The ghost conquistador and the specter of smuggling

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

 

What is the best measure of an effective public opinion piece?  Praise?  Or savage criticism?

Of course, everyone loves compliments.  But then, how do we know if the expression of approval is authentic, not fawning?  Further, some praises just do not provide new insights. “Wow!” or “Great!” or “Awesome!” is blasé.

On the other hand, a negative response can be unnerving.  Yet, by getting negative feedback to an opinion piece, one can discover and process critical information. And that’s good.

I have not forgotten some of Mao Zedong’s famous quotations. One is relevant to this discussion.  But before that, I can’t resist naming one other quotation that can easily be retrieved from my memory, that is, without aid from Google. “Learn to play the piano,” should not be taken literally.  For how could Mao’s Red Army of guerillas benefit from hauling pianos during the Long March?  Learning to play the piano simply means being good at multi-tasking.

But I digress.  The other Mao quotation that I like is “To be attacked by the enemy is a good thing.”

And so when the other side trashes your statement, that’s a sign that what you wrote stings.

Let’s illustrate.  Recently, the Philippine Daily Inquirer’s editorial titled Taxing vices (27 August 2011) made this conclusion: “So whether it is to raise taxes or curb vices, this is one piece of legislation that merits serious consideration by Congress. And the time to enact it is now during the current session, when our lawmakers are still not too preoccupied with ensuring their reelection.”

A week earlier (19 August 2011), Inquirer columnist Raul Pangalangan explained through his essay the essential features of the sin tax reform, namely the indexation of the specific tax to inflation, the adoption of a simplified unitary tax, and the removal of the discriminatory price freeze classification for certain tobacco products, where tax rates are pegged at 1996 prices. The Inquirer editorial cited above also discussed these attributes.  Professor Pangalangan extends his work to tackle the “legal sophistication of the tobacco industry.”

To borrow Muhammad Ali’s famous line, the Pangalangan jab stung like a bee.

The Pangalangan piece was an effective one, if we go by Mao’s statement that to be attacked by the enemy is a good thing.  Someone rejoined, through a letter to the editor, which the Inquirer published.  The letter writer said:

“The excise tax apparently favored by President Aquino and columnist Raul Pangalangan (“Guilt-free ‘sin tax’ on tobacco,” Inquirer, 8/19/11) for priority legislation is House Bill 3465, authored by Rep. Henedina Abad, the budget secretary’s wife. Abad’s bill masquerades as a boost to government revenues but really aims to achieve non-fiscal, anti-tobacco objectives.”

Never mind the guy’s name and organization, for they are fictitious.  (If you search the name Miguel Lopez, what comes out on the Google page is the Spanish conquistador Miguel Lopez de Legazpi.)

A fictitious writer does not deserve a response.  But one thing we can learn from his letter is that the tobacco industry will use smuggling as one of its main arguments.  The Spanish conquistador warns us that the sin tax reforms expressed in the Abad bill will  “open the floodgates to smuggling and illicit trade in cheap, untaxed tobacco products.”

The conquistador’s logic is deeply flawed.  He assumes that the government will not do anything about smuggling.  The reform of the excise taxes on sin products will be accompanied by measures to curb smuggling.  For example, the Bureau of Internal Revenue is very supportive of having stamps or unique markings on tobacco packages. This is a tested way of controlling smuggling.

Moreover, price in itself is not the determinant of smuggling.  The World Bank identifies the “degree of corruption” as the variable that mainly predicts the rise of smuggling. Note,for example, that despite the sharply reduced tariffs in the Philippines, smuggling was rampant, especially during the corrupt Gloria Arroyo administration. The situation has drastically changed under the PNoy administration, whose main platform is anti-corruption.  Political will is essential, and we already see this in the leadership of the revenue-collecting agencies.

The fact is indisputable that even granting the tax leakage arising from smuggling, the net revenues from the sin tax reforms will be substantial. The experiences of many developing countries or emerging economists (as well as the literature of the economics of tobacco control) provide overwhelming evidence that tobacco tax increases, even steep ones, result both in higher revenues and a reduction of smoking prevalence.

My suggestion to the Spanish conquistador is to undertake an expedition to Ukraine. He will discover how Ukraine’s “dynamic 2007-2010 tax policy,” in which the real value of the excise tax increased five-fold (400 percent!), resulted in an increase in revenues by US$700 million in 2009 and US$500 million in 2010. (See the 2011 journal paper co-authored by Hana Ross, Michal Stoklasa, and Konstantin Krasovsky, titled Economic and public health impact of 2007-2010 tobacco increases in Ukraine.)

I also suggest that the Spanish conquistador retrace the Manila-Acapulco route, He will also learn from our Mexican amigos the same lessons obtained from our Ukrainian comrades.

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