Impact Assessment of Personal

Income Tax Reduction in the

Philippines

Institute for Development and Econometric Analysis (IDEA), Inc.

July 2014

Executive Summary
Senate Bill 2149 seeks to reduce the current income tax brackets from seven
down to five and gradually adjust tax rates within the next three years in line with
inflation. The lowest income bracket under the proposal will be PhP20,000 (from
PhP10,000) with a tax rate of 10 percent and the highest will be PhP1,000,000 (from
PhP500,000) with a tax rate of 25 percent by January 2017.
The proposal has been put forward in light of ongoing progress towards
greater regional integration and a concern for the outmigration of human resources,
with implications economic and competitiveness implications. Neighboring countries
such as Malaysia and Thailand are already in the process of reducing income taxes
while the Philippines continues to have one of the highest income tax rates in the
region.
A countrys tax system plays a key role in determining its competitiveness
through the effects of its various aspects on economic decision-making. More than
the magnitude of tax changes, there is also the question of who effectively bears
the tax burden and how this affects their behavior. Thus, any tax reform proposal
needs to properly account for its redistributive and welfare effects on the overall
economy.
There are reservations that lowering tax rates would result in significant
reduction in government tax revenues. This paper reviews the literature on the
economic impact of tax changes and develops a simultaneous equations model to
describe how consumption and labor supply react to changes in income taxes using
data from merged surveys on the labor force and income and expenditures.
Evaluating the evidence, the emerging consensus is that taxes generally
have a negative impact on output growth. The specific mechanisms and channels
by which taxes affect the economy are not clear-cut. Income taxes in general, and
corporate taxes in particular, have the largest effects on firm and household
decisions and are thus more likely to adversely affect economic outcomes. There is
evidence that while cutting personal income taxes leads to a fall in tax revenues, it
can also stimulate the economy in the short run. Tax cuts also raise employment,
consumption and investment, though the evidence is mixed with some studies
finding the increases to be insignificant, small, or moderate at best.
Using available household survey data, we analyze the effects of income tax
changes on household consumption and labor supply using a simultaneous
equations model. We find that the relationships between our variables are in line
with economic theory, affirming the progressive nature of the income tax system
and the negative effect of income taxes on spending and working hours. On the

basis of such results, it appears that a reduction in PIT rates would be beneficial to
households in terms of 1) increasing consumption spending as measured by total
household expenditures, and 2) increasing labor supply as measured by total hours
worked.

Introduction
The Philippines currently has one of the highest personal income tax (PIT)
rates among the member states of the Association of Southeast Asian Nations
(ASEAN) at 32 percent. Progress towards regional integration through the ASEAN
Economic Community (AEC) has prompted some member states to begin lowering
income tax rates with the end in view of preserving country competitiveness in the
regional marketplace.
A countrys system of taxation plays an important role in determining country
competitiveness. The Organisation for Economic Co-operation and Development or
OECD (2010) notes that various aspects of the tax system such as the taxes raised,
the tax mix, the quality of tax administration, the complexity of the tax rules and
the tax compliance costsand the broadness of the different tax bases can have an
impact on the countrys rate of economic growth.
Any tax reform proposal needs to take into consideration the redistributive
effects of tax changes and their welfare effects (Haughton and Khandker, 2009).
Income taxes in general, and corporate income taxes (CIT) in particular, have the
largest effects on firm and household decisions and are thus more likely to
negatively impact welfare outcomes. A tax system that promotes economic growth,
therefore, is one that shifts the burden of taxation from income to consumption or
residential property, broadens the tax base, and lowers the tax rate (OECD, 2010).
This motivates current moves to amend domestic income tax rates in the
Philippines, in view of the expected increase in the mobility of people in the region
and the continued growth in the number of overseas Filipino workers.In particular,
Senate Bill (SB) 2149 seeks to reduce the current seven-tier income tax brackets of
the graduated individual tax rates to five tiers, with tax rates gradually adjusted in
the next three years to the current consumer price index. Moreover, the lowest
income bracket under the proposal will be PhP20,000 (from PhP10,000) with a tax
rate of 10 percent and the highest at PhP1,000,000 (500,000) with a tax rate of 25
percent by January 2017.
There are reservations, however, that lowering the PIT would result in direct
reduction ingovernment tax revenues. This paper looks at the case, under certain
conditions, when lowering PIT can still incitegrowth in government tax revenues
through increased consumption and labor supply.This paper proceeds with the
review of the literature on the economic impact of tax changes including that of PIT
in particular, as well as the arguments for and against the proposed tax
amendments. Cross-country-comparisons, specifically among ASEAN member
countries, are presented for benchmarking purposes as applied to the Philippine
situation. A simultaneous equation model was developed to describe how
consumption and labor supply behaviors react to changes in income tax.The model

was tested using data from merged surveys on income and expenditure and labor
force. This paper ends with concluding remarks.

Review of Literature
The issue of taxation and its effects on the economy remains a hotly debated
topic and the arguments for and against increasing (or decreasing) taxes are wellknown by now. It appears, however, that the consensus is that taxes generally have
a negative impact on aggregate economic growth though the evidence on the
specific mechanisms and various channels by which taxes affect the economy are
not clear-cut.
In a comprehensive paper on tax policy reform and economic growth, the
OECD (2010) notes that it is income taxes, particularly CIT, that have the most
adverse effect on per capita gross domestic product (GDP) growth. This is followed
by PIT, consumption taxes, and, lastly, recurrent taxes on immovable property. They
conclude that ideal growth-oriented tax reforms are those that shift part of the tax
burden from income to consumption or residential property.
The motivation behind these findings involves not only the magnitude of the
tax changes, but also the question of who effectively bears the taxes and how this
affects their behavior. In general, the least harmful taxes are those that have a
smaller adverse effect on the economic decisions of individuals and firms. In this
sense, indirect taxes are less likely to affect individual economic decision-making
and therefore result in smaller welfare losses as compared to direct types of
taxation such as income taxes.
Following neo-classical economic theory, income taxes are effectively taxes
on the factors of production, i.e. labor and capital. They serve as additional costs
imposed on the production of goods and services and thereby the creation of
income and wealth. Thus, McBride (2012) argues that corporate taxes discourage
investment, resulting in lower labor productivity and therefore lower wages. He
adds that progressive taxes on labor income not only reduce the incentive to work,
but also diminish the returns to education. This has negative implications on the
build-up of human capital, as well as on entrepreneurial activity given that highincome earners account for a large share of these activities. The OECD (2012)
supports the view that increases in PIT top rates may reduce working hours and
productivity by reducing the incentive for work, investment, and innovation.
There is considerable empirical evidence on the negative effects of income
taxes on the macroeconomy. For a condensed overview of the literature, refer to the
summary table (Table 1) by McBride (2012).
Leigh et al (2010) estimate the short-term growth effects of fiscal
consolidation using data on advanced economies over the past 30 years. They also
employ simulations to investigate its long-term effects. They find that fiscal

contraction using tax-based adjustments, i.e. tax hikes, have greater contractionary
effects than the use of spending cuts. Their simulation assumes that savings from
debt reduction is used to finance reductions in labor income taxes. Such reductions
are expected to raise labor supply and output since taxes on labor income
discourage workers from supplying labor.
The simulation results suggest that using the savings from fiscal
consolidation to reduce income taxes has a beneficial impact on GDP in the long
run, more so in the case of CIT over PIT a reflection of capital income taxes
strong negative effect on private sector investment. Nonetheless, reducing labor
income taxes still results in an average of 1.02 percent increase in global GDP, with
the top advanced economies (i.e. the United States, the Euro area, and Japan)
benefiting the most.
In an attempt to more directly evaluate the effect of taxes on GDP, Romer
and Romer (2010) use a new measure that incorporates all legislated tax changes
as a percentage of nominal GDP. They find that a tax increase equivalent to one
percent of GDP has a consistently negative effect on the path of real GDP. With a
maximum effect of a 3.08 percent decrease in output after ten quarters, they
conclude that tax increases have a very large, sustained, and highly significant
negative impact on output or alternatively, that tax cuts have very large and
persistent positive output effects.
Furthermore, their work suggests that the output effect of tax changes are
tied to the actual changes in taxes rather than to news about planned or future
changes. The evidence supports the assertion that the main channel through which
tax changes affect GDP is through a sharp fall in investment.
When it comes to PIT, in particular, Barro and Redlick (2011) also construct
their own time series to measure average marginal income tax rates and reveal
evidence that increased tax rates have significantly negative effects on GDP.
Specifically, a one-percentage-point (ppt) reduction in the average marginal income
tax rate boosts next years per capita GDP by 0.5 percent. They argue that marginal
income tax rates have substitution effects, which affect decisions on work versus
consumption, the timing of consumption, and investment, among others. In turn,
these effects on economic behavior ultimately influence GDP and other
macroeconomic aggregates.
Mertens and Ravn (2013) find that cuts in personal income taxes lead to a fall
in tax revenues while corporate income tax cuts have little impact on the average.
Cuts in the former raise employment, consumption, and investment, while cuts in
the former boost investment and do not affect private consumption and
employment. Notably, a reduction in the average PIT rate stimulate output in the
short run: there is a significant increase in economic activity within two-years after
the tax cut. More precisely, a one-ppt decrease in the average PIT rate increases

output by 1.4 percent in the first quarter after the reduction, up to a 1.8 percent
increase three quarters after the tax cut.
Others, however, support the view that reducing income taxes are not
necessarily beneficial to economic growth. Using simple numerical examples of
various tax cuts, Charney (2012) calculates the size of the multipliers needed for a
tax cut to grow the economy such that the foregone revenue is more than made up
for by increased economic activity. She does the hypothetical estimates for the
state of Arizona for individual income and sales taxes. This is in response to
common arguments in favor tax cuts that tax cuts will grow the economy and will
therefore pay for themselves, with the implication that there will be no
corresponding reduction in public services or expenditures.
The results show that the multipliers necessary for tax cuts to pay for
themselves are extraordinarily high and substantially out of the range of any
multipliers computed for the type of sectors in which consumers spend. It is simply
not reasonable to believe to tax rate cuts will not reduce the amount of revenue
collected by the state. Instead, tax rate cuts will reduce revenues by almost the full
amount implied by the rate cut.
This is not to say tax cuts have no impact on the economy, however.
Charney (2012) finds a small stimulative effect, but even this is likely to be offset if
the negative effects of tax cuts on state spending are taken into account. Thus, if
the economic effect of reduced government expenditures exactly offset the
stimulative effect of the tax cut, then revenues fall by the full amount of the tax cut.
If the effect of reduced government expenditures is greater than the stimulative
effect, then revenues will decline by more than the implied amount of the tax cut.
In an empirical investigation of the recovery of the United States (U.S.)
economy in the 1980s, the Congressional Budget Office (1989) concludes that
contrary to popular belief, it was not the tax cuts under the Reagan administration
that drove U.S. economic growth during the period. Rather, it was expansionary
monetary policy that was behind the economic expansion with corporate tax cuts in
1981 playing a limited role through stimulating business investment.
In a similar vein, Hungerford (2012) notes that advocates of lower tax rates
argue that reduced rates would increase economic growth, increase saving and
investment, and boost productivity while proponents of higher tax rates argue
that higher tax revenues are necessary for debt reduction, that tax rates on the rich
are too low and that high tax rates on the rich would moderate increasing income
inequality. He concludes, however, that analysis of U.S. data since 1945 implies
that reducing tax rates on the rich has little association with saving, investment or
productivity and that these top tax rates are associated with increasing income
concentration at the top of the income distribution.

The methodology of the above-mentioned study, however, has been

questioned. McBride (2012) criticizes the use of the top statutory marginal tax rate
as a measure of taxes as the composition of those who pay the said taxes changes
over time. The results also run counter to the evidence from the literature, citing for
instance, that the OECD has found that progressivity of income taxes, i.e. shifting
the tax burden to high income earners, is associated with lower economic growth.
Hungerford (2012), in turn, also cites relevant literature to support his claims.
On CIT, he agrees with the consensus that corporate taxes have a negative
economic impact, citing Ferede and Dahlby (2012) who find that a higher CIT rate is
associated with lower private investment and slower economic growth using
Canadian panel data from 1977-2006. Moreover, a one-ppt reduction in the
corporate tax rate yields a 0.1-0.2-ppt increase in the annual economic growth rate.
Ferede and Dahlby (2012) explain that taxes can affect growth through their
impacts on factor accumulation and total factor productivity. In the first channel,
taxes raise the cost of capital and thereby reduce the incentive to invest and
ultimately dampen economic growth. Citing Feldstein (2006), they also argue that
taxes distort factor prices and induce efficiency loss in resource allocation.
Moreover, taxes also affect entrepreneurial activity, which is a source of new ideas
and innovations.
On PIT, Hungerford (2012) refers to the work of Lee and Gordon (2005) who
also find a negative association between corporate tax rates and economic growth.
They note, however, that the effect of the top PIT rate is insignificant, suggesting
that adjustments to the said rate may not significantly affect aggregate economic
output growth. This echoes earlier work by Katz, Mahler, and Franz (1983).
One criticism for cross-country studies like these, however, is that income tax
bases are defined differently across countries and as such the effects of any taxgrowth analysis may not be directly comparable. This motivated Ferede and Dahlby
(2012) to use Canadian provincial with similar income tax bases in to investigate
the effects of tax rates on growth.
In sum, it appears that the contention is not whether taxes in general, or
even income taxes in particular, negatively impact on growth, but rather the
significance of the effect of PIT especially vis--vis other taxes. It becomes clear that
most studies find a negative association between CIT and economic growth, but the
evidence is more mixed in the case of PIT.
Reviewing the literature on PIT, Jappelli and Pistaferri (2010) cite a series of
papers by Shapiro and Slemrod that use instant-survey data to measure individual
responses to actual or hypothetical tax policies. Analysis of U.S. tax cuts in 1992,
2001, and 2008 reveals that a temporary tax change has, at best, only a moderate
effect in terms of increasing household spending. Also citing Johnson et al (2006),
they note that an evaluation of the 2001 tax rebates in the U.S. shows that the

average household spent 20-40 percent on consumption goods practically the

same range of estimates by Shapiro and Slemrod. Johnson et al (2006), however,
find that expenditure responses tend to be higher for households with low income or
low liquid wealth.
In his own review of the evidence on PIT, Rider (2006) explains that while
governments use progressive PIT rate structures to address income inequality, there
is evidence that high state PIT rates in the U.S. negatively affect business and
individual decisions, which in turn dampen state growth rates. An important
assumption behind this reasoning is that labor and capital are mobile, and that they
respond to tax differentials among states.
Moreover, he argues that taxes do not stick where they are legally placed.
In response to high PIT rates, individuals may reduce their work effort, migrate to
states with lower rates, or exert efforts to reduce PIT liabilities. Firms, in turn, may
have to compensate their employees for the higher costs associated with high tax
rates with implications for wage rates, consumer prices, and other associated costs.
Thus, employees are able to shift out the PIT burden, either in part or in full, to their
employers. Economic decision-making by employers or firms are, in turn, affected.
Some firms may choose to invest less in high-PIT rate states or simply relocate to
states with lower PIT-rates.
Rider (2006) also contends that differences in state PIT rates are an
important determinant of pre-tax wage differences, which influence location
decisions of plants and facilities. In this regard, high state PIT rates negatively affect
plant and facilities location decisions, foreign direct investment (FDI), capital
investment, firm location, state employment, and personal income.
Note, however, that the above analysis applies only to the U.S. where there
appears to be a high degree of mobility of labor and capital among the different
states. The results of the said analysis do not necessarily apply to different
countries or even the member states of ASEAN despite moves towards regional
integration. Unlike the U.S., for instance, ASEAN does not operate under a single
currency or a single central government that determines common or at least similar
governance or regulatory frameworks for various aspects of economic life.
With regard to the issue of tax rates and compliance, the evidence is also
mixed though the general consensus appears to support the view that higher tax
rates reduce compliance. In theory, the basic model of individual choice posits that
a higher tax rate decreases disposable income and encourages people to underdeclare their taxable income. But such an outcome is also influenced by an
individuals risk preference. If an individual exhibits decreasing absolute risk
aversion, then the lower income brought about by a higher tax rate decreases the
return to cheating on taxes. As a result, such people would rather comply with than
under-declare their tax obligations (Allingham and Sandmo, 1972). Yitzhaki (1974)

shows that a higher tax rate increases declared income when the penalty rises in
proportion to the rate of evaded taxes.
The model, however, has undergone numerous refinements and extensions
that complicate the analysis and makes it extremely difficult to tease out definite
analytical results on the effect of tax rate changes on compliance.
In terms of empirical evidence, the evidence favors the negative effect of
higher tax rates on compliance with an estimated under-reported income-tax rate
elasticity ranging from -0.5 to -0.3 (Alm, 1998). For more on this, see Clotfelter
(1983), Crane and Nourzad (1992), Slemrod (1985), etc. There are other studies,
however, that depart from the above-mentioned results. Feinstein (1991), for
instance,finds no significant relationship between marginal tax rates and noncompliance. Others provide evidence for the role of risk aversion in influencing the
relationship between tax rates and compliance.
Plumley (1996) shows that the effects of an increase in marginal tax rates
differ among income groups. Low-income individuals who are typically more riskaverse become more compliant in response to an increase in marginal tax rates.
This is because the penalties for under-reporting their taxable income comprise a
greater proportion of their net income rather than those with higher income; in
other words, they have much more to lose from being caught cheating on their
taxes. In contrast, high-income individuals were found to increase non-compliance
by decreasing their reported income and increasing their tax offsets though the
effects are only marginally significant.
In light of the prevailing knowledge, many countries have decided to cut
income tax rates while broadening the tax base, especially for corporate taxes
(OECD, 2010). There has also been a shift towards greater adoption and higher
rates of VAT, though the same cannot be said for indirect taxes in general. There
also appears to be increasing preferential tax treatment for small and medium
enterprises (SMEs) and research and development (R&D) activities among OECD
members.
Lastly, it is worth emphasizing that aside from the economic evidence, one
also needs to take political economy considerations into account. As Haughton and
Khandker (2009) would pose the question, A tax system with a lower VAT and
higher personal income tax might be more equitable than the current
arrangements, but why is the current system , rather than a more equitable one, in
place?
Tax systems are as much a product of political forces as they are of economic
motivations. While the prevailing knowledge and evidence may provide broad
guides, each country will have to take into account its own unique circumstances
and idiosyncrasies and find the best fit.

Table 1. Summary of Empirical Studies on the Effects of Taxes on Economic

Growth

Reference

Method/Dat
a

Effect
s

Summary of Findings

ErgeteFerede& Bev
Dahlby, The Impact of Tax
Cuts on Economic Growth:
Evidence from the Canadian
Provinces, 65 National Tax
Journal 563-594 (2012).
KarelMertens& Morten
Ravn, The dynamic effects
of personal and corporate
income tax changes in the
United States, American
Economic Review
(forthcoming) (2012).

Canadian
provinces
(1977-2006)

Negati
ve

Reducing corporate
income tax 1
percentage point raises
annual growth by 0.1 to
0.2 points.

U.S. PostWWII
exogenous
changes in
personal and
corporate
income taxes

Negati
ve

Norman Gemmell, Richard

Kneller, & Ismael Sanz, The
Timing and Persistence of
Fiscal Policy Impacts on
Growth: Evidence from
OECD Countries, 121
Economic Journal F33-F58
(2011).
Jens Arnold, Bert Brys,
Christopher Heady, sa
Johansson,
CyrilleSchwellnus, & Laura
Vartia, Tax Policy For
Economic Recovery and
Growth, 121 Economic
Journal F59-F80 (2011).

17 OECD
countries
(Early 1970s
to 2004)

Negati
ve

A 1 percentage point
cut in the average
personal income tax
rate raises real GDP per
capita by 1.4 percent in
the first quarter and by
up to 1.8 percent after
three quarters. A 1
percentage point cut in
the average corporate
income tax rate raises
real GDP per capita by
0.4 percent in the first
quarter and by 0.6
percent after one year.
Taxes on income and
profit are most
damaging to economic
growth over the long
run, followed by deficits,
and then consumption
taxes.

21 OECD
countries
(1971 to
2004)

Negati
ve

Corporate taxes most

harmful, followed by
taxes on personal
income, consumption,
and property.
Progressivity of PIT
harms growth. A 1
percent shift of tax
revenues from income
taxes (both personal
and corporate) to
consumption and
property taxes would
increase GDP per capita
by between 0.25

Robert Barro& C.J.

Redlick,Macroeconomic
Effects of Government
Purchases and Taxes, 126
Quarterly Journal of
Economics 51-102 (2011).
Christina Romer& David
Romer, The macroeconomic
effects of tax changes:
estimates based on a new
measure of fiscal shocks,
100 American Economic
Review 763-801 (2010).
Alberto Alesina& Silvia
Ardagna,Large changes in
fiscal policy: taxes versus
spending, inTax Policy and
the Economy, Vol. 24 (Univ.
of Chicago Press, 2010).

U.S (1912 to
2006)

Negati
ve

U.S. PostWWII (104

tax changes,
65
exogenous)

Negati
ve

OECD
countries
(fiscal stimuli
and fiscal
adjustments,
1970 to
2007)

Negati
ve

International Monetary
Fund, Will it hurt?
Macroeconomic effects of
fiscal consolidation, inWorld
Economic Outlook:
Recovery, Risk, and
Rebalancing (2010).
Robert Reed, The robust
relationship between taxes
and U.S. state income
growth, 61 National Tax
Journal 57-80 (2008).

15 advanced
countries
(170 fiscal
consolidation
s over the
last 30 years)

Negati
ve

U.S. states
(1970-1999,
5 year
panels)

Negati
ve

percent and 1 percent in

the long run. Corporate
taxes, both in terms of
the statutory rate and
depreciation
allowances, reduce
investment and
productivity growth.
Raising the top marginal
rate on personal income
reduces productivity
growth.
Cut in the average
marginal tax rate of one
percentage point raises
next years per capita
GDP by around 0.5%.
Tax (federal revenue)
increase of 1% of GDP
leads to a fall in output
of 3% after about 2
years, mostly through
negative effects on
investment.
Fiscal stimuli based
upon tax cuts more
likely to increase growth
than those based upon
spending increases.
Fiscal consolidations
based upon spending
cuts and no tax
increases are more
likely to succeed at
reducing deficits and
debt and less likely to
create recessions.
1% tax increase reduces
GDP by 1.3% after two
years.

Robust negative effect

of state and local tax
burden. Multi-year
panels mitigate
misspecified lag effects,

1
0

1
1

1
2

1
3

1
4

1
5

1
6

1
7

N. Bania, J. A. Gray, & J. A.

Stone,Growth, taxes, and
government expenditures:
growth hills for U.S. states,
60 National Tax Journal 193204 (2007).
Young Lee & Roger
Gordon, Tax Structure and
Economic Growth, 89 Journal
of Public Economics 10271043 (2005).
Randall Holcombe & Donald
Lacombe,The effect of state
income taxation on per
capita income growth, 32
Public Finance Review 292312 (2004).
Marc Tomljanovich,The role
of state fiscal policy in state
economic growth, 22
Contemporary Economic
Policy 318-330 (2004).
Olivier Blanchard & Robert
Perotti, An Empirical
Characterization Of The
Dynamic Effects Of Changes
In Government Spending
And Taxes On Output, 107
Quarterly Journal of
Economics 1329-1368
(2002).
F. Padovano& E. Galli, E., Tax
rates and economic growth
in the OECD countries
(1950-1990), 39 Economic
Inquiry 44-57 (2001).
Stefan Folster& Magnus
Henrekson,Growth effects of
government expenditure
and taxation in rich
countries, 45 European
Economic Review 1501-1520
(2001).
M. Bleaney, N. Gemmell& R.
Kneller, Testing the
endogenous growth model:
public expenditure, taxation,

serial correlation, and

measurement error.
Taxes directed towards
public investments first
add then subtract from
GDP.

U.S. states

Negati
ve

70 countries
(1980 - 1997,
crosssectional and
5 year
panels)
Counties
separated by
state borders
(1960 to
1990)

Negati
ve

Reducing corporate
income tax 1
percentage point raises
annual growth by 0.1 to
0.2 points.

Negati
ve

States that raised

income taxes averaged
a 3.4% reduction in per
capita income.

U.S. states
(1972 to
1998, multiyear panels)

Negati
ve

Higher tax rates

negatively affect short
run growth, but not long
run growth.

U.S. PostWWII
(VAR/event
study)

Negati
ve

Positive tax shocks, or

unexpected increases in
total revenue,
negatively affect private
investment and GDP.

23 OECD
countries
(1951 to
1990)

Negati
ve

Effective marginal
income tax rates
negatively correlated
with GDP growth.

Rich
countries
(1970 to
1995)

Negati
ve

Tax revenue as a share

of GDP negatively
correlated with GDP
growth.

OECD
countries
(1970 to
1995)

Negati
ve

Distortionary taxes
reduce GDP growth.
Consumption taxes are
not distortionary.

1
8

1
9

2
0

2
1

2
2

2
3

2
4

and growth over the long

run, 34 Canadian Journal of
Economics 36-57 (2001).
R. Kneller, M. Bleaney& N.
Gemmell, Fiscal Policy and
Growth: Evidence from
OECD Countries, 74 Journal
of Public Economics 171-190
(1999).
Howard Chernick,Tax
progressivity and state
economic performance, 11
Economic Development
Quarterly 249-267 (1997).
Enrique Mendoza, G. MilesiFerretti, & P. Asea, On the
Effectiveness of Tax Policy in
Altering Long-Run Growth:
HarbergersSuperneutrality
Conjecture, 66 Journal of
Public Economics 99-126
(1997).

Stephen Miller & Frank

Russek,Fiscal structures and
economic growth:
international evidence, 35
Economic Inquiry 603-613
(1997).
John Mullen & Martin
Williams, Marginal tax rates
and state economic growth,
24 Regional Science and
Urban Economics 687-705
(1994).
William Easterly & S.
Rebelo, Fiscal Policy and
Economic Growth: An
Empirical Investigation, 32
Journal of Monetary
Economics 417-458 (1993).
Reinhard Koester & Roger
Kormendi,Taxation,
Aggregate Activity and
Economic Growth: CrossCountry Evidence on Some
Supply-Side Hypotheses, 27

OECD
countries
(1970 to
1995)

Negati
ve

Distortionary taxes
reduce GDP growth.

U.S. states
(1977 to
1993)

Negati
ve

Progressivity of income
taxes negatively affects
GDP growth.

18 OECD
countries
(1965-1991,
5 year
panels)

None

Developed
and
developing
countries

Negati
ve

Estimated effective tax

rates on labor and
capital harm
investment, but effect
on growth is
insignificant. Effective
consumption taxes
increase investment,
but not growth. Overall
tax burden levels have
no effect on investment
or growth.
Tax-financed spending
reduces growth in
developed countries,
increases growth in
developing countries.

U.S. states
(1969 to
1986)

Negati
ve

Higher marginal tax

rates reduce GDP
growth.

Developed
and
developing
countries

None

Effects of taxation
difficult to isolate
empirically.

63 countries

Negati
ve

Controlling for average

tax rates, increases in
marginal tax rates
reduce economic
activity. Progressivity
reduces growth.

2
5

2
6

Economic Inquiry 367-86

(1989).
Jay Helms, The effect of
U.S. states
Negati Revenue used to fund
state and local taxes on
(1965 to
ve
transfer payments
economic growth: a time
1979)
retards growth.
series-cross section
approach, 67 Review of
Economics and Statistics
574-582 (1985).
Claudio J. Katz, Vincent A.
22 developed None
Taxes reduce saving but
Mahler & Michael G.
countries
not growth or
Franz,The impact of taxes
investment.
on growth and distribution
in developed capitalist
countries: a cross-national
study, 77 American Political
Science Review 871-886
(1983).
Source: Lifted from McBride (2012)

Tax Comparisons Across ASEAN

In the ASEAN Tax Guide, KPMG International (2013) notes that differences in
taxes become a point of differentiation among the member states of ASEAN as they
seek to attract foreign direct investment (FDI). While there may be more pertinent
issues that influence investment decisions, e.g. bureaucracy, corruption,
infrastructure, etc., the fact is that ASEAN countries have traditionally used tax
rates and other financial incentives to compete against each other. This policy
preference is likely to persist, notwithstanding efforts towards regional integration.
The report notes that corporate taxes in the region have shown a declining
trend over the last fifteen years, with a marked fall in rates with the signing of the
AEC Blueprint in 2007. More recently, Thailand decided to reduce its CIT rate to 20
percent and its maximum PIT rate to 35 percent effective last year (see Table 2).
Malaysia is also set to cut income taxes by one ppteach for PIT and CIT effective on
2015 and 2016, respectively. Nonetheless, there are still significant differences in
taxes among member countries and no drastic changes are seen without a
concerted regional effort at harmonizing tax regimes.
Table 2. Thai Personal Income Tax
Annual Taxable Net
Income, THB

Personal Income
Tax Rate, 2012

New Personal
Income Tax Rate,
2013

Nil

Nil

10%

5%

10%

10%

20%

15%

750,001
1,000,000

20%

20%

1,000,001
2,000,000

30%

25%

2,000,001
4,000,000

30%

30%

37%

35%

0 150,000
150,001 300,000
300,001 500,000
500,001 750,000

4,000,001 or more

Source: Lifted from Respondek& Fan (2014)

A cursory look at the comparative taxes in ASEAN reveals that the Philippines
has one of the highest PIT rates in the region. The maximum PIT tax rate of 32
percent in the country is higher than Indonesia, Malaysia, Laos, Cambodia,
Singapore, and Brunei. Only Thailand, Myanmar, and Vietnam have higher tax rates,
though the differences is only three ppts (refer to Table 3). Moreover, the Philippines
also has the highest tax rates for withholding tax (on dividends, interest, and
royalties) and indirect taxes with a value-added tax (VAT) rate of 12 percent.
Table 3. Comparison of ASEAN Taxes
Non-resident
Withholding
Tax Rates
Divide Royalti Intere
nds
es
st
None
10%
15%

Indirect
Tax (i.e.
VAT/GST)
Standard
Rate
No VAT or
consumptio
n-based tax
system

20%

14%

14%

14%

10%

No separate
capital
gains tax.
Capital
gains are
treated as
taxable
income,
subject to
20% profit
tax.

25%

30%

20%

20%

20%

10%

Subject to
tax

Laos

24%

24%

10%

5%

10%

10%

No capital
gains tax

Malaysia

25%.
Reduces
to 24%
from YA
2016.

26%.
Reduces
to 25%
from YA
2015.

None
(assumi
ng
single
tier
dividen
d)

10%

15%

Service tax:
6%. Sales
tax:
Generally
5% or 10%.
GST of 6%
will be
introduced
from 1 April

No capital
gains tax
other than
on the
disposable
of interests
in
Malaysian
real

Country

Standard
Corporat
e Income
Tax Rate

Top
Personal
Income
Tax Rate

Brunei

20%

No
personal
tax on
individual
s.

Cambodi
a

20%

Indonesi
a

Capital
Gains
No capital
gains tax

2015

property or
shares in a
Real
Property
Company.

Myanma
r

25% company;
35% branch

20% employm
ent
income;
30% other
income;
35% nonresident
foreigners

None

20%

15%

No standard
rate. 5% for
services.
Between
3% and
100% for
goods.

Subject to
tax at 10%
for resident
taxpayers
and 40% for
nonresident
taxpayers

Philippin
es

30%

32%

30%

30%

30%

12%

Capital
gains on
the
disposal,
sale, or
exchange of
shares, and
land and
buildings
are subject
to tax

Singapor
e

17%

20%

None

10%

15%

7%

No capital
gains tax

Thailand

20% (for 2
accountin
g periods
beginning
on or after
1 January
2013)

37%. This
is
expected
to be
reduced
to 35%
from the
2013 tax
year.

10%

15%

15%

10%,
although a
reduced 7%
rate applies
on 30
September
2014

No separate
capital
gains tax.
Capital
gains are
treated as
taxable
income.

Vietnam

25%. This
is to be
reduced to
22% from
1 January
2014, and
20% from

35%

None
for
corpora
te
investor
s. 5%
for

10%

5%

10%

Capital
gains tax is
applied to
both
corporate
and
individual

1 January
2016.

individu
al
investor
s

investors.

Source: ASEAN Tax Guide (2013)

An earlier assessment by Botman et al (2008) calculates effective tax rates in
ASEAN and concludes that general effective tax rates are relatively higher in the
Philippines though its investment incentives are generally comparable to its ASEAN
neighbors. The authors, however, decided to ignore personal income taxation for
simplification purposes though they note that, in principle, PIT affects investment
and saving behavior, especially taxes on interest, dividends, and capital gains. It is
worth mentioning that these taxes vary widely within the region and that rates in
the Philippines are among the highest.
On a related note, Reside (2007) provides evidence that proxy variables for
fiscal incentives, including income tax-related incentives such as income tax
holidays, are not good predictors of regional investment in the Philippines. He notes
that this is consistent with previous empirical findings and international evidence,
i.e. there are other more important factors than fiscal incentives that influence
investment decisions.
Comparing the tax structure in ASEAN countries, the National Tax Research
Center or NTRC (2007) notes that nine out of the ten member countries impose
taxes on individual income, with Brunei as the lone exception. All nine countries
have schedular income tax structures and make distinction between employment
and business income. Cambodia, Laos, and Myanmar all have a separate schedule
of tax rates for employment income and business income. Of the nine countries,
most have five income tax brackets (Cambodia, Indonesia, Vietnam, and Malaysia),
the Philippines and Singapore have seven, Thailand recently added three new
income for a total of eight, Laos has nine, and Myanmar has 13.
In terms of the tax base for employment income, the Philippines is most
similar to Thailand, Singapore, Indonesia, Myanmar, and Malaysia. These countries,
however, allow for more itemized deductions from gross income while the
Philippines allows only premiums on health insurance and only up to a certain
amount, in addition to personal exemptions. In particular, Malaysia, Thailand, and
Singapore have extensive lists of personal allowances and itemized deductions,
including special consideration for the disabled and expenses on health and
education of children.
Unlike in other ASEAN countries (e.g. Myanmar, Singapore, and Thailand),
however, the Philippines allows personal and additional exemption allowances aside
from itemized business expenses deducted from gross income of individuals
engaged in business or practice of a profession.

Malaysia, the Philippines, Singapore, and Thailand practice the selfassessment system when it comes to tax administration. In Cambodia, Indonesia,
Laos, Myanmar, and the Philippines, the employer has the mandate to deduct taxes
from its employees income and remit these taxes to authorities.
Figure 1. Per Capita income vs. PIT in ASEAN, 2012

Source: Latest World Bank (if not available, International Monetary Fund) data as of
2012

As for greater outward migration as a possible consequence of ASEANs

economic integration, data on the distribution of overseas Filipino workers (OFWs)
shows that only a little over 10 percent of OFWs can be found in ASEAN with almost
the entire figure accounted for by Singapore and Malaysia. While there has been a
diversification in the skills profile of OFWs in general, a good number (30.8 percent)
are laborers and unskilled workers while only a small proportion (around 20 percent)
are employed in high-paying jobs (professionals, technicians and associate
professionals, and managerial positions in government and special-interest
organizations.
Singapore is known for a large population of Filipino domestic workers.
Meanwhile, Malaysia harbors a considerable Filipino population owing to historic and
cultural ties that have persisted through backdoor linkages despite crackdowns by
Malaysian authorities. Since PIT rates tend to matter more for people with high
incomes, and therefore have more to lose from taxes, it would be reasonable to

assume that PIT differentials would not by themselves significantly affect outward
migration flows to these countries or to the rest of the region.
Moreover, while there is evidence that income tax differentials can encourage
migration to areas with lower rates (Rider, 2006), we note that this analysis is
limited to the context of states within a single country (i.e. the United States) where
there is a high degree of labor mobility. ASEAN is not as homogenous or integrated
as the U.S. in terms of language, culture, development, economic and political
systems, or even ease of transport.

Research Method
Framework
The Micro-Impacts of Macroeconomic Adjustment Policies (MIMAP) framework
developed by Lamberte et al (1991) offers an analytical tool for examining the
economic effects of proposed tax amendments. The MIMAP framework looks at the
interaction between macroeconomic policies and heterogeneous households, given
a countrys particular institutional structure and natural resource endowments. The
channels of influence are: the labor market; the goods market; and the delivery of
public goods. The framework allows for differential impacts on different groups of
households and how affected groups cope with the situation. As such, evaluations of
macroeconomic policies should not be limited to macroeconomic aggregates, but
also micro-indicators on the impact on household wellbeing.
Thus, for purposes of this study, the channels concerned are on the
consumption of goods and services, and labor supply.
In theory, taxes on labor income such as the PIT are expected to discourage
workers from supplying labor, primarily through substitution effects affecting the
decisions of individuals on work versus leisure. This response to tax changes is often
measured through working hours, though individuals may also adjust other aspects
of labor supply such as labor participation, work effort, human capital investment,
type of occupation, etc. For instance, OECD (2012), notes that increases in top PIT
rates may reduce working hours and productivity by reducing the incentives for
work and innovation. There is also evidence that cuts in PIT rates raise employment
(Mertens and Ravn, 2013) while others argue that labor income taxes influence
decision-making with regard to the accumulation of human capital, e.g. education
and training (Ferede and Dahlby 2012).
PIT, by definition, directly reduces disposable income available for saving or
consumption. Thus, cuts in PIT rates are expected to raise consumption spending
and this is also borne out by empirical evidence (Mertens and Ravn, 2013). The
magnitude of the expenditure response varies, however. In their analysis of U.S. tax
cuts, for example, Jappelli and Pistaferri (2010) find that temporary tax cuts have
only a moderate effect in terms of increasing household spending. Moreover, the
expenditure response tends to be higher for low-income or low-liquidity households.
The decision to work and consume are assumed to be determined by income
tax, as well as other taxes and individual and community characteristics. Income tax
payment is considered to be affected by individual characteristics.

Data
Data from the merged results of the Family Income and Expenditure Survey
(FIES) and Labor Force Survey (LFS) is perhaps the most appropriate in studying
behaviors related to changes in income tax policy in the Philippines. However,
individual behaviors are difficult to observe as income taxes are recorded
collectively at the level of the household. Thus, the household is used as the unit of
analysis. For this study, the 2009 survey results were utilized. The said data set
contains information on the demographic characteristics, income levels, and
expenditure patterns of a sample of 38,400 households from all over the country.
While the data still provides necessary insights on household behavior, it cannot be
denied that the same information is quite aged. However, the data set used is still
meritorious, as it characterizes household behavior during times of crisis.
Consequently, results obtained in this study may be considered conservative.

Regression Models
A regression model was used in order to ascertain the effects of changes in
income tax on household consumption and on labor supply (characterized by the
total number of hours worked in the past week). Table 4 lists the variables used in
the models and their corresponding descriptions, with the first three variables listed
being the dependent variables.
Table 4. List of Variables and Definitions
Variable

Definition

ytax

Income tax paid, per household, in pesos

cons

Total family expenditure, in pesos

hrsworked
toinc
married

childdep
hhdsex

Total number of hours worked during the past week

Total family income, in pesos

Proportion of married household members

Proportion of dependent household members
Sex of household head, 1 if male, and 0 if female

hhdage
mem
ttaxes

Age of household head

Total number of household members
Total taxes, per household; computed as sum of income tax;
real estate tax; car registration, toll fees, and driver's license;
and other direct taxes.

iloan

Loans from other families, in pesos

wdraw

Withdrawals from savings, in pesos

remit

Total household remittances from abroad, in pesos

urban

Urbanity indicator, 1 if urban and 0 if rural

paytax

Tax payment indicator, 1 if paid taxes and 0 otherwise

Notes:In the survey, respondents are asked whether they or their family paid any taxes
(such as income, real estate, or other forms) during the period specified in the interview.
Responses, however, are coded in terms of the amount of taxes the household paid. As
such, it is not entirely clear whether responses coded as zero means that they did not pay
any taxes or if they are exempt from paying taxes.

The households decision to consume is related to a number of causal factors,

which includes income tax and other direct taxes (ytax, ttaxes). The level of income
(toinc), the availability of liquid assets (iloan, wdraw, remit), community
characteristics (urban), and household characteristics (hhdsex, hhdage, mem) affect
this decision. Meanwhile, the decision to supply labor hours is determined by taxes
and community and household characteristics, as stated above. Income tax,
however, is potentially jointly determined with consumption and labor supply. Thus,
income tax payment behavior is also modeled as a function of income and other
household characteristics (married, childdep, hhdsex, hhdage, mem).
Equations (1) to (3) exhibit the complete specification for each of the models.
(1
)
(2
)

(3
)
Under usual circumstances, equations (1) to (3) are estimated separately
using ordinary least squares (OLS). However, since there is interplay in
consumption, labor, and taxation behavior, the same equations were treated as
simultaneous; that is, the equations were estimated at the same time using threestage least squares (3sls).
Apart from theory, a more objective approach to determining whether
simultaneous models are needed is to conduct a test that compares the estimates
obtained from the independent models and the simultaneous equations. The
Hausman Test compares the estimates and is used for this purpose.
Households were also divided into five equal groups, or quintiles, and
equations were again estimated for each of the quintiles. These quintiles divide the
total number of households into five equal groups according to some variable sorted
according to magnitude. For the purposes of this study, income quintiles were used.
All tests are performed at a ten-percent level of significance ( = 0.10).

Results and Interpretation

Before proceeding to the results of the models, it is of interest to confirm
whether the 3SLS model is more appropriate over the OLS model. As previously
mentioned, the Hausman Specification Test was used in order to determine the
appropriateness of the 3SLS model.
The Hausman Test compares the estimates obtained from the OLS and 3SLS
models. If the 3SLS model does not offer any valuable improvement on the OLS
model, then the estimates obtained should not be greatly different. However, for the
models in this study, the results of the test show that the estimates from the two
models are significantly different, and that the 3SLS model should be used.
The outputs of the estimation procedures for the 3SLS model are summarized
in Table 5 below.
Table 5. Estimation Output: Simultaneous Equations Model
Equation (1)
Income Tax
Explanator
y Variable
toinc
married
childdep
hhdsex
hhdage
mem
intercept

Equation (2)
Family Expenditure

Explanator
y Variable
0.019874* ytax

Coefficient

(1088.797)*
(2924.388)*
980.777*
(6.174742)
(80.5948)*
182.7682

ttaxes
toinc
iloan
wdraw
remit
urban
hhdsex
hhdage
mem
intercept

Equation (3)
Total Hours Worked

Explanator
y Variable
(49.69389)* ytax

Coefficient

49.1486*
0.1762088*
0.4790175*
0.2801235*
0.4738713*
57751.03*
(2487.998)
(135.1811)
10047.55*
28112.61*

ttaxes
urban
hhdsex
hhdage
mem
intercept

Coefficient
(0.0114988)
*
0.0112578*
9.880471*
10.04519*
0.1575624*
10.45288*
2.334081

Notes: Figures in parentheses are negative. Figures noted with an asterisk are significant at
= 0.10

The estimated modelshows that income tax has an inverse relationship with
total family expenditure. Specifically, every peso increase in income tax may, on the
average, dictate a decrease of Php49.69 in total family expenditure, while keeping
all other variables and factors constant. As such, there is reason to believe that a
higher level of income tax may hamper or discourage expenditure at the household
level.

Similarly, the amount of income taxes paid by a household also has a

negative effect on the total number of hours spent working in the past week. Based
on the model, on the average, every peso increase in income tax may decrease the
total number of hours worked by 0.011 hours, while keeping all other factors
constant. In effect, a higher level of income tax may discourage people from
working more hours. Note that while the effect is significant, it may be considered
minute, which is likely due to the diversity in the incomes and characteristics of the
households interviewed. Therefore, perusing the data in terms of income levels
would also be noteworthy.
A model was also estimated for income taxes paid. Note that total income is a
significant determinant of income tax, since, on the average, a peso increase in
total income may lead to a Php0.02 increase in taxes paid, while holding other
variables constant. Again, the figure is small; however, this may be due to the fact
that even at higher income levels, some respondents still pay lesser taxes through
some exemption mechanisms.
The proportion of married household members and the proportion of
dependent children in the household negatively affect income taxes. On the
average, an increase in the proportion of married household members leads to a
Php1,089 decrease in total taxes paid, while an increase in the proportion of
dependent children leads to a Php2,924 decrease in total taxes, keeping other
factors constant. These results are to be expected as being married and having
children in the household are some conditions for tax deductions.
Since it is also of interest to ascertain how the variables would behave at
different income level, models were also estimated at each income quintile, results
of which are found in Annex 3.
Except for quintile 4, models show that income taxes have a negative effect
on total family expenditure. That is, every peso increase income taxes paid will, on
the average, spur a decrease in total family expenditure. This means that regardless
of the amount of total income received, a higher amount of tax tends to discourage
households from spending.
The same, however, cannot be said for total hours worked. It is only for the
fifth income quintile, where the top 20 percent of households (in terms of income)
are found, that the amount of income paid would, on the average, translate to a
decrease in the total number of hours worked.
Results for each income quintile should be approached with caution, however,
as the 3SLS models for each quintile have a negative R-squared. This implies that
such a model specification is not necessarily an improvement over the OLS models.

Concluding Remarks
From the results of the above analysis, it is worth pointing out some key
findings. For one, the relationships between the dependent and independent
variables used in the analysis are consistent with the predictions of economic
theory.

Income taxes paid by households increase with total income, affirming the
progressive nature of the income tax system. The magnitude of the
estimated coefficient, while statistically significant, is quite small. Tax
exemptions and other means of tax avoidance are likely to play a part in
diminishing the relationship between the amount of taxes paid and total
household incomes (though we cannot also discount other explanations such
as limitations with the survey data or outright tax evasion). This is confirmed
by the logistic regression analysis where being married and having children
as dependents reduce the likelihood of paying taxes as these two are bases
for income tax exemptions.

The negative relationship between income taxes, on one hand, and, on the
other hand, total household spending and total hours worked is also
confirmed by our results. In the case of total hours worked, the magnitude of
the effect of income taxes is small, but the fact that it is at the top income
class where this is most apparent is also consistent with economic theory.
Low-income households, a good number of which may be minimum wage
earners and are thus exempt from income taxes in the first place, are
constrained from reducing their work hours because they cannot afford to do
so. This is not the case with high-income households who can afford to
substitute work for leisure. Moreover, the type of occupation may also play a
part with low-income workers typically under no-work-no-pay arrangements.
Workers belonging to the top-income group, meanwhile, tend to enjoy more
flexibility or may even be self-employed.

On the basis of such results, it appears that a reduction in PIT rates would be
beneficial to households in terms of 1) increasing consumption spending as
measured by total household expenditures, and 2) increasing labor supply as
measured by total hours worked. In particular, a one-peso decrease in income taxes
paid increases household expenditure by PhP49.69 and total hours worked by 0.01
hours. The former reinforces progressivity as the increases in expenditure generally
decline with higher income. The latter effect, however, is small and is concentrated
among the top 20-percent of households in terms of income.

The findings appear to run counter to the notion of Ricardian Equivalence

where consumers understand that any tax cuts in the present must be balanced out
by future tax increases. The implication is that forward-looking, rational consumers
would rather save the amount accruing to them from the tax cut in order to pay for
higher taxes in the future. Thus, a decrease in government savings owing to the tax
cut will be offset by an equivalent increase in private savings. Therefore, the timing
of tax cuts ought not to affect to affect the equilibrium real interest rate, as they do
not affect overall national savings, and aggregate economic demand.
In our case, we do see evidence of short-run effects in the labor and goods
markets through changes in work hours and in household spending, running counter
to the theorys prediction that tax cuts would have no effect on employment and
output. Given the limits of our dataset, however, there remains the question of
whether this would persist in the long run. Ricardian Equivalence predicts that
aggregate demand in general would remain unchanged, but there are compelling
reasons to discount this.
One of the more apparent reasons why Ricardian Equivalence may not hold,
however, is that it assumes lump-sum taxation and not proportional or distortionary
taxes, which is the nature of income taxes. Another is that the theory assumes fixed
government spending, which is not the case. Both of these assumptions do not hold
in reality, thus making Ricardian Equivalence unlikely.
Moreover, the strict underlying assumptions that are often cited as being
crucial for the theory to hold are also questionable. These include altruism in
intergenerational linkages, e.g. parents concern for their children who may inherit
future tax increases; perfect capital markets where consumers face no borrowing
constraints and make consumption decisions based on lifetime expected income;
and consumer rationality, that is, consumers can fully anticipate the future tax
implication of a deficit-finance tax cut.

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100: 763-801, June 2010.
Slemrod, J. (1985), The Optimal Size of a Tax Collection Agency. Scandinavian
Journal of Economics, 89:183-192.

Yitzhaki, S. (1974). A Note on Income Tax Evasion: A Theoretical Analysis. Journal

of Public Economics, 3: 201-202.

Annex 1
Results: Hausman Specification Test
---- Coefficients ---|
(b)
(B)
(b-B)
sqrt(diag(V_b-V_B))
| Reg3OLS
Reg33SLS
Difference
S.E.
-------------+---------------------------------------------------------------toinc | .0199538
.019874
.0000799
5.18e-06
married | -1118.752 -1088.797
-29.95553
16.54913
childdep | -2864.336 -2924.388
60.0517
44.30329
hhdsex | 995.4552
980.777
14.67824
6.961727
hhdage | -5.944975 -6.174742
.2297674
.2353892
mem | -85.44507
-80.5948
-4.850266
2.414634
-----------------------------------------------------------------------------b = consistent under Ho and Ha; obtained from reg3
B = inconsistent under Ha, efficient under Ho; obtained from reg3
Test: Ho: difference in coefficients not systematic
chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B)
=
10.98
Prob>chi2 =
0.0518

Annex 2
Model Estimation Outputs: Simultaneous Equations Model
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
38400
6
14500 0.1498 6719.71 0.0000
cons
38400
10 136615.3 0.3639 13755.03 0.0000
hrsworked
38400
6 57.08796 0.0482 8820.43 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .019874 .0002455 80.96 0.000
.0193928 .0203551
married | -1088.797 315.0026 -3.46 0.001
-1706.19 -471.4028
childdep | -2924.388 349.653 -8.36 0.000 -3609.695 -2239.08
hhdsex | 980.777 208.475
4.70 0.000
572.1735 1389.381
hhdage | -6.174742 5.72616 -1.08 0.281 -17.39781 5.048325
mem | -80.5948 37.90606 -2.13 0.033 -154.8893 -6.300294
_cons | 182.7682 424.0275
0.43 0.666 -648.3103 1013.847
-------------+---------------------------------------------------------------cons
|
ytax | -49.69389 18.19928 -2.73 0.006 -85.36384 -14.02395
ttaxes | 49.1486 17.56632
2.80 0.005
14.71924 83.57796
toinc | .1762088 .0372419
4.73 0.000
.103216 .2492017
iloan | .4790175 .2003357
2.39 0.017
.0863667 .8716683
wdraw | .2801235 .0747158
3.75 0.000
.1336831 .4265638
remit | .4738713 .0271549 17.45 0.000
.4206487 .5270938
urban | 57751.03 2775.521 20.81 0.000
52311.1 63190.95
hhdsex | -2487.998 5120.983 -0.49 0.627 -12524.94 7548.946
hhdage | -135.1811 198.4714 -0.68 0.496 -524.1779 253.8157
mem | 10047.55 860.8564 11.67 0.000
8360.298 11734.79
_cons | 28112.61 10095.95
2.78 0.005
8324.909 47900.32
-------------+---------------------------------------------------------------hrsworked |
ytax | -.0114988 .0004415 -26.04 0.000 -.0123642 -.0106335
ttaxes | .0112578 .000418 26.93 0.000
.0104385 .0120771
urban | 9.880471 .5845397 16.90 0.000
8.734794 11.02615
hhdsex | 10.04519 .7322252 13.72 0.000
8.610053 11.48032
hhdage | .1575624 .0217736
7.24 0.000
.1148869 .2002379
mem | 10.45288 .1306903 79.98 0.000
10.19673 10.70903
_cons | 2.334081 1.525574
1.53 0.126 -.6559897 5.324152
-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked
Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban

------------------------------------------------------------------------------

Annex 3
Model Estimation Outputs: Simultaneous Equations Model, by Income
Quintile
quintile = 1
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
7680
6 143.0998 -0.0018
69.21 0.0000
cons
7680
10 412519.9 -559.3293 5827.46 0.0000
hrsworked
7680
6 58.10299 -1.1997 1082.83 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .0008525 .0001101
7.74 0.000
.0006367 .0010684
married | 6.30443 4.237272
1.49 0.137 -2.000472 14.60933
childdep | 4.139466 5.127892
0.81 0.420 -5.911016 14.18995
hhdsex | -2.485975 4.413798 -0.56 0.573 -11.13686 6.164911
hhdage | .0522193 .1152639
0.45 0.651 -.1736937 .2781324
mem | -1.487226 .9737731 -1.53 0.127 -3.395786 .4213344
_cons | -36.98796 10.20446 -3.62 0.000 -56.98833 -16.9876
-------------+---------------------------------------------------------------cons
|
ytax | -2935.476 1211.367 -2.42 0.015 -5309.712 -561.2391
ttaxes | 68.74653 36.34254
1.89 0.059 -2.483528 139.9766
toinc | 2.146218 .3627412
5.92 0.000
1.435258 2.857178
iloan | -2.598711 1.848925 -1.41 0.160 -6.222537 1.025115
wdraw | 5.041801 2.300301
2.19 0.028
.5332926 9.550309
remit | -.5079376 .2630781 -1.93 0.054 -1.023561 .0076859
urban | 3747.482 1363.478
2.75 0.006
1075.113
6419.85
hhdsex | -1135.456 2866.114 -0.40 0.692 -6752.938 4482.025
hhdage | -9.117619 79.27526 -0.12 0.908 -164.4943
146.259
mem | 423.1454 637.2561
0.66 0.507 -825.8536 1672.144
_cons | -51065.54 16663.9 -3.06 0.002 -83726.19 -18404.9
-------------+---------------------------------------------------------------hrsworked |
ytax | .3182577 .0348813
9.12 0.000
.2498916 .3866238
ttaxes | -.0040735 .0011358 -3.59 0.000 -.0062996 -.0018473
urban | .8735021 1.053689
0.83 0.407
-1.19169 2.938694
hhdsex | 9.249672 1.290741
7.17 0.000
6.719867 11.77948
hhdage | .0219587 .0357744
0.61 0.539 -.0481579 .0920752
mem | 6.596929 .2853368 23.12 0.000
6.037679 7.156179
_cons | 16.74874 2.787691
6.01 0.000
11.28497 22.21252

-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked

Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban
------------------------------------------------------------------------------

quintile = 2
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
7680
6 204.7407 0.0023
22.39 0.0010
cons
7680
10 51158.25 -6.8259 5178.71 0.0000
hrsworked
7680
6 370.1619 -68.7174 5083.27 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .0001808 .0000971
1.86 0.062 -9.41e-06 .0003711
married | 7.798341 4.49769
1.73 0.083
-1.01697 16.61365
childdep | 5.598024 5.531685
1.01 0.312
-5.24388 16.43993
hhdsex | -5.334613 7.091692 -0.75 0.452 -19.23407 8.564847
hhdage | -.2236622 .1794009 -1.25 0.213 -.5752815
.127957
mem | -4.43036 1.221232 -3.63 0.000
-6.82393 -2.03679
_cons | 29.32174 15.68039
1.87 0.061 -1.411263 60.05475
-------------+---------------------------------------------------------------cons
|
ytax | -252.9726 43.80012 -5.78 0.000 -338.8193 -167.126
ttaxes | 17.94203 4.999348
3.59 0.000
8.143489 27.74057
toinc | .836032 .019374 43.15 0.000
.7980596 .8740044
iloan | .9958752 .0364387 27.33 0.000
.9244567 1.067294
wdraw | .6715349 .0277102 24.23 0.000
.6172239
.725846
remit | -.0992119 .0300253 -3.30 0.001 -.1580603 -.0403635
urban | 5958.747 907.3114
6.57 0.000
4180.45 7737.045
hhdsex | -1153.396 942.197 -1.22 0.221 -3000.068 693.2765
hhdage | -100.3887 27.9373 -3.59 0.000 -155.1448 -45.63258
mem | 960.5542 159.0349
6.04 0.000
648.8516 1272.257
_cons | 10880.32 2314.487
4.70 0.000
6344.01 15416.63
-------------+---------------------------------------------------------------hrsworked |
ytax | 1.880577 .1550674 12.13 0.000
1.57665 2.184503
ttaxes | -.1116626 .0176654 -6.32 0.000 -.1462861 -.0770391
urban | -21.75144 3.437758 -6.33 0.000 -28.48932 -15.01356
hhdsex | 17.48696 6.702052
2.61 0.009
4.351177 30.62274
hhdage | .8459485 .1811691
4.67 0.000
.4908636 1.201033
mem | 10.8986 1.136938
9.59 0.000
8.670242 13.12696
_cons | -41.00472 13.01626 -3.15 0.002 -66.51611 -15.49333

-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked

Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban
------------------------------------------------------------------------------

quintile = 3
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
7680
6 1197.551 0.0191
177.62 0.0000
cons
7680
10 34018.35 -0.6383 3258.62 0.0000
hrsworked
7680
6
71.2834 -0.9499 1648.79 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .0055348 .0008247
6.71 0.000
.0039184 .0071511
married | -96.39574 64.22875 -1.50 0.133 -222.2818 29.49029
childdep | -465.9999 63.42184 -7.35 0.000 -590.3044 -341.6954
hhdsex | 40.42505 44.04868
0.92 0.359 -45.90879 126.7589
hhdage | -6.723978 1.094261 -6.14 0.000 -8.868691 -4.579265
mem | -29.97505 7.32389 -4.09 0.000 -44.32961 -15.62049
_cons | 85.33416 131.8038
0.65 0.517 -172.9966 343.6649
-------------+---------------------------------------------------------------cons
|
ytax | -34.97379 7.155069 -4.89 0.000 -48.99747 -20.95012
ttaxes | 17.79353 4.453161
4.00 0.000
9.06549 26.52156
toinc | .8608525 .0188198 45.74 0.000
.8239664 .8977385
iloan | .7442828 .0456317 16.31 0.000
.6548463 .8337193
wdraw | .5896205 .0436841 13.50 0.000
.5040013 .6752398
remit | -.0942303 .0147769 -6.38 0.000 -.1231924 -.0652682
urban | 9539.629 952.8641 10.01 0.000
7672.05 11407.21
hhdsex | -1108.666 992.1174 -1.12 0.264
-3053.18 835.8485
hhdage | -241.436 38.79588 -6.22 0.000 -317.4745 -165.3974
mem | 1281.165 153.7239
8.33 0.000
979.8719 1582.459
_cons | 8502.592
2881
2.95 0.003
2855.935 14149.25
-------------+----------------------------------------------------------------

hrsworked |
ytax | .0644411 .0129508
4.98 0.000
.0390581 .0898241
ttaxes | -.0259086 .0081011 -3.20 0.001 -.0417865 -.0100306
urban | -8.066674 1.909775 -4.22 0.000 -11.80977 -4.323583
hhdsex | 12.06571 2.267112
5.32 0.000
7.622255 16.50917
hhdage | .6621812 .0806818
8.21 0.000
.5040478 .8203146
mem | 8.693393 .3720991 23.36 0.000
7.964092 9.422694
_cons | -1.37177 4.378193 -0.31 0.754
-9.95287
7.20933
-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked
Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban
------------------------------------------------------------------------------

quintile = 4
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
7680
6 3498.645 0.0631
537.32 0.0000
cons
7680
10 36582.51 0.3699 4943.46 0.0000
hrsworked
7680
6 119.3442 -3.2252 1242.51 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .0177113 .0012194 14.52 0.000
.0153213 .0201013
married | -854.6968 176.8859 -4.83 0.000 -1201.387 -508.0068
childdep | -1702.433 181.3376 -9.39 0.000 -2057.848 -1347.018
hhdsex | 44.69675 107.6142
0.42 0.678 -166.2231 255.6166
hhdage | -23.90258 3.23433 -7.39 0.000 -30.24175 -17.56341
mem | -217.1616 19.87326 -10.93 0.000 -256.1125 -178.2108
_cons | 661.8082 337.601
1.96 0.050
.1223274 1323.494
-------------+---------------------------------------------------------------cons
|
ytax | 3.530254 6.759027
0.52 0.601 -9.717195
16.7777
ttaxes | -2.095355 5.885249 -0.36 0.722 -13.63023 9.439521
toinc | .7519506 .0143286 52.48 0.000
.7238671 .7800342
iloan | 1.040866 .0572191 18.19 0.000
.9287191 1.153014

wdraw | .4671525 .0398135 11.73 0.000

.3891194 .5451855
remit | .0682153 .0150146
4.54 0.000
.0387872 .0976434
urban | 11778.57 2122.255
5.55 0.000
7619.03 15938.11
hhdsex | 2839.501 1773.455
1.60 0.109 -636.4064 6315.409
hhdage | -157.0019 66.26541 -2.37 0.018 -286.8797 -27.12407
mem | 1997.138 253.6358
7.87 0.000
1500.021 2494.255
_cons | 12221.03 3530.412
3.46 0.001
5301.551 19140.51
-------------+---------------------------------------------------------------hrsworked |
ytax | .0777059 .0103523
7.51 0.000
.0574157
.097996
ttaxes | -.0595058 .0090561 -6.57 0.000 -.0772554 -.0417563
urban | -20.07855 3.845203 -5.22 0.000 -27.61501 -12.54209
hhdsex | 28.19095 3.471663
8.12 0.000
21.38662 34.99529
hhdage | .9248591 .1295435
7.14 0.000
.6709585
1.17876
mem | 10.78306 .630388 17.11 0.000
9.547525
12.0186
_cons | -10.2881 6.683545 -1.54 0.124 -23.38761 2.811406
-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked
Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban
------------------------------------------------------------------------------

quintile = 5
Three-stage least-squares regression
---------------------------------------------------------------------Equation
ObsParms
RMSE "R-sq"
chi2
P
---------------------------------------------------------------------ytax
7680
6
30328.7 0.0843
703.73 0.0000
cons
7680
10 289642.8 -0.4114 2476.93 0.0000
hrsworked
7680
6
69.8405 0.1058 1593.48 0.0000
--------------------------------------------------------------------------------------------------------------------------------------------------|
Coef. Std. Err.
z P>|z|
[95% Conf. Interval]
-------------+---------------------------------------------------------------ytax
|
toinc | .0160276 .0006417 24.98 0.000
.0147698 .0172854
married | -3887.712 1412.221 -2.75 0.006 -6655.614 -1119.809
childdep | -9763.749 1552.567 -6.29 0.000 -12806.72 -6720.774
hhdsex | 4426.006 819.5282
5.40 0.000
2819.76 6032.252
hhdage | -41.2232 28.54655 -1.44 0.149
-97.1734
14.727

mem | -512.6123 160.5408 -3.19 0.001 -827.2666 -197.9581

_cons | 10559.67 2056.437
5.13 0.000
6529.13 14590.21
-------------+---------------------------------------------------------------cons
|
ytax | -61.33875 16.59442 -3.70 0.000 -93.86321 -28.81429
ttaxes | 61.19477 16.09908
3.80 0.000
29.64115
92.7484
toinc | .0740477 .0296534
2.50 0.013
.0159281 .1321674
iloan | -.1252526 .2502314 -0.50 0.617
-.615697 .3651919
wdraw | .166625 .0755445
2.21 0.027
.0185605 .3146895
remit | .3045364 .026245 11.60 0.000
.2530971 .3559757
urban | 89399.92 11616.57
7.70 0.000
66631.86
112168
hhdsex | -9329.782 11966.52 -0.78 0.436 -32783.73 14124.16
hhdage | -1316.624 628.3273 -2.10 0.036 -2548.123 -85.12478
mem | 14805.29 2661.796
5.56 0.000
9588.269 20022.32
_cons |
143042 20851.67
6.86 0.000
102173.5 183910.5
-------------+---------------------------------------------------------------hrsworked |
ytax | -.0055076 .000726 -7.59 0.000 -.0069306 -.0040846
ttaxes | .0055668 .0006956
8.00 0.000
.0042034 .0069301
urban | 12.65861 1.930491
6.56 0.000
8.87492 16.44231
hhdsex | 16.0726 1.828677
8.79 0.000
12.48846 19.65674
hhdage | -.1136904 .0677951 -1.68 0.094 -.2465664 .0191855
mem | 12.46531 .3624348 34.39 0.000
11.75495 13.17566
_cons | 13.45538 4.179488
3.22 0.001
5.263733 21.64703
-----------------------------------------------------------------------------Endogenous variables: ytax cons hrsworked
Exogenous variables: toinc married childdephhdsexhhdagememttaxesiloan
wdraw remit urban
------------------------------------------------------------------------------