Tax Reforms and Collective Action

Sta. Ana coordinates Action for Economic ReformsThis piece was published in the June 7, 2010 edition of the BusinessWorld, pages S1/4 to S1/5.

Tax reforms are most difficult to do.  For one thing, the constituency for tax reforms, especially those relating to new taxes or increasing tax rates, is hard to find.  For another thing, precisely because the constituency is narrow, legislators avoid being supporters, much less being champions, of tax reforms.

We have seen, for example, how Ralph Recto, who sponsored the law that increased the valued-added tax (VAT) from 10 percent to 12 percent, was trounced in the 2007 Senate elections.  He has regained his position by joining the Noynoy Aquino bandwagon and by doing a complete turn-around—packaging himself as a populist by calling for measures (say, reduced oil prices) that make the whole population, especially the rich, happy, even if such measures aggravate the government’s fiscal problems.

And in the 2010 elections, Mar Roxas was painted as a firm supporter of the increase in the VAT rate.  On the other hand, rival Jojo Binay projected himself as the creator of a socialist Makati, which he intends to replicate all over the country. This is Binay’s  Makati that offers cash gifts, free movies, free groceries to senior citizens, even to those residing in Dasmariñas and Forbes Park, that has a state-of-the art hospital and  modern clinics that are accessible to all, that provides not only free education but also free uniforms, textbooks, and school supplies to children.

But it is also a Makati that owes the national government PHP1.2 billion in unpaid taxes. That the Makati City local government has agreed to settle with the Bureau of Internal Revenue (BIR), I surmise, is Binay’s action to at least avoid a collision with incoming President Aquino.  The President-elect faces face an acid test in increasing revenue effort, without losing political support.

The point is, tax reforms, as a public interest concern, are hard to attain.  Compare tax reforms to freedom of information (FOI).  The FOI advocacy has a natural broad constituency—the powerful media, the articulate non-governmental organizations (NGO), the influential business chambers, the opinionated Church, etc.  And FOI is a popular issue that politicians will quickly embrace.  Only the scumbags—the handful few at Malacañang and the subalterns in the House of Representatives—will scuttle FOI, and they have done so.

Unfortunately for tax reform advocacy, the favorable conditions enjoyed by the FOI campaign are absent.  Public opinion, which the media will carry, is allergic to new taxes.  The majority of NGOs also resist taxation, especially if it is seen that such taxation is regressive. And business will be divided, for we expect vested interests to fight taxes that will adversely affect them.

Tax reform advocacy is the  classic case of a collective action problem. Tax reforms benefit everyone—they are good for macroeconomic stability; the revenues can be used to finance growth and poverty reduction.  Higher and stable revenues spur both private and public investments, which in turn create quality jobs. Despite these benefits, the ordinary citizen will not go out of his way to campaign for tax reforms.  He may arrive at the calculation that the costs of being politically active—the transaction as well as opportunity costs—will be greater than the perceived benefits. Said benefits are abstract, if not indirect, and they may not even materialize.

In the meantime, this citizen, a potential recruit for the tax reform advocacy, will be awed, nay, threatened and probably discouraged by the huge resources, the sleek organization, the political connections, and the intense lobbying of vested interests.

So, in relation to tax reforms, what can be done to address the collective action problem and thus advance the public interest?

The sequencing of reforms is important.  Government must first regain the trust of the people—that it will fight corruption, that it will not be captive to particularistic interests, that it will deliver the public services effectively and efficiently—before the hard taxation reforms can be introduced.  At least, we are off to a good start under the Aquino administration.  Noynoy Aquino won the elections decisively and thus has tremendous political capital to make good his promise:  kung walang corrupt, walang mahirap.  Let us not quarrel about the slogan’s logic.  I interpret it as (Gloria Arroyo’s) shameless, immoderate corruption being a binding constraint on investments and poverty reduction.

The next concrete step is to appoint men and women of integrity and independence who will lead the Department of Finance, the Bureau of Internal Revenue, and the Bureau of Customs.  Choosing the right people is not going to be a problem because the Noynoy Aquino team has a deep bench.

The tax reforms to be introduced must likewise be anchored on fairness and equity.  This is of course a question of principle at the same time that it serves the strategy of getting a mass base for the advocacy. The principle of progressive, equitable taxation should not be diluted.  I see a tendency among some leading policy professionals to apply progressiveness of fiscal policy only at the spending side.  There is likewise a preference among some technocrats to shift from income taxation to consumption taxation as the main source of revenues.  This is an idea that will entail huge political costs and therefore infeasible at this period.

On the other hand, we also have to inform and educate the public, especially those who are capable of undertaking collective action, about the basics and nuances of taxation.  For example, a mistaken idea is that indirect taxation is regressive and thus anti-poor.  A tax on petroleum is an indirect tax, but it is a good tax.  It addresses negative externalities like traffic and pollution.  Furthermore, those who pay the petroleum tax are mainly those who have the ability to do so—those who own Benzes, Hondas, and Kias, and they all belong to the high-income bracket in Philippine society.

But what about the effects of a petroleum tax on the poor?  The poor can be insulated through well-targeted subsidies—for example, subsidies for public transportation and economic activities of the small fisherfolk and farmers.

Another indirect tax that is beneficial to the whole society is the excise tax on alcohol and tobacco. Such tax is admittedly regressive, but we want our citizens, especially the poor, to live healthy lives.  It is a modest proposal to increase the specific taxes on sin products, since such merely adjusts the tax to inflation.

Citizens’ ownership of the reforms, especially the more controversial ones, is critical. It is the task of public officials to reach out to civil society, including possible adversaries.  Not only will this facilitate healthy debate; it can also lead to new forces, new alliances.  I recall for example the initiative of then Finance Undersecretary Nene Guevara in the mid-1990s to talk to the officials of the Freedom from Debt Coalition (FDC) towards getting support for the Comprehensive Tax Reforms Package (CTRP).  Before this, she and the FDC had several encounters with regard to the VAT and the oil levy.

But Guevara’s entering the FDC den, a lion’s den, led to warming up the relationship. And through persistent, friendly dialogue, a convergence was found.  Eventually, an organization like Action for Economic Reforms, which we founded, became one of the mainstays in the passage of CTRP.  It was the belief that we were meaningfully involved in the reform process that led us to be part of the CTRP coalition.

Now, we can involve more NGOs that will help strengthen national ownership of tax reforms.  Some of these organizations are involved in causes that one way or another relate to taxation issues.  People’s organizations in mining communities as well as environmental groups will be much interested in the advocacy to withdraw the fiscal incentives for extractive industries.  A newly formed group called Bantay Kita is a watchdog group that monitors the revenues that extractive industries must pay.  Publish what you pay is one of its operative slogans. We find a convergence between the stance of these NGOs and the DOF position.  After all, incentives to extractive industries are redundant.

In the area of public health, tobacco control groups like Health Justice (an organization that bridges health and law) actively campaign for the increase in the tobacco tax as a means to reduce smoking prevalence.

Organizations that advocate better public spending to achieve human development goals are natural allies in the campaign for tax reforms.  These groups, like the Alternative Budget Initiative, rightly demand increased spending for health, education, nutrition, and essential economic services.  Yet, they are aware of the fiscal constraints that government faces. Hence, they will be willing to support reforms that will increase revenues that will finance their pro-poor proposals.

All told, we do have favorable conditions to pursue collective action for tax reforms.  Let’s seize the moment.

Sta. Ana coordinates Action for Economic Reforms (

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