New tax measures needed to boost government finances — economist

THE GOVERNMENT needs new taxes in order to increase its tax effort to achieve its medium-term fiscal program, a former socioeconomic planning secretary said in a professorial lecture yesterday.

“The Aquino administration’s medium-term fiscal program requires an increase in tax effort by four percentage points. That may not be achievable without new revenue measures,” said Felipe M. Medalla, also an economist at the University of the Philippines School of Economics, at the Bangko Sentral ng Pilipinas Professorial Chair Lecture.

Preliminary data from the Finance department showed that the government posted a last year 12.8% tax effort — or the percentage of collected tax revenues with the gross domestic product (GDP) — missing its 13.9% goal.

For this year, the Aquino administration has set a preliminary 14.1% tax effort goal. A 7%-8% growth goal was also initially adopted for next year although a lower 5.5% GDP growth target has been set for budgeting purposes. These figures however are yet to be finalized by economic managers.

Tax effort is affected mainly by missed targets from the Bureau of Internal Revenue (BIR) and of Customs, which account for about 90% of state revenues.

For 2010, BIR missed its P860.4-billion target by roughly P38 billion, while Customs lagged behind its P280-billion goal by collecting only P258.98 billion.

“BIR and [Customs] tax-effort ratios are now both two to three percentage points lower than their previous peaks. But that does not imply that tax effort can be increased by four percentage points without new tax measures,” Mr. Medalla said.

The highest separate BIR and Customs tax efforts could not be obtained as of press time, but top government tax effort was at 17% posted in 1997, Finance Undersecretary Gil S. Beltran said in a phone interview.

Mr. Medalla said Customs collections suffer from “tariff reductions and free trade agreements” that have reduced import duties considerably. “[Customs] collections are now just about the same as they were 25 years ago in spite of [the] RVAT.”

RVAT or the Reformed Value-Added Tax Law, passed in 2005, mainly increased to 12% the VAT from 10%. Higher imports — which rose by 35.3% year-on-year by Nov. 2010 to $4.9 billion — should give government more tax revenues.

This however was not the case, Mr. Medalla noted, as he pointed out that collections of the BIR, which accounts for about 70% of state tax revenues, is hurting from “inflation and decline in interest rates.”

BIR Commissioner Kim S. Jacinto-Henares, in a phone interview, yesterday cited the Treasury rejections of auction bids that cost the bureau “to lose earnings” from “20% withholding tax” from every government borrowings.

Revenue from excise taxes have also been “eroded by inflation,” Mr. Medalla said, as real estate tax per capita collection of domestic taxes on goods and services remain “stagnant” because of “inflation and population growth.”

On the other hand, BIR collections are boosted by “VAT, the corporate income tax and withholding [tax] systems,” he added. “But this part of the tax system is also the most vulnerable to economic and financial crisis.”

Mr. Beltran declined to comment on Mr. Medalla’s findings, saying that the government will “wait until the end of 18 months” before considering new taxes.

BIR’s Ms. Jacinto-Henares agreed, saying that “the policy of the President is to plug first the holes in tax administration.” “We will reach our target by fixing tax administration,” she added.

Both officials echoed Finance Secretary Cesar V. Purisima’s statement in an interview with GlobalSource Partners, Inc. last Jan. 3, where he said that new taxes will only be possible “after 18 months.” –PRINZ P. MAGTULIS, Reporter, Businessworld