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 a
piece 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 tax
on 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.
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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 to
PhP38.9 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.”
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