The TRAIN from a not so technical point of view

One of the many things that I miss with the suspension of Uber is conversing with its drivers. I am surprised by their street-smart insights that give me a greater understanding of what is real. Technocrats like me have been trained to look at the big picture of policy initiatives, and may consider all the other considerations as less important. What is worse is that technocrats may have been conditioned to think that they know better than anybody else because they are rich in theories and proficient in working with spread sheets.

I remember perfectly my inability to appreciate why ordinary citizens were so against the VAT which was then to be levied on food consumed in fast food chain like Jollibee. In my mind, the expansion of the VAT to include services would make it more equitable and efficient. I was aghast that taxpayers were so against the then 10% VAT or 11.50 on a hamburger sandwich. I had the temerity to reproach them, "Kahit po ba 11.50, ipagkakait ninyo sa pamahalaan?" (Why would you deny government a tax payment of 11.50?). It took years before I found the answer. For the poor, eating a hamburger at Jollibee is truly a feast to celebrate Christmas or a birthday in the family.

I was all ears on how the Uber driver described that he has nothing to gain from the proposed tax reform program. He said that he has everything to lose. He is not part of the income tax base and does not stand to benefit from the reduction in tax rates. It is clear to him though that he will bear the brunt in paying the increase in the excise tax rates on petroleum products.

He is quite correct. One of the pitfalls of a tax program that moves away from reliance on direct taxes towards indirect taxes is the heavier burden on the poor relative to their income. Since traders can easily shift indirect taxes to consumers, it is difficult to know who will ultimately bear the burden from a tax measure. This is unlike direct taxes where the legal and effective incidence falls on the same person. The tax is shouldered by the taxpayer who is named in the law. The payment of taxes can thus be distributed with the ability to pay criterion, i.e. more will be expected from the wealthy. But this is not so with indirect taxes. They are not related at all with incomes of taxpayers. The best that can be done is looking at how taxes on commodities will affect prices.

The full impact of the excise tax on petroleum products on housewives, laborers, commuters, consumers, and small traders will be hard to predict. The DOF estimates that a 14.35 tax increase per liter of premium gasoline will only trigger a 1.5% increase in transport prices. But to a cab driver, his gasoline expense will increase by 1213.00 per liter per day (if he consumes a full tank of unleaded gas.) This is about 14,689 of additional expense per month.

It was wrong for government not to have adjusted the tax on fuel for so many years. It was worse for government to have a 0 tax rate on diesel. It has distorted product choices. The DOF informs that as of 2015, some 75% of SUVs run on diesel. Demand for diesel ballooned due to its preferential tax rate. The tax system ceased to be efficient and has unduly influenced production and consumption patterns.

By giving every taxpayer a personal exemption of 1250,000 regardless of status, the proposed tax reform program gives up 1137 billion. This represents 0.8% of GDP and whittles down the income tax effort ratio from 1.9% to 1.1%. We are giving up 51% of the income tax that is paid by employees and the self-employed. Instead of strengthening government's capacity to make more taxpayers share in financing government based on their ability to pay, we are weakening it. We are further thinning a very narrow tax base. The natural consequence is our heavier reliance on indirect taxes. The proposed increase in fuel taxes is expected to bring in 174.4 billion to replace the income tax that will be lost.

Since what will be lost will not be totally recouped from the excise tax adjustment, three ticket items have been identified to rake in more revenues. These are tax administration measures that are expected to give government 143.8 billion, complementary measures with 165.8 billion, and VAT base expansion that is estimated to raise 189.3 billion.

I join Undersecretary Karl Chua and the DOF team in wishing that our collecting agencies can institute measures to check tax avoidance and evasion. But putting these measures in place will take time and resources. Systems have to be developed, staff members need to be trained, and values need to be reformed. Currently, both the BIR and BOC keep missing their revenue targets. How real is it to expect them to reach their revenue goal and bring in much, much more in one year?

It will give us a great degree of comfort if the DOF can identify the complementary measures that will compensate for the income tax revenues that will be lost. Otherwise, government will face an uncalculated risk in financing basic needs and carrying out its "Build, build, build" program.

We have faced big deficits in the past. And our experience was not pleasant. Let us not face that possibility again. mguevara@synergeia.org.ph