The author is the coordinator of the research and policy advocacy group Action for Economic Reforms.
Philippine history informs us that taxation has always been a serious, not to say dangerous, problem.
A chief cause of popular revolts against Spanish colonialism, theprecursor of the Katipunan revolution, was the unjust tax impositions(i.e., the collection of tribute). In the postcolonial period, variousadmin istrations were irresponsible on matters of taxation—theirfootdragging on tax legislation, their inconsistent and unevenenforcement of revenue laws, and their reluctance to prosecute big-timetax evaders.
While taxation is indeed an old problem, it likewise has something new.In the age of globalization, an increasing proportion of economicactivities and transactions transcends national borders. In thiscontext, developing countries are having a difficult time sustainingthe collection of revenues at a desirable level. The revenue effort(measured in terms of the amount of taxes collected as a proportion ofthe national output) of developing countries, including the moreprosperous ones, has declined in recent years.
Economic homogenization brought about by economic globalization haseroded the revenues of national governments. The significant reductionof tariffs—in light of their standardization under the rules of theWorld Trade Organization—is one example. This means that governmentshave to find other sources of funding to replace the revenues foregonefrom much lower tariffs. In the late 1990s, lower tariffs accounted forabout half of the decline of the collection of the Bureau of Customs.
However, locational competition among developing countries preventstheir governments from increasing tax rates. In fact, tax rates arebeing lowered in the name of competitiveness and investor confidence.In other words, taxes have replaced tariffs (in light of theirstandardization under the World Trade Organization regime) as a tool ofone country to gain an additional advantage over competitors. Thelowering of tariffs and tax rates, aside from other fiscal incentivesgiven to investors, has significantly contributed to the fiscaldegradation in many countries.
In the case of the Philippines, the phenomenon of overseas employmenthas also led to foregone revenues since overseas Filipino workers(OFWs) are exempted from paying their income tax in the Philippines.This is not to say that the income abroad of OFWs should be taxed.Rather, it illustrates the point that the many facets of economicglobalization—good or bad—pose serious challenges to the nationalgovernment in tackling fiscal degradation.
Truth to tell, the revenue problem that we currently face is, in themain, self-inflicted. Yes, part of the constraint is economichomogenization and integration. But the Philippine State has enoughinstruments to increase tax or revenue effort. The revenue effort inthe Philippines has deteriorated since the late 1990s. In 1997, therevenue effort was equivalent to 19.4 percent of the Gross DomesticProduct. But in 2000, it dropped to 13.8 percent.
Upon her accession to the presidency, Gloria Macapagal-Arroyo promisedto address the fiscal problem by committing to a policy leading to abalanced budget. This has not happened. Policy analysts and scholarswill likely agree that the Gloria Macapagal-Arroyo (GMA)administration’s main failure in regard to the economy is the huge andserious budget deficit resulting from awfully insufficient revenues.The International Monetary Fund and even Jose Isidro Camacho, whorecently resigned as the Secretary of Finance, have raised the alarmover the unsustainable debt and the fiscal crisis.
The intractable budget deficit has terrible consequences for sustainingPhilippine economic growth and fighting poverty. For example, spendingon public construction took a plunge by the third quarter of 2003.Also, real spending for essential services has been very
In fairness to the Bureau of Internal Revenue (BIR) and the Bureau ofCustoms (BOC), they have performed well in collecting the revenues.Both revenue collection agencies are expected to meet, if not surpass,their hard targets for 2003.
In addition, the BIR, which generates more than 70 percent ofgovernment revenues, is putting in place administrative reforms thatstrengthen its capacity to efficiently collect taxes. Theadministrative reforms cover a wide range of measures: frequent taxmapping, closer surveillance of hard-to-tax groups, refinement ofimplementing rules and regulations, gathering of third-partyinformation, acceleration of the computerization program, demotion ofinefficient officers and punishment of erring BIR personnel, andinvolvement of civil society in the tax campaigns.
In that case, since the BIR and the BOC are doing fine, what accounts for the weak revenues?
The first factor is that despite the administrative reforms that therevenue collection agencies are pursuing, the tax leakage is so hugebecause of infirmities or loopholes in the law, the vagueness ofimplementing rules, the lack of information, and the like. Anunpublished paper from the Department of Finance reveals how grave thetax leakage is. The estimates (for the fiscal year 2001) of the leakagefor various taxes are: a) individual income tax: 72.7 percent; b)corporate income tax: 39.86 percent; c) minimum corporate income tax:87.75 percent; and d) value-added tax: 49.94 percent.
The second factor is the weakness in tax policy, not to mention thelack of political will of the current administration to pass newrevenue laws.
As mentioned earlier, one reason behind the high rate of tax leakage iscompromised legislation. The Comprehensive Tax Reform Package (CTRP),passed during the Fidel Ramos administration, is a good example of apiece of legislation that had the best of intentions but was eventuallydiluted. One weakness of the CTRP is how to tax the business income ofhard-to-tax groups such as lawyers, doctors, accountants, and otherself-employed professionals. The tax is based on the net income, whichallows many deductible expenses and thus results in massive taxleakage. There is also inequity in this, for fixed-income earners paytheir taxes using the same tax schedule for individuals with businessincome but based on gross income with very limited exemptions. Anotherweakness is that the CTRP is still hobbled by the compromises or thevague rules in relation to the cap on deductible expenses forcorporations and the minimum corporate income tax.
Another example of weak, if not captured, legislation is the excise taxon cigarettes and alcoholic beverage, the so-called sin products. Inthe past, the excise tax was based on factory price, thus an ad valoremtax. Thus, the manufacturer, to avoid paying a higher tax, would sellthe cigarettes or the beer at a lower price to an affiliateddistributor (a dummy). To curb such practice, the government shiftedfrom ad valorem to specific. It sounds good, except for the fact thatthe enacted specific tax is not indexed to inflation. Over the years,then, the amount of excise tax collected by the government from the sinproducts has deteriorated in real terms.
The GMA administration promised to rectify the weakness by introducinga law that will index the specific tax. But nothing has happened; thebill languishes in a committee in the Lower House. In a word, do notexpect any new taxes to be passed in an election year.
The GMA administration has done nothing, either, to rationalize thefiscal incentives. These incentives—in the form of tax exemption, taxcredits, and subsidies—have a huge opportunity cost. It is estimatedthat in 2000, the foregone revenues from the incentives amounted toPhP38.9 billion. Yet the wisdom of offering generous incentives toinvestors is questionable. The critics, including the InternationalMonetary Fund (IMF) and the World Bank (WB), have argued that fiscalincentives are not a decisive factor in attracting investments.Investors are more sensitive to policy predictability, low level ofcorruption, peace and order, good infrastructure, and a robust internalmarket.
We can no longer afford to wait for tax reforms to be implemented. Wecan only hope that whoever holds power in the next administration willuse the “honeymoon” period with the public to immediately carry outreforms in tax policy and tax administration.
The tax reforms should be guided by the following principles: a) aprogressive and equitable system of taxation, b) a buoyant tax systemto keep revenues flowing to sustain development programs, and c) anefficient tax system that increases the tax base and plugs theloopholes to minimize tax evasion and avoidance.
It is always desirable to have a progressive tax system. Unfortunately,global competition has pressured nation-states to sacrificeprogressivity in favor of tax rates and a tax system that are generousto capital and internationally mobile, highly skilled labor. Directtaxes
(on income, capital, and other assets) are invariably associated with aprogressive system of taxation. Government must come to grips with thisquestion: Up to what extent can the national government promote directtaxation, without incurring greater costs that result from the failure
to attract capital and technology or even from the departure of its own mobile factors of production?
At the same time, indirect taxes can be designed to be less regressiveand even to enhance progressivity. For example, government canintroduce higher excise taxes on luxurious or affluent consumption andon socially undesirable goods (e.g., tobacco and liquor).
We have pointed out some key elements that can form the nucleus of thetax reform agenda of the next administration. To reiterate:
- Carry on the tax administration reforms that the present BIR and BOC are doing
- Address the infirmities of the Comprehensive Tax Reform Package.
- Legislate the indexation to inflation of the specific tax on sin products.
- Rationalize the fiscal incentives given to investments.
- Introduce progressive, efficient, and equitable taxes (taxes on pollution, on affluent consumption, and other activities that have negative externalities).
On the international front, the Philippine government should have akeen interest in the shaping of global rules in relation to financingand taxation. Among other things, the government should support rulesthat will: a) put in place mechanisms and arrangements for coordinationand harmonization where appropriate and necessary, b) preventlocational competition from becoming a race to the bottom, and c) giveroom to nation-states to exercise flexibility and autonomy amidsteconomic homogenization.
The specific design of the reform agenda is very important. Already,the IMF is recommending that government increase the rate of thevalue-added tax, which is certainly controversial. The measures we haveenumerated above, if carried out, will not warrant a move to increasethe rate of a highly regressive tax.
Let us, then, keep in mind the wise words of the eminent Gunnar Myrdal(in Political Element in the Development of Economic Theory): “Taxationis a most flexible and effective but also a dangerous instrument ofsocial reform. One has to know precisely what one is doing lest theresults diverge greatly from one’s intentions.”