A taxing problem

MOST ECONOMISTS agree that the single most critical economic imperative for the Aquino government now is to dramatically hike government revenues. The previous government left behind a P197-billion deficit in the first half of the year, much more than the P153 billion incurred in the same period last year. This is already more than three-fourths of the P250-billion deficit originally targeted for the entire year. As a proportion of gross domestic product (GDP), our government’s budget shortfall has gone up from less than one percent in 2007 and 2008, to 3.9 percent in 2009, and on to 6.9 percent in 2010 so far. This is well over twice what is usually considered to be the safe level of 3 percent, suggesting that the Arroyo administration threw all caution to the winds in managing its finances in its closing months.

What is wrong with having a huge government deficit anyway? Government needs to borrow massively to finance it, and anyone instinctively knows what is wrong when you spend and borrow way beyond your means, especially in the context of individual or family finances. But when it comes to borrowings and debt, there is one crucial difference between a person or family, and the government. Sooner or later, an individual’s debts would catch up with him, and he would have to pay up. Governments, on the other hand, can live on indefinitely, and simply keep incurring new debt to pay up old maturing ones. In other words, government can theoretically keep rolling over its debts forever, and the day of reckoning need never come. Why, then, should we worry about large government deficits?

In the short term, having large deficits means that government would suck up a large chunk of the loanable funds in the system, funds that could otherwise be available for the private sector to fund investments. By incurring a large deficit, government “crowds out” private borrowing, thus reducing potentially job-creating private investments. But it hurts even those private investors who manage to obtain loans, as the cost of borrowed funds (i.e., interest rates) would have been jacked up by the large demand created by the government. Either way, government makes it difficult for the economy to generate the jobs needed to bring poverty levels down.

In the medium to long term, accumulating large debts forces the government to spend more and more every year for servicing the debt, that is, for interest payments and amortization of the loan principal. As of 2006, the Philippine government was spending a third of its annual budget on debt interest payments alone, thereby crowding out vital expenditures on social services and infrastructure. The budget shares of education and health had in fact kept falling from 17.1 and 2.1 percent in 2000, respectively, to only 13.9 and 1.3 percent in 2006. Through that period, debt interest payments had jumped from one-fifth to one-third of the annual budget. The Aquino government now faces the same prospect of a mounting debt service burden that could severely tie its hands in providing for our ever-growing needs for education and health services. This is not to mention infrastructure, wherein we are badly lagging behind both our neighbors and our own requirements.

So what is P-Noy and his economic managers to do to achieve the required massive boost in revenues? Simply raising taxes when an estimated P250 billion is lost yearly to tax evasion would be patently unjust as it puts the burden solely on the shoulders of obedient taxpayers. We would, in effect, be penalizing those who actually ought to be rewarded. Thus, government must first exhaust all efforts to raise tax compliance and curb corruption in the revenue agencies. This will take systemic changes in the structures, processes and procedures in revenue collection, not just sporadic tax campaigns and tax amnesties that ultimately abet continued evasion. A move worth reviving is corporatization of the revenue agencies to be able to effect long-needed changes in the incentive and penalty systems for revenue officials and officers. Another key imperative is beefing up the human resource support for processing the large volumes of third-party computer data now accessible to the Bureau of Internal Revenue (BIR) towards tax fraud detection. The US government recently approved $54 million for the computerization program of the Bureau of Internal Revenue under the Millennium Challenge Account Compact Agreement. This could go a long way toward optimizing the use of information technology in boosting tax collection efficiency.

But there are certain good tax measures on the table that the 15th Congress should consider as well. One is the restructuring and indexation of the excise taxes on “sin products” (tobacco products and alcoholic beverages), estimated to yield up to P51 billion. It is a good measure because our current tax rates on these products have been determined by the World Health Organization to be comparatively low, and it is well-known that the industry got away with a watered-down excise tax law the last time around. Similarly, additional excise taxes on petroleum products could raise up to P25 billion, while being justifiable as a corrective tax to mitigate pollution and congestion costs associated with petroleum consumption. Still another is the rationalization of fiscal incentives to remove redundant ones that only serve to erode government revenues without helping attract new investments.

In 1997, tax revenues hit 17 percent of GDP; the Arroyo government left it at barely over 12 percent. I see no reason why we cannot get it right back up to 17 percent and beyond in the foreseeable future. –Cielito Habito, Philippine Daily Inquirer

E-mail: cielito.habito@gmail.com