Yes, New Taxes 2: Low Hanging Fruit

Introspective by: Romeo L. Bernardo | Posted on February 28, 2016 08:28:00 PM

In the first installment of this column (“Yes, New Taxes,” Feb. 1), we emphasized the need to raise revenues to cover catch-up infrastructure, to offset revenue gives for equity reasons in favor of low to middle-income salaried workers, and to align our corporate income tax regime with our peers to attract investments and create jobs. Moreover, we also need to provide for advance commitments of the administration that go beyond 2016, notably increases in government salaries over the next three years.

Where can all these come from? Let us do some math on how much this would cost.

For simplicity, expressing these in percent of Gross Domestic Product (GDP).

1. Additional spending for infrastructure to raise it to a minimum of 5% of GDP, same as our neighbors, from the present 2%-3%. Needed: additional 2%-3% of GDP or around P200 billion-P300 billion each year.

2. Adjustment in personal income tax exemptions to correct for “bracket creep,” the bloating of income due to inflation that does not reflect real purchasing power. Needed: 0.5% of GDP.

3. Reduction of corporate income taxes to 25% (same as Indonesia and Malaysia) from the current 30%, the highest in ASEAN. Needed: 0.6% of GDP

4. Salary increases under EO 201, Needed: 0.5% of GDP every year for the next three years. Or a total of 1.5% by 2018.

When this is totaled, the required amount ranges from P450 billion to P500 billion, or roughly around 5% of GDP every year. This does not even count other new expenditure claims like the modernization of the AFP and the indexed increases in the pensions of soldiers.

Early in its term, the next administration needs to think about its fiscal program so it can pursue its investment and expenditure program confidently and responsibly without courting macro instability and a credit downgrade. While there is headroom to increase debt due to historic low levels of debt to GDP, credit markets look at the medium term. Unless there is clarity that the medium term fiscal program is sustainable, interest rates will rise, crowding out government development spending and dampening private investment.

Secretary Cesar Purisima, recently deservedly recognized Best Finance Secretary for the sixth time, is cited as saying there is no need to impose new tax measures in order to boost collection — “I think we need to continue to use technology to make sure that we improve the efficiency of tax collection.” (Phil Star, Feb. 26 — “Incoming government does not need to impose new taxes” — Purisima ).

Indeed, improving collection efficiency should be government’s first resort. At the same time, we call attention to the limits of administrative measures, as evidenced by experiences of many countries that this is at most around 0.5% of GDP per year.

In the last 5 years, despite heroic, some would say excruciatingly painful, efforts of the BIR, tax to GDP only rose from 12.1% in 2010 to estimated 13.8% in 2015. If one takes out the effect of the increase in effective tax rates on sin taxes (see Part 1 of column), the net effect of administrative measures over the entire five years is only 1% of GDP. Of course, the figure is a conservative estimate since there were other moving parts that brought down collection — for example the drop in oil prices that reduced the base. But clearly, 1% is nowhere close to the 5% of GDP we calculated as needed over the medium term.

We do agree with Sec. Purisima that there are ample opportunities for using technology to improve collections. As discussed in Part 1, how BIR/DoF used security stamp taxes to ensure that smuggling and evasion do not rise with the higher sin taxes in cigarettes — and coming soon in alcohol — is a model case study on smart and resolute use of technology.

A logical extension on use of technology is plugging smuggling in oil products — a problem that has vexed our country for decades.

It has been estimated by industry experts, investigative journalists, and a variety of government officials over the past few years that at least 20% of all diesel and gasoline sold at retail in the Philippines has been smuggled into the country — which means that the government is unable to collect a large portion of the tax that should be paid on these fuels.

In a paper published in October 2015 by the Asian Development Bank, the bank encouraged governments to institute sophisticated fuel marking programs as a proven way to increase government revenues, improve fuel quality and combat criminal activity.

Fuel marking can be the parallel to the successful security stamp program the government instituted here last year.

A well-run fuel marking program puts a high-tech marker (in effect — a tax stamp) in all legally imported and locally refined fuel before it is distributed. Just like with a cigarette tax stamp, when fuel is then tested throughout the country at retail and commercial sites, any fuel that is found not to have the proper fuel marker is illegal — and thus subject to confiscation, and the illicit trader is subject to fines, closure and if necessary, criminal prosecution. Deterrence that fuel marking creates has been proven in many countries with similar problems.

Still in the area of oil taxes, the very sharp decline in oil prices provides an opportunity to capture some of it by imposing a variable tax that goes up when oil prices are low, and down when prices are high. This is can also correct for the erosion in the real value of the excise taxes on oil. Just like tobacco and alcohol products until two years ago, oil excise taxes are not indexed to inflation, and thus steadily dropped from 1.1% of GDP in 1997 to only 0.1% of GDP currently. (See graph)

At this time when our thoroughfares sometimes look like giant parking lots during rush hour, a good way to package this variable oil tax is as short-term response to reduce traffic, while at the same time addressing the traffic problem at the roots by earmarking collections for building and upgrading of mass transport and road systems.

The savings of the country from the global oil price drop is around $6 billion annually. If only a third of this is captured via a variable oil tax, we can have $2 billion incremental revenue collection — around 1% of GDP, thus also restoring oil excise tax to GDP ratio to its 1997 level.

The next installment of this column will talk about other potential revenue sources, rationalizing fiscal incentives, reducing unnecessary exemptions, and tariffication of quantitative restrictions on rice.

The last measure, will not only bring down the cost of rice, historically twice to thrice our neighbors’, but can bring new revenues of P25 billion to P30 billion every year, and save government P4 billion from annual budget subsidy and stem further explosion in unpayable NFA debt (around P 150 billion) guaranteed by the Republic.

Source: www.bworldonline.com