Oil prices have been soaring, leading to strident calls to lower oil prices to give consumers relief.
The revolutionary Left would like government to subsidize oil consumption. But the tradeoff is disagreeable—a reallocation of the budget , adversely affecting spending for development priorities. This is all the more difficult if not unacceptable in a situation that we are grappling with low tax effort and persistent budget deficit.
On the other hand, some quarters, well articulated by the economics professor Benjamin Diokno, want a temporary lowering of the value-added tax (VAT) for oil. The Diokno proposal is to decrease the VAT rate from 12 percent to 10 percent at a time that oil prices are soaring. A peak in prices, say at US$120 a barrel, triggers the reduction of the rate to 10 percent. The rate returns to 12 percent when prices stabilize.
The Left’s and Diokno’s proposal are different but both have the same objective of giving relief to consumers. While the Diokno proposal is perhaps better than the Left’s, it nevertheless results in foregone revenues.
We note some problems with the Diokno proposal. The main beneficiaries of a general subsidy or a lowering of the VAT rate are those who have the ability to pay—those who own vehicles, which comprise a tiny fraction of the population. Haven’t we observed that the Metro traffic has not alleviated? And haven’t we seen that the volume of vehicles occupying the road has remained steady in spite of the high oil prices? In other words, the upper classes can still absorb the current high oil prices.
Furthermore, despite the spike in oil process, the over-all inflation rate is very benign. The headline inflation rate in end-February 2012 was a low 2.7 percent. That is to say, government intervention to stabilize prices through general subsidy, other than adopting the standard macroeconomic management tools, is not necessary.
It is thus better to target the subsidy to the poor through improvements in mass transportation. Rebates through a voucher system for transport cooperatives and marginalized groups who use fuel for their work may be given.
In the same vein, a lowering of the VAT rate for fuel, while maintaining the rate of 12 percent for all other goods, also causes tax administration problems, causing inefficiencies and increasing transaction costs.
The concern over leakage is minor, compared to the revenue losses. But what about the argument that government is reaping windfall revenues from oil? We must not lose sight of the bigger context that low tax collection is a binding constraint. Government is doing its utmost effort to boost tax effort. Tax administration by itself is insufficient, and the administration has realized the urgency of the passage of the sin tax reforms and the rationalization of fiscal incentives. But these proposed measures are still bills, with the former encountering rough sailing in Congress. Precisely because of this context, the windfall from the VAT revenues from oil is most welcome for government.
Moreover, we must be reminded that the tax on petroleum in the Philippines is low compared to the rest of the world. Worse, the excise part of the taxes has not been adjusted to inflation. In fact, the loss of revenues from the oil tax is a main contributor to the decline in tax effort.
Perhaps, only when the government has addressed the erosion of the excise on oil taxes can it contemplate a tinkering of the VAT rate.
The low excise tax on fuel is a cause for concern. A high tax on non-renewable resources is economically sound, especially now that we are all concerned about the problems arising from climate change.