Why BPT should not be cut
In the last month, the Progressive Democrats of Guam have been trying to help refocus the political discussions that occur around this election for the Guam Legislature.
We believe that many of the most important issues get sidelined or receive one-sided discussion before policymakers and the public.
We see a crisis coming when the Pandemic Unemployment Assistance program expires and an ongoing crisis for workers on Guam who are being paid inadequately and are expected to subsidize their own employment by providing their own personal protective equipment for use at their work.
Aside from these, we see the potential for a self-inflicted wound that could be made by laying off hundreds of GovGuam workers.
The wealthiest corporations on Guam want the business privilege tax to be slashed by 1 percent, cutting about $61 million annually from the GovGuam budget.
Since a fiscal crisis in 2018 due to the catastrophic financial effects of the Trump tax cuts, the 5 percent BPT has allowed GovGuam finances to stabilize and gradually reduce its deficit. Keeping the BPT at 5 percent is essential to keep GovGuam finances in good order and avoid layoffs.
The Republican Party and these self-interested corporations are engaged in a misinformation campaign about fiscal policy. They believe that cutting taxes will magically deliver an economic recovery, but that betrays a stunning ignorance of basic macroeconomics.
Any competent economist would tell you that cutting government spending and taxes together results in less economic activity, not more.
Conventional economics uses a balanced budget multiplier to reflect the degree to which an equal cut in taxes and spending will reduce economic output. In a closed economy, a $1 cut in taxes and spending would reduce output by $1.
In an open economy, the multiplier is reduced somewhat due importation, but cuts still reduce output. With about 10 percent of Guam’s output being used for imports, we could expect a $1 cut in taxes and spending to reduce output by about $0.90. Thus, if we are cutting $61 million in BPT and spending, output would be reduced around $55 million.
It is easy to understand how someone could be confused about the way a whole economy works. It is natural for them to look at their own financial statements and imagine what would happen if they had a change in their expenses. But a business is not isolated from the entire economy. An expense on one’s profit and loss statement is revenue on someone else’s, and an expense on someone else’s statement may be reflected in one’s revenue.
In addition to conventional economic models, we know from experience that cutting BPT is not a panacea. When BPT was last cut there was no miraculous private sector job boom. There was no systemwide private sector pay raise. There was no sudden decrease in consumer prices. It seems evident that GovGuam’s lost revenue went into corporate bank accounts. During that time and following it, there was no large construction boom or any massive turnaround for Guam’s economy.
It took years for the economy to slowly recover. It is impossible to make a case from Guam’s history that cutting BPT by 1 percent will stimulate the economy significantly. We know differently from experience.
One may ask why some corporations would be pushing to cut BPT if it has such negative effects on Guam’s economy and does not stimulate economic growth. One might think that it would be in the corporation’s interest to stimulate economic growth, but that would be mistaken. A few big corporations would stand to gain a lot, but the costs would be on GovGuam workers, contractors, other taxpayers, and those who provide goods and services to them.
Apart from the harm to GovGuam workers, the fiscal damage to GovGuam and the reduction of economic output on Guam, slashing BPT may result in reduced government services for basic things like health and public safety at precisely the time we need it most.
Julian Janssen is a resident of Tamuning and chapter leader of the Progressive Democrats of Guam. Send feedback to email@example.com.