Land reform and tax amnesty

There were two major economic news, in the Philippines, this past week. The first was the announcement of the government to revive the agrarian reform program and distribute land for free. The second was the interview of the country’s economic czar, Secretary Carlos Dominguez, where he announced that the government would launch a tax amnesty program similar to Indonesia.

If implemented properly, the first – land reform – would have long term benefits and, hopefully, result in a more equitable society. The second would have the short term benefit of a massive increase in government revenues. However, if the additional funds are used to fund major infrastructure projects and the tax reform program  that will not result in massive government deficits, the tax amnesty program would also have long term benefits for the Philippines.

Land Reform

It has always seemed strange to me that land reform has always been deemed as some kind of “leftist” agenda. In Asia, the most successful land reform programs were those implemented by  “rightist “ regimes – Japan, Taiwan, South Korea. 

In Japan, the land reform program was carried out in 1947,  after World War II, under instruction from General Douglas MacArthur, then Supreme Commander of Allied Powers in Japan. Land was bought from landlords and re-sold to the farmers, who worked them, at extremely low prices. By 1950, three million peasants had acquired land dismantling the power of landlords. 

In South Korea, from 1945 to 1950, the government required large landholdings to divest most of their land leading to the creation of a new class of independent farmers. In Taiwan, in the 1950s the Chiang Kai-shek led Nationalist government successfully carried out a program of land reform and community development. These three countries have emerged as among the most prosperous in Asia. Land reform was initiated in these three countries not by Communist or leftist regimes; but, by rightist regimes. In Japan it was implemented by an occupying power. 

In his highly recommended book How Asia Works, Joe Studwell wrote that the successful North-East Asian countries – Japan, China, South Korea, Taiwan – followed the same pattern of development focusing on three major areas. The first was developing agriculture through land reform. The second was promoting manufacturing through exports. The third was keeping finance aligned with national interest through “carrot and sticks.” A book review summarizes  Studwell’s views on land reform:

“ Key #1: a land reform to redistribute opportunities and give jobs. First a land reform maximizes output from agriculture while giving more jobs for the majority of people in these then poor countries. Increase in yields and a more even redistribution of wealth create surpluses for the whole country.

In emerging markets where agriculture employs up to 75 percent of the work force, it is key to break up concentration of ownership and divide the land on an equal basis, making new smaller landowners incentivized to increase yields. In Taiwan...”the transfer of wealth involved in the land reform was equivalent to 13 percent of the GDP passing from one group of people to another.” The land reform, a bold move from politicians who need to cut their links with landlords, usually a source of their support and income, must go with help on the infrastructure and marketing side as well. Land reform is key to long term political stability, as rural poverty is a primary source of instability, separatism and terrorism. An even redistribution of  land creates equal opportunities and increases the level of social mobility... Land is probably the economic asset on which the government has the more – if not all – control. So it is up to a government, and only to a government to decide to run this reform.

In short, land policy tells you how much the leaders know and care about their population.”

Tax amnesty

The business community – legitimate and underground – is now buzzing with excitement at the anticipated tax amnesty program. There are obvious short term benefits resulting from a tax amnesty program. The government gains the advantage of collecting the money sooner.

There are, however, many risks that have led to the failure of many tax amnesty programs. Most programs have failed because the countries implementing them did not possess the means or the political will to enforce strict tax collection after the amnesty. The result is that these programs often lead to one one-time revenue gains but appear to have had no lasting effect. 

Secretary Dominguez is on the right track when he says that the tax amnesty will not work unless the tax evaders believe that the government will actually go after them after the conclusion of the program. The government must show that it has the political will to go after tax evaders. 

Before it implemented its tax amnesty program, the Indonesian government estimated that there was some $303 billion worth of Indonesian money secretly stashed abroad in tax havens like Singapore, Panama, London, Hong Kong and British Virgin Islands. The tax amnesty allowed Indonesian tax residents to get tax relief for their unreported net assets. The requirements was that these assets should be invested in Indonesian territory in certain government designated instruments; and, must be retained in Indonesia for at least three years.

The result of the Indonesian tax amnesty has been mixed. On the plus side, an additional $96 billion has been paid and there are now three million new taxpayers. On the negative side, the new taxpayers do not include the “big fish.” Less than 100 of the new participants paid more than $750,000 in penalties. Less than two percent of the previously unknown assets had actually been returned to Indonesia by the end of 2016. 

A developing country, like the Philippines, will have little to gain from a tax amnesty program unless it also improves its overall system of tax collection. 

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