Something old, something new, something borrowed
Itotally changed my List of Readings for my Public Finance class. I knew that this task was going to be a hassle. Now, I have to spend hours reading and preparing my lesson plans. I have to revise our case studies and exams. But I had no other alternative. I am already Jurassic and my students do not deserve any more archaic thoughts. Certainly, I have a rich experience on the finance of government. But my class is not on history. Public finance is a dynamic science and an art. Fiscal psychology is now a respected part what used to be a pure economics subject. Richard Thaler, the 2017 Nobel Prize winner in economics was awarded for his work in integrating economics with psychology. We can now fully appreciate how decisions are made with irrational behaviour and self-interest. Attitudes, perceptions, and prejudices are equally important in formulating public policies.
Like a true certified fiscal nerd, I read the latest work of Prof. Richard Bird with breathless anticipation. It was as if I was reading Cinderella for the first time. And I was not disappointed, Prof. Bird wrote how markedly different are tax policies now from what was known as the Washington Consensus in the 90s. This was when we had a program with the International Monetary Fund. Almost every quarter, we defended our performance before an IMF team – and we were always on the defensive. It was so difficult to explain how difficult it was to collect more taxes and customs duties.
Those were the days when more was better. Increasing the tax collection ratio relative to GDP was foremost in our mind. President FVR dreamt of raising the tax effort from 12% to 20% to finance his vision of Philippines 2000. In addition, we were driven by a new norm in public finance – levelling the playing field (which must have been borrowed from General Joe Almonte). We were equally focused on eliminating inequities and weaknesses in the tax system that distorted allocation of resources, prices, profits, and power.
While raising the tax effort is still important, the new thinking now widens the perspectives on how government can be financed. The finance of infrastructure is no longer the monopoly of taxation. We can tap the private sector through Public-Private sector partnerships and collect user-charges. Unlike tax-financing where everybody bears the costs of an infrastructure project, user-charges are only paid by those who actually consume the service or the product. It is just like buying a good from the market. Pay as you order. A major obstacle though is the impression that everything that government provides is for free. This dole-out mentality is reinforced by politicians who think that governance is purely the provision of free gifts and treats to citizens. Thus, there is a parade of T-shirts, giant TV screens to view the Pacquiao fight, medical missions, and gift giving on Christmas.
The VAT has risen into prominence. It now shares the center stage with the income tax. Progressive tax rates looked good on paper. But high rates discourage work efforts and provide great incentives for people to avoid and evade taxes. Thus, while it may look noble to tax the wealthy with a 35% tax, the purpose may not be achieved. Incomes may be converted into stocks, dividends, and royalties which enjoy preferential tax rates. Or, there are the ecozones to invest in which serve as tax havens in the Philippines.
I could not help but smile when I heard of Senator Lacson’s proposal to lower the VAT rate from 12% to 10%. This would be possible if we can only eliminate the special laws which exempt several entities from paying the VAT. This act of courage would mean some P75.9 billion in additional revenues (DOF estimate) which is more than what we would lose from a 2-point rate reduction, which is about R50 billion.
But what spoke closely to my heart is the growing importance of transferring more revenue raising powers and expenditure responsibilities to local governments. Without endorsing federalism, we should take a closer at local government leaders and focus our efforts in helping them become the true leaders that we deserve. Many of them will truly amaze us with their capacity not only in raising revenues but in spending them correctly to improve the lives of their constituents.
mguevara@synergeia.org.ph