The Bureau of Internal Revenue is cracking down on tax evaders, but economists say that without substantial fiscal reforms, paying taxes doesn’t quite pay either
A businessman in Pampanga is assessed 150,000 pesos in taxes: 50,000 pesos to the government and 100,000 to the hardworking tax collector. These are your taxes at work.
While more anecdotal than indicative of the country’s tax collectors, former national treasurer Leonor Briones who shares the story says that plugging leakages in the country’s revenue system could mean that we will no longer have to borrow from foreign institutions like World Bank again.
The RP Bureau of Internal Revenue (BIR) may have exceeded its 60-billion-peso collection target for December last year, but this has hardly been the norm. The BIR only collected 778.2 billion pesos of a target 845 billion pesos in 2008 while it fell short of its 2007 revenue target by 54.3 billion pesos.
The government has had a Run After Tax Evaders (Rate) program in place since 2005, but the going has been slow. An Asian Development Bank study released last year notes that of 83 tax evasion cases with a total liability of some 6.4 billion pesos, only 6 had been brought to court by 2007. Meanwhile, UK-based international development group Christian Aid estimates some US$160 billion in revenues is lost yearly to tax evasion by multinational corporations alone. The RP Department of Finance (DOF) estimates a more mind-boggling total of US$5.2 billion lost to tax evasion every year.
BIR commissioner Joel Tan-Torres has promised to revitalize the Rate program, admitting that the program has lost steam over the years, with even media interest in tax evasion cases waning. The BIR, he reminds us, has considerable power to shut down businesses that cheat the government of its share in their profits. Along with a renewed campaign against tax evasion, Tan-Torres is also designing a program to train more scrupulous tax collectors.
But tax fraud is only one front in plugging the loopholes. There are other ways to pay less taxes without resorting to back room deals and under-the-table transactions. Ways that the government itself has put its imprimatur on.
“In order to plug the loopholes, we have to start with the perks and exemptions,” Briones, now a professor of public administration at the University of the Philippines (UP), tells attendees of a forum on the national budget at the recently-concluded UP Academic Congress. She adds that while the government collects 75 billion pesos from Value-Added Tax (VAT), it forgoes 95 billion in exemptions and tax breaks.
Briones blames poor revenue generation on ‘redundant’ tax exemptions, ‘outdated’ fiscal incentives, and revenue-eroding measures granted by the government to entice investors to do business in the Philippines.
While the idea seems to make sense, the granting of exemptions is dangerously open to abuse. She shares how an ‘island resort’ in the South has been granted tax exemptions for years just because the owner is related to the island’s vice mayor. Never mind that the resort has been making enough money to recoup the owner’s initial investment.
Christian Aid puts it more bluntly as it cites the example of a multinational mining corporation operating in the Philippines. “Little of the income it has generated has been shared with local communities, but other (ill) effects have,” a documentary it released in 2009 reports. Former Socio-economic Planning Secretary Cielito Habito explains how this is possible, “local government units cannot tax effectively because corporate headquarters are in Makati, not in the province.” It doesn’t help that the tax holidays and incentives that the government grants to businesses is unnecessary. Commissioner Tan-Torres admits that “even foreign studies indicate that the grant of tax breaks or fiscal incentives are not the main inducements or incentives for businesses to come in.” Investors will either invest anyway or will be turned off by the country’s inadequate infrastructure and high transaction costs.
Tan-Torres adds that at a recent Organisation for Economic Cooperation and Development (OECD) conference in Paris, he was told that for every dollar forgone through fiscal incentives, only US$0.80 comes in. “It creates a lot of leakages. It can reach up to 60 billion pesos a year in leakages coming from these tax breaks,” he says.
If it’s any consolation, tax breaks aren’t just for large companies. Republic Act 9504 signed into law in 2008 exempted minimum-wage earners from paying income taxes and raised personal tax exemptions for everyone else to 50,000 pesos. This will cost the government some 14.2 billion pesos while giving minimum-wage workers an extra 34 pesos a day to spur domestic consumption and entrepreneurship. What happened was just the opposite, UP economics professor and former National Economic Development Authority (Neda) chief Cayetano Paderanga Jr says. Filipinos are saving more while the rate of investment is declining.
Passing the Buck(s)
While losing 35% of your income to the government is painful, not seeing it paid back in terms of social services makes it the unkindest cut of all. Briones says that although government expenditures are high, spending has decreased on all services except debt servicing. She says that up to 73% of every peso that the government earns goes to paying off the country’s debts, which stand at an estimated US$4.7 trillion. Our debts are so huge, and grow so steadily that nobody even knows how much we owe at any given moment. Briones shares that when she was national treasurer, she had to monitor debts every hour.
Government funds are limited to what is left, with half of that going to unaudited “special purpose funds” like the President’s Social Fund. “We are being taxed more than what we are getting in return,” adds former budget secretary Benjamin Diokno.
Finance undersecretary Gil Beltran has admitted that we need to spend at least 60 billion pesos more on health and education to be “able to reduce poverty significantly.” But with poor revenue and tax breaks, government has had to think up novel ways to get money.
Taxation of Christmas bazaars and text messaging have been proposed, but were rejected by politicians and the public. That the Philippine tax system needs to be overhauled is a given, but Congress seems allergic to instituting anything in the way of reforms other than letting people pay less taxes. Diokno warns that without a fundamental reform in the tax system, “fiscal collapse is inevitable.” He adds “anyone who says there is no need (for reforms) is just pandering to the electorate.
Tinkering With Taxes
Like it or not, we all have to pay taxes to keep the government, such as it is, running. Diokno says that one way to soften the sting of taxes is to broaden the tax base. With more people paying taxes, the government will not have to tax as much. Diokno says that the personal and corporate income taxes can be lowered to 25%. VAT, on the other hand, will have to be raised from its present 12% to 15%. It might even be possible to shift from direct taxation and lower the income tax rate to just 18% if VAT is raised to 18%. Diokno prefers raising the VAT because he says collection is more efficient, is highly responsive to economic changes, and is mildly progressive. “We should tax consumption and what people take away instead of income, or what they contribute,” he adds.
Taxes on cigarettes and liquor should also be raised, he says, saying that in some countries, up to a third of revenue comes from excise taxes on “sin” products. Fuel products will also have to levied variable tax rates, which will mean higher pump prices, but could rake in revenue that can be poured into mass transit projects.
Briones warns, however, that raising the VAT will only serve to burden the Filipino poor who already have to contend with rising prices of basic commodities. BIR commissioner Tan-Torres also cautions against raising the VAT, saying “maybe a more thorough study should be done on that because as a general rule we need to take into account equity considerations.”
The principle holds that those who have the most income must pay the most taxes. There is another aspect of equity, though, that those who benefit from government must pay the taxes. Government has focused on pro-poor programs, perhaps on the principle that a rising tide lifts all boats, but with minimum-wage earners exempt from direct taxation, it isn’t hard to sympathize with one student who asked candidates running on a pro-poor platform, “what about the middle class and the rich?
It can be argued that the rich can afford to pay taxes without making a dent in their wallets (and their companies get fiscal incentives anyway), but the fact remains that the cash-strapped Philippines gets the bulk of its national budget from taxation. Government has to plug the leakages and spend the money on projects that taxpayers benefit from, not disconnected patches of concreted roads in each congressional district and junkets abroad.
It isn’t that people don’t want to pay. The Danish, after all, are taxed up to 62% of their income, but it also spends the biggest percent of GDP on social services, and are the happiest people on Earth according to separate surveys conducted by the University of Leicester and Erasmus University Rotterdam. What hurts most is knowing that you’re practically giving away your money. And, really, what’s the percentage in that?
Print ed: 03/10