The Republic of the Federation of the Philippines

The prodigal son asks his father for his share of the inheritance so that he may live independently the rest of his life. Similarly, the federalists suggest the notion of states moving on with their autonomy from the republic.

To the prodigal son’s credit, he acknowledges the fiscal repercussions. He accepts that once he is autonomous, he can no longer ask for financial support. He knows fiscal federalism. To the credit of the federalists, they do not ask for some sort of inheritance. They only ask for autonomy. But until now they are silent on the fiscal support the autonomous states will need from the government. Perhaps it is because many in society, including the federalists, do not know fiscal federalism. So let’s talk fiscal federalism.
According to the Department of Finance, the revenue effort (revenue as a proportion of national income) in 2013 was close to 14%. Assume that the revenue effort of each region is 14% and the obligation of each region is to remit 20% of the 14% to the national treasury. This means each state remits 2.8% of the gross regional domestic product (GRDP) to the national treasury and keeps 11.2% of GRDP.

The latest GRDP data available is for 2013. From the GRDP data, one can estimate how much each region keeps and contributes to the national treasury in a federal setting. For example, the biggest collecting regions, NCR (National Capital Region) and CALABARZON, will generate P480 billion and P210 billion respectively, while the smallest collecting regions, the Autonomous Region in Muslim Mindanao (ARMM) and CARAGA, will generate P11 billion and P14 billion respectively. In this federal setting, the rich regions collect so much more and will become richer, and the poor regions collect so little and at best will stay poor.

But what about the 2.8% of the GRDP that the national treasury collects? Is this enough to distribute to at least prevent the poor regions from getting poorer? Before that, consider two rules of thumb in fiscal policy.

Suppose that the income of NCR is P90, that of Bicol is P10, and the tax is 20%. Then the government collects P18 from NCR and P2 from Bicol for a total revenue of P20. The first rule of thumb is that the state that earns the most income gets the biggest allocation, and the state that earns the least gets the lowest peso allocation. For example, the national government allocates P15 to NCR and P5 to Bicol. The economic rationale is to incentivize states to earn more income.

An equally important rule of thumb is that the share of allocation given to the biggest income earner is less than the share of its income. For example, the P15 allocation to NCR is 75% of the total revenue of P20 even if its contribution to national income is 90%, while the P5 allocation to Bicol is 25% even if its contribution to national income is 10%. NCR pays a net tax of P20 minus P15 or P5. Bicol collects a net subsidy of P15 minus P10 or P5. This makes the fiscal policy regionally progressive.

Consider the average tax revenues that regions automatically keep. The ones that are above average are NCR, CALABARZON, Central Luzon, and Central Visayas, and their total revenue is P887 billion. There are 13 regions below the average and their total revenue is P380 billion. Half of the difference is P254 billion and that is the amount to be redistributed from the four richest regions (for lack of a better term) to the 13 poorest just so the total public spending of the two groups are equal. The 2.8% of GDP that the national treasury collects is P323 billion. So P323 billion is enough to meet the two rules of thumb mentioned above.

The question is how progressive is this? The total GRDP of the four richest regions is P7.9 trillion, while the total GRDP of the 13 poorest is P3.4 trillion. Half of the difference is P2.25 trillion and that is the amount it will take to redistribute from the four richest to the 13 poorest just so the two groups will have the same total GRDP. Compared to P254 billion, the fiscal policy cannot be progressive enough to make a significant change in the income disparity among regions.

The big assumption is that only 20% of taxes collected by each state will be remitted to the national treasury. The assumption can be changed. For example, it can be assumed that 70% will be remitted to the national treasury. This makes the central government more powerful in making a significant change in the income disparity among regions. But technically, it is no longer fiscal federalism. It is now “unknown.”

In colloquial terms, if you (the state) can put up with mom and dad (the central government), you live with them and put up with their rules. But these go with the privilege of access to the fridge, electricity and water. Sometimes, you can even use the car with free gasoline and collect allowance. But if you move out, you get autonomy but you cannot come back weekly to collect grocery items, much less ask money for your bills, gasoline and apartment. If you want autonomy, that autonomy comes with raising money to make ends meet. Having autonomy while mom and dad pay for your grocery, electricity, apartment, car, gasoline, etc. is “unknown.”

For the country, this “unknown” should appear credible. To do so, the Republic of the Philippines which the federalists propose to be the Federation of the Philippines should instead be the Republic of the Federation of the Philippines.

Luis F. Dumlao is a professor at the Department of Economics of the Ateneo de Manila University.

This article was first posted on BusinessWorld last June 7, 2015.
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