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, the precursor of the Katipunan revolution, was the unjust tax impositions(i.e., the collection of tribute). In the postcolonial period, various administrations were irresponsible on matters of taxation—their foot dragging on tax legislation, their inconsistent and uneven enforcement of revenue laws, and their reluctance to prosecute big-time tax evaders.
While taxation is indeed an old problem, it likewise has something new. In the age of globalization, an increasing proportion of economic activities and transactions transcends national borders. In this context, developing countries are having a difficult time sustaining the collection of revenues at a desirable level. The revenue effort(measured in terms of the amount of taxes collected as a proportion of the national output) of developing countries, including the more prosperous ones, has declined in recent years.
Economic homogenization brought about by economic globalization has eroded the revenues of national governments. The significant reduction of tariffs—in light of their standardization under the rules of the World Trade Organization—is one example. This means that governments have to find other sources of funding to replace the revenues foregone from much lower tariffs. In the late 1990s, lower tariffs accounted for about half of the decline of the collection of the Bureau of Customs.
However, locational competition among developing countries prevents their governments from increasing tax rates. In fact, tax rates are being lowered in the name of competitiveness and investor confidence. In other words, taxes have replaced tariffs (in light of their standardization under the World Trade Organization regime) as a tool of one country to gain an additional advantage over competitors. The lowering of tariffs and tax rates, aside from other fiscal incentives given to investors, has significantly contributed to the fiscal degradation in many countries.
In the case of the Philippines, the phenomenon of overseas employment has 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 economic globalization—good or bad—pose serious challenges to the national government in tackling fiscal degradation.
Truth to tell, the revenue problem that we currently face is, in the main, self-inflicted. Yes, part of the constraint is economic homogenization and integration. But the Philippine State has enough instruments to increase tax or revenue effort. The revenue effort in the Philippines has deteriorated since the late 1990s. In 1997, the revenue effort was equivalent to 19.4 percent of the Gross Domestic Product. But in 2000, it dropped to 13.8 percent.
Upon her accession to the presidency, Gloria Macapagal-Arroyo promised to address the fiscal problem by committing to a policy leading to a balanced budget. This has not happened. Policy analysts and scholars will likely agree that the Gloria Macapagal-Arroyo (GMA)administration’s main failure in regard to the economy is the huge and serious budget deficit resulting from awfully insufficient revenues. The International Monetary Fund and even Jose Isidro Camacho, who recently resigned as the Secretary of Finance, have raised the alarm over the unsustainable debt and the fiscal crisis.
The intractable budget deficit has terrible consequences for sustaining Philippine economic growth and fighting poverty. For example, spending on public construction took a plunge by the third quarter of 2003.Also, real spending for essential services has been very tight.
In fairness to the Bureau of Internal Revenue (BIR) and the Bureau of Customs (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 of government revenues, is putting in place administrative reforms that strengthen its capacity to efficiently collect taxes. The administrative reforms cover a wide range of measures: frequent tax mapping, closer surveillance of hard-to-tax groups, refinement of implementing rules and regulations, gathering of third-party information, acceleration of the computerization program, demotion of inefficient officers and punishment of erring BIR personnel, and involvement 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 the revenue collection agencies are pursuing, the tax leakage is so huge because of infirmities or loopholes in the law, the vagueness of implementing rules, the lack of information, and the like. An unpublished paper from the Department of Finance reveals how grave the tax leakage is. The estimates (for the fiscal year 2001) of the leakage for 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 the lack of political will of the current administration to pass new revenue laws.
As mentioned earlier, one reason behind the high rate of tax leakage is compromised 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 eventually diluted. One weakness of the CTRP is how to tax the business income of hard-to-tax groups such as lawyers, doctors, accountants, and other self-employed professionals. The tax is based on the net income, which allows many deductible expenses and thus results in massive tax leakage. There is also inequity in this, for fixed-income earners pay their taxes using the same tax schedule for individuals with business income but based on gross income with very limited exemptions. Another weakness is that the CTRP is still hobbled by the compromises or the vague rules in relation to the cap on deductible expenses for corporations 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. In the past, the excise tax was based on factory price, thus an ad valorem tax. Thus, the manufacturer, to avoid paying a higher tax, would sell the cigarettes or the beer at a lower price to an affiliated distributor (a dummy). To curb such practice, the government shifted from ad valorem to specific. It sounds good, except for the fact that the enacted specific tax is not indexed to inflation. Over the years, then, the amount of excise tax collected by the government from the sin products has deteriorated in real terms.
The GMA administration promised to rectify the weakness by introducing a law that will index the specific tax. But nothing has happened; the bill languishes in a committee in the Lower House. In a word, do not expect any new taxes to be passed in an election year.
The GMA administration has done nothing, either, to rationalize the fiscal incentives. These incentives—in the form of tax exemption, tax credits, and subsidies—have a huge opportunity cost. It is estimated that in 2000, the foregone revenues from the incentives amounted toPhP38.9 billion. Yet the wisdom of offering generous incentives to investors is questionable. The critics, including the International Monetary Fund (IMF) and the World Bank (WB), have argued that fiscal incentives are not a decisive factor in attracting investments. Investors are more sensitive to policy predictability, low level of corruption, peace and order, good infrastructure, and a robust internal market.
We can no longer afford to wait for tax reforms to be implemented. We can only hope that whoever holds power in the next administration will use the “honeymoon” period with the public to immediately carry out reforms in tax policy and tax administration.
The tax reforms should be guided by the following principles: a) a progressive and equitable system of taxation, b) a buoyant tax system to keep revenues flowing to sustain development programs, and c) an efficient tax system that increases the tax base and plugs the loopholes to minimize tax evasion and avoidance.
It is always desirable to have a progressive tax system. Unfortunately, global competition has pressured nation-states to sacrifice progressivity in favor of tax rates and a tax system that are generous to capital and internationally mobile, highly skilled labor. Direct taxes (on income, capital, and other assets) are invariably associated with a progressive system of taxation. Government must come to grips with this question: Up to what extent can the national government promote direct taxation, 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 regressive and even to enhance progressivity. For example, government can introduce higher excise taxes on luxurious or affluent consumption and on socially undesirable goods (e.g., tobacco and liquor).
We have pointed out some key elements that can form the nucleus of the tax 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 a keen interest in the shaping of global rules in relation to financing and taxation. Among other things, the government should support rules that will: a) put in place mechanisms and arrangements for coordination and harmonization where appropriate and necessary, b) prevent locational competition from becoming a race to the bottom, and c) give room to nation-states to exercise flexibility and autonomy amidst economic homogenization.
The specific design of the reform agenda is very important. Already, the IMF is recommending that government increase the rate of the value-added tax, which is certainly controversial. The measures we have enumerated above, if carried out, will not warrant a move to increase the 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): “Taxation is a most flexible and effective but also a dangerous instrument of social reform. One has to know precisely what one is doing lest the results diverge greatly from one’s intentions.”