“No new taxes yet.” (Part 1)

Sta. Ana coordinates Action for Economic Reforms. This piece was published in the July 4, 2011 edition of the BusinessWorld, pages S1/4 to S1/5.

 

“Aquino: No new taxes yet.”  This was the BusinessMirror’s headline on 27 June 2011.

How should the statement of President Noy Aquino be interpreted?  Should we—those who support an increase in taxes—be dismayed over the statement?

Of course, for vested interests—e.g., the manufacturers of sin (alcohol and tobacco) products—the statement is welcome news.  They will emphasize the phrase “no new taxes.”

But the full statement includes the modifier “yet.” The adverb “yet” is the operative word in the sentence. President Aquino is in fact saying that for the time being or for a specified time, he will not introduce new taxes.  Said another way, we can expect new taxes to be introduced later.

And that will come sooner than later.As articulated for instance by Bureau of Internal Revenue (BIR) Commissioner Kim Henares, the period of “no new taxes” is effective till the end of 2011.  Before the Ways and Means Committee of the Lower House, Commissioner Henares said: “We are not imposing any new tax measure at least for the first 18 months under President Aquino.”  (Source: GMA News Online, 27 March 2011.)

The BusinessWorldheadline story confirms this—that “Mr Aquino’s commitment not to raise taxes ends on December 31, or 18 months into his term.”

The promise of President Aquino about “no new taxes” springs from his desire to regain the people’s trust in taxation.

The despised Gloria Arroyo administration imposed higher taxes to defuse a fiscal crisis ofits own making.  Yet, Arroyo’s higher taxes did not benefit the people.  Despite higher taxes, spending for infrastructure, health, and education remained low during the Arroyo administration.  Despite higher taxes, Arroyo’s tax effort, the amount of taxes as a percentage of gross domestic product (GDP), fell to a very low 12.2 percent before her term ended. (The computation is derived from the National Statistical Coordination Board’s 2000 rebased/revised GDP).

To firm up political support for fiscal reforms, it was thus sensible for President Aquino to emphasize improvement of tax administration or tax efficiency.

But then, new taxes cannot wait forever.  Although President Aquino said that the tax administration reforms are “bearing fruit”(BusinessWorld, 27 June 2011), the general picture remains stark.  To be specific, the over-all tax effort registered a tiny increase from 11.58 percent in the first quarter of 2010 to 11.86 percent in the first quarter of 2011.

The efforts of BIR Commissioner Henares and Bureau of Customs (BOC) Commissioner are most laudable, but the gains from the administration reforms they have set in motion will become visible only in the medium term.  It is noteworthy, for example, that the BIR has relentlessly pursued tax evasion charges against high-profile individuals as well as unfamiliar entities.  But is only when the courts have convicted the tax evaders—entailing a long process—that the public will absorb the message that government is capable of pinning down tax cheats.

Moreover, the gains from tax administration reforms will be insufficient for government to attain a tax effort of, say, 17 percent. In short, tax administration and tax policy have to go hand in hand.

And the time has come to put tax policy (i.e., new taxes) on the front burner.

Be that as it may, some taxes are not actually new taxes. The Aquino administration should urge Congress to take action on these taxes.  We are referring to the sin taxes on alcohol and tobacco.

In the case of amending the law on sin taxes, the intent is to correct the basic weaknesses in the current legislation.

What are these weaknesses?  First, the specific taxes on sin products are not indexed to inflation, thus resulting in the erosion of the real value of revenues over time.  Second, in relation to the tobacco taxes, the price classification for older cigarette brands upon which the tax rate is imposed has been pegged at the brands’ net retail prices as of 1 October 1996. Just imagine the scores of billions of revenues that government can reap if classification was based on current prices.  Third, the sin taxes have a multi-level structure, making it difficult to administer.  Making the tax simple, by just having a unitary tax for all brands, regardless of their price, addresses not only efficiency but also tackles the health objective of preventing smokers from merely switching to higher-priced brands to lower-priced cigarettes.

To summarize, the sin taxes are not new taxes. Reforming a fundamentally flawed law on sin taxes hardly qualifies as a new tax.  Making sin taxes a priority legislative measure will be the first step to significantly increase revenues both for the short term and the long term.

Moreover, this measure is the easiest tax policy to gain popular support, for it also tackles health objectives. The taxes will reduce alcoholism and smoking prevalence. Furthermore, the revenues from sin taxes will be used to finance the administration’s flagship programs like the expansion of universal health coverage.

Let’s not wait for the end of 2011 to push for sin taxes.  But these sin taxes must contain the following essential reforms:  a) indexation to inflation, b) a move towards a unitary tax system, and c) concomitantly, the removal of the price classification freeze.

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