending to gain from the increase in VAT with the intention to gain $103m from the increase.

Needless to say; Value aded tax (VAT) has become a major source of revenue in many developing countries. However, it could be a deadly trap to many. It is a consumption tax that is relatively easy to administer and hard to evade - both for the poor and for the rich. Recently, I had been teaching my students about these two terms: 'relative' and 'absolute'. When in it comes to consumption the absolute and relative effect of VAT to individual need to be analyzed.

On the other hand; the macroeconomics perspective of such needed to be addressed as well. These include, prices, output, income and consumption. Theory (positive economics) tells me when VAT increases, consumption will eventually decreases. Ideally the causality test should be done before such increase - to see whether the forecasted $103m is a reality or for balancing purpose. You will see that is why you need an Economist to do that - our economic principles do not only care about balancing the two sides of the book but the economic consequences and the rationality of our policies. I hope this will not be a repeat of the mistake we did in 2002 without doing simple analysis (even by CGE Modeling) before we increased the VAT as advised by IMF. As I had said - consumption rate fell so as investment - what are we doing now?? - further reducing consumption - and might increase other forms of income redistribution - mostly direct or even indirect to drain out the that $103m.

Want to say more but maybe in my next thread.