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(written December 1994 by Arturo C. Boquiren under a University of the Philippines Faculty Grant)

 

WHY VAT UNDER R.A. 7716 IS "REGRESSIVE" TAXATION

             

              Considered even by itself,  RA 7716 is a regressive tax because it is indirect taxation.  While the rich can evade the burden of tax by spending less on luxuries, the poor cannot do so because the main bulk of their spending is on necessities.  A double-check of figures used by those who hold the view that the Expanded VAT Law is progressive taxation or that the rich will bear the greater burden of tax will even show that RA 7716 constitute regressive taxation.

 

              For example, National Economic Development Authority Secretary Cielito Habito argues that the Expanded VAT Law is progressive because the law would be increasing the budgets of expenditures of the lowest income groups by about a little less than 3%  of their total budget. In contrast, according to Secretary Habito, it would be 4.5% for the top income groups.[2] Using these data on Table 2.2 of the 1993 Statistical Yearbook will show that the increase in expenditure as percentage of income is higher for the lowest income group compared to that of the highest income group. In Table 2.2 of the yearbook, the average expenditure of the lowest income group (under P6,000 monthly) is P5,553 and its average income  P4,625 while  the average monthly expenditure of the highest income group is P115,851 and its average income P179,092. This indicates that the Expanded VAT is regressive taxation.

 

              For another example, let us take the main argument of Dr. Rosario Manasan, reportedly a prominent fiscal economist and research fellow of the Philippine Institute for Development Studies (PID). Her arguments were reported  in the 27 August 1994 issue of the Philippine Journal. Dr. Manasan has supposedly claimed that the richest 10% of the population will bear more of the tax burden under the Expanded VAT because decile 1 (the 10% of the population with the lowest incomes) will bear only 2.35% of the tax to be collected while 32.52% will be shouldered by the richest decile (10).  A check with Table 2.8 of the 1993 Philippine Statistical Yearbook shows that decile 10 gets 38.6% of the total income of the Philippine population while decile 1 gets only 1.8%.  Therefore, despite her claim that under the Expanded VAT the richest 10% will bear the greater tax burden, Dr. Manasan's data only confirm that the Expanded VAT Law is regressive taxation: the lowest decile pays a greater percentage of tax burden compared to his income share while the highest decile pays a lower percentage of the tax burden compared to his share in the country's total  income.

 

              Another portion of the Philippine Journal news item further confirms our argument on the  Expanded VAT Law as regressive:  once successful  in generating tax revenues,  the Expanded VAT will make decile 1 (10% of the population with the lowest incomes) pay 5.5%  of their incomes from 4.4% before the Expanded VAT while decile 10 (10% of the population with the highest incomes) will pay 3.7% from the pre-Expanded VAT level of 2.9%. The data show two things: 1)  the lower income groups pay a greater percentage of their income even before the VAT, and that 2) the lowest 10% of the population will have to pay 1.1% more of their income while the highest 10%  will pay only 0.8%  more of their income. Again, the regressive nature of the Expanded VAT Law is confirmed.

             

              Even business tycoon Enrique Zobel  acknowledge that VAT "would benefit only big businessmen" and that the "big businessmen will simply pass on their additional tax burden to consumers." [3]

 

              At the same time,  even  the IMF Occasional Paper #88 Series of 1991[4] had acknowledged that "VAT is not designed to correct for income or wealth inequalities." Although the IMF in 1991 had recommended the VAT only in the context of a generally progressive tax system and allocation of the national budget, approval in June 1994 of the $684 million IMF Extended Fund Facility to the Philippines was made conditional on the approval of the Expanded VAT Law. Thus, in October 1994,  the Philippine government had to explain to visiting IMF official Michel Camdessus  on why the VAT has not been implemented.[5]

 

              Considered within the context of other tax measures, VAT is also regressive. In "simplifying" the Philippine tax system, for example, VAT will replace 70 existing indirect tax.[6]  Quoting  Ms. Jessica Cantos of the Freedom from Debt Coalition,  newspaperman Adrian Cristobal says that the VAT will replace the 30% tax on luxury goods; 12% on hotels, motels, and resorts; 12% on caterers on clubs and cockpits; 15% on caterers in race tracks; and 20% on semi-essential goods. [7] Meanwhile, the Ramos administration plans to reduce corporate taxes from a maximum of 35% to a maximum of only 25%.[8]

 

VAT IS ALWAYS INFLATIONARY

 

              Although there are goods and services exempted from VAT, price increase of goods under an expanded VAT regime can be 10% or more as the VAT is implemented through the credit method. Despite claims to the contrary,   pyramiding or cascading price increases will be inevitable through the credit method as producers and sellers are allowed to immediately pass on the VAT to their consumers. Although the input VAT can be deducted from the output VAT, producers or sellers are allowed to automatically raise prices by 10% in the credit method of VAT. [9]

 

              In contrast, government deficit spending is not necessarily inflationary, especially if the spending serve to  increase domestic production.

 

AN EXPANDED VAT CAN DISCOURAGE LOCAL INVESTMENTS

 

              VAT increases the capital requirements for business firms to operate. Small businesses can be forced to close shop  even as VAT can be passed on  to consumers.  Industries who stand to suffer most from VAT are firms whose demand for their products is highly price elastic  (% decrease in demand is higher than the %  increase in price).  Especially for such firms, price increase with VAT translates into lower revenues.

 

WHY A NEW TAX LAW NEED NOT BE IMPOSED

             

              Government need not create new laws to increase government revenues.  Instead of expanding VAT, government can collect the taxes due and strengthen tax collection based on old tax laws.  The following data show the magnitude of uncollected tax that can easily cover the government budget deficits. The data also show the degree of tax evasion in the country:

 

YEAR	COLLECTION RATE	UNCOLLECTED AMOUNT BECAUSE OF TAX EVASION (in million pesos)	TAX EVASION RATE
1985	26.9%	16,037.6	73.1%
1986	38.3%	9,564.7	61.7%
1988	28.5%	19,940.3	71.5%
1990	35.1%	29,994.3	64.9%
1991	34.0%	40,367.5	66.0%

                                                     SOURCE:  Manahan, Rosario G. "Breaking Away from the Fiscal Bind: Reforming the

                                                         the  Fiscal System," Philippine Institute for Development Studies, August 1993.[10]

 

              Proponents of the Expanded VAT Law argue that the Expanded VAT Law will enhance revenue-collection and that it is self-policing.  This is not, however, supported by evidence in the Philippine experience.  Since implementation,  as high as 50% of potential tax revenue from the VAT of 1988 was being missed. [11]  In 1992, for example, although collections in the old VAT reached P32.24 billion, VAT was around 50% short of its potential revenue collection of P63.78 billion.[12]

 

              To argue that new tax laws need not be imposed is not to say that existing tax laws without the VAT is  progressive.  According to the 23 May 1994 Press Release of the Freedom from Debt Coalition, indirect taxes comprise about 70% of total revenue collections and eat up 11-12% of the incomes of the poorest families.[13] The Expanded VAT Law will only make the Philippine taxation system more regressive.  The biggest tax evaders in the country are already identified, what is needed is a political will to go after them.  Penal laws on the biggest tax evaders must be made more stringent and severe. At the same time, tax laws  must be kind and compassionate to the poor and lower-middle classes.

VAT WILL NOT SIGNIFICANTLY DIMINISH TAX EVASION

AND CORRUPTION IF AT ALL

 

              On the view that VAT would narrow the range of discretion of revenue collection agents thereby limiting the occasion for graft and corruption, the 14 July 1994 editorial of the Philippine Daily Inquirer refutes this, saying that  "confusion over its coverage and computation already argues otherwise."

 

              A shift to the VAT system will  not significantly improve tax collection rate and will not eliminate tax evasion and corruption.  Even if businessmen with taxes due can be identified under a VAT system, there is no guarantee that government can collect the tax. One of those who has successfully refused to pay taxes, for example, is  Lucio Tan. Government agencies had long ago identified him to be owing the government P25.2 billion in taxes for the last 3 years.[14] Yet,  until now, there is no likelihood that he will be made to pay his tax due.

 

VAT AS UNNECESSARY TODAY

 

              VAT is unnecessary today because the reasons for limiting the budget deficits for which VAT was hatched in early 1994 no longer exist:  1) a dwindling Oil Price Stabilization Fund; and 2) the desire to limit inflation rate for 1994 at  8.5%.  VAT was intended to raise P8.3  billion annually so government budget deficits can be reduced and  achieved the 1994 IMF inflation rate target of 8.5%.

 

              Inflation rate, however, has improved to 7.8% as of October 1994 despite a P4 billion overshot in the  government budget. Instead of deficits, the OPSF experienced a surplus of  P3.9 billion[15] as of end-October 1994---even without the implementation of the Expanded VAT Law, even with a P1.00 oil price  rollback in 10 August 1994!  Remember: the Expanded VAT Law was designed to replace the aborted oil price hike in January 1994 after protests forced the government to a rollback. The OPSF surplus resulted from the appreciation of the peso  vis-a-vis the dollar in 1994.

 

ON WHAT GROUNDS CAN R.A. 7716 BE OPPOSED?

 

              The Expanded VAT Law (R.A. 7716) can be opposed on several grounds.  The most important reasons appear to be the following:

 

1. R.A. 7716 CONSTITUTES IMF-WB  INTERFERENCE ON RP'S ECONOMIC AFFAIRS

2. VIEWED BY ITSELF AND WITHIN THE CONTEXT OF  OTHER TAX POLICIES  OF THE RAMOS ADMINISTRATION,  R.A. 7716 IS ESSENTIALLY  REGRESSIVE

 

              While a VAT system can be part of a genuinely progressive Philippine tax system,  the Expanded VAT Law (R.A. 7716) constitute an attempt to pass to the poor and middle classes the principal burden of  taxation.  At the same time it can also be argued that there is no need to impose new taxes and that what is needed more is the political will to implement progressive taxation in the Philippines.

 

VAT IN OTHER ASEAN COUNTRIES

             

              The richer countries have a smaller VAT rate. In Thailand, VAT is only 7% and it is only 3% in Singapore. According to NEDA Secretary Cielito Habito,  VAT should be 10% for the Philippines because other countries are more successful in their administration of direct taxes. [16]

 

VAT AND GATT

 

              With trade liberalization embodied in the possible "ratification of GATT" and Philippine membership in the World Trade Organization, we can anticipate new and more taxes to be imposed  in the coming  years.  Professor Leonor Magtolis Briones  asserts in the July 1994 issue of PAID that even without the "ratification of the GATT," import deregulation under Executive Order 470 has meant an annual revenue lost of P18 billion to P26 billion (remember: additional revenue target with the Expanded VAT Law was P8.3 billion for 1994).