‘15% VAT to cut consumption, imperil MDGs’

DESPITE calls from economists for the incoming administration to increase the country’s value-added tax (VAT) rate to 15 percent, the University of the Philippines Open University (UPOU) and Code: Reforms for Economic Development (CODE: RED) warned on Monday that this could cut consumption, increase poverty and endanger the achievement of the Millennium Development Goals (MDGs).

In a statement, the UPOU and CODE: RED said increasing the VAT to 15 percent could again become an additional burden to the poor and even rich households, similar to what happened when the new 12-percent VAT was imposed in 2006.

The UPOU and CODE: RED cited an International Monetary Fund study authored by David Newhouse and Daria Zakharova showing that the broadening of the VAT base to petroleum products, electricity and professional services reduced consumption of poor Filipino households and those in the top quintile by 2.4 percent and 2.7 percent, respectively.

Higher prices through VAT will also endanger the achievement of the MDGs, since poor households often cut back on nutrition or education expenses to meet their daily needs.

“This finding, while consistent with the consumption patterns of poor households who tend to rely more on unprocessed agricultural products that are exempt from the VAT, should not disregard the fact that the poor population experience disproportionately greater suffering from reduction of consumption and volatile income  swings,” UPOU and CODE: RED said in a statement.

“For people living in poverty across the globe, increases in prices of goods result in consumption cutbacks in nutrition or education which negatively impact human development,” the statement read.

The UPOU and CODE: RED said the increase in the number of poor families to 4.7 million in 2006 from 4 million in 2003 was attributed to the low increase in personal income during the period and higher prices of food and nonfood basic needs.

This increase, UPOU and CODE: RED said, followed the increase in oil prices and the expansion of the VAT coverage in November 2005, and the imposition of higher VAT rate in February 2006.

They said that while VAT reforms in 2005 included mitigating tax measures and increases in social spending to reduce the average income loss from the VAT by 25 percent, only a small percentage of poor households benefited fully from these measures.

The UPOU and CODE: RED said only about 15 percent of the benefit from the package of tax cuts and spending increases benefited poor households, while households in the top quintile enjoy about 30 percent of the benefit.

The UPOU and CODE: RED also stressed that the reductions in energy and franchise taxes, which accounted for over 40 percent of the total mitigating package, were poorly targeted, with the bottom quintile receiving only 7 percent of the total benefit and the top quintile receiving 43 percent.

“The current proposal to hike VAT rate to 15 percent calls for expansion of social safety nets, such as the conditional cash transfer [CCT] to cushion the lower- income groups from impact of tax increase. However, there are several issues that have to be addressed first in order to devise and implement an effective CCT program,” the two entities stated.

Instead of increasing the VAT, they proposed a review on VAT exemptions to check whether the objectives in the exemptions imposed in 2006 have really been met.

They also recommend the rationalization of fiscal incentives and the restructuring of sin taxes by the incoming administration’s fiscal reform group, not only because they are overdue, “but more so, because they are propoor.”

The UPOU and CODE: RED said rationalizing fiscal incentives will unburden the poor and middle-class taxpayers of the cost of tax incentives since every P1 gained by big investors from tax incentives could be equivalent to as much as P2 worth of forgone spending for infrastructure and social services for the poor.

They said restructuring sin taxes will be more effective in deterring the consumption of tobacco and alcohol, and will “fairly allocate negative externalities.”

Earlier, the University of the Philippines School of Economics recommended the increase in the VAT to 15 percent from 12 percent to close the deficit and generally increase the country’s revenue-to-gross domestic product ratio.

The National Economic and Development Authority supports the recommendation of the UPSE, saying that the increase in the VAT is needed to address the country’s problem with low revenues and improve the overall fiscal position of the Philippines. –Cai U. Ordinario / Reporter, Businessmirror