Kill the ex­cise tax, not the poor with higher prices

Cebu Daily News - - OPINION - Per­ry­fa­jardo@ya­hoo.com

Early this week, ABS-CBN Cebu asked me if it would be ben­e­fi­cial to sus­pend the ex­cise tax on pe­tro­leum prod­ucts. My re­sponse was yes. I then pro­ceeded to ex­plain my point this way.

This year the Train Act im­posed an ex­cise tax of P2.50 per liter on diesel. That will go to P4.50 next year and P6.00 in 2020. On gaso­line, the ex­cise tax is in­creased from the pre­vi­ous P4.35 per liter to P7.00 this year, then to P9.00 next year, and P10.00 by 2020. Diesel and gaso­line are used in land, wa­ter, and air trans­port. Our trans­port ex­penses now ac­count for about 8 per­cent or more of our aver­age house­hold ex­pen­di­tures. Rich and poor alike, the ex­cise tax on oil is hurt­ing us di­rectly but most es­pe­cially the poor who are not ben­e­fited by the in­crease in in­come ex­empted from in­come tax un­der the Train Act.

But the worst part is the mul­ti­plier ef­fect of the ex­cise tax on oil. For ex­am­ple, fish­er­men used diesel when they go fish­ing and bring­ing their catch to the fish land­ing ar­eas, thus mak­ing fish more ex­pen­sive to con­sumers. Note that al­most ev­ery­thing sold in the mar­ket, from fish to meat, fruits and veg­eta­bles, rice and corn, etcetera, are trans­ported to the mar­ket from their source and, there­fore, af­fected also by higher trans­port costs.

The gov­ern­ment says that most of the petrol sold in the coun­try are con­sumed by the rich in us­ing their cars and the pres­i­dent’s eco­nomic team used this to jus­tify the ex­cise tax. They for­get that this shot-gun ap­proach of pun­ish­ing the rich also hit the poor who have no means to de­flect the bul­let. If I were rich or us­ing a com­pany or gov­ern­ment car, do I care if the price of gaso­line or diesel is in­creased? What the gov­ern­ment should do in­stead is to tax the sale of cars, with rates go­ing up the more ex­pen­sive the units. Then charge them with higher road user’s fee when they reg­is­ter their cars. These partly solve also our traf­fic and air pol­lu­tion prob­lems.

Now, if may add, the ex­cise tax when col­lected by the gov­ern­ment is to a pro­ducer or seller an added costs in do­ing busi­ness. When busi­ness is costly to do, this means in eco­nom­ics like shift­ing the firm’s sup­ply curves up­ward to the left. If what is pro­duced is in­elas­tic in de­mand (steeper de­mand curve) then the ob­vi­ous re­sult is for the price of that prod­uct to rise. In fact, the price of the prod­uct can go as high as the ex­cise tax per unit if de­mand is com­pletely in­elas­tic (ver­ti­cal de­mand curve). If the de­mand for the prod­uct is elas­tic (flat­ter de­mand curve), then the re­sult of the in­crease in the cost of do­ing busi­ness (left­ward shift of the sup­ply curve) is lower out­put and less de­mand for work­ers on the part of the firm. Like the in­crease in price, this is not good too.

In the ag­gre­gate, an in­crease in the over­all costs of do­ing busi­ness, is like shift­ing our ag­gre­gate sup­ply curve to the left which leads to a gen­eral in­crease in prices or in­fla­tion. The more in­elas­tic the ag­gre­gate de­mand, the higher would be the in­fla­tion rate. If elas­tic, then the econ­omy will also suf­fer from lower GDP growth, if not neg­a­tive, lead­ing to higher unem­ploy­ment or un­der­em­ploy­ment rates.

The in­ter­est rate is now pushed higher by the BSP to fight in­fla­tion. This is an­other in­ter­est­ing topic to dis­cuss next time. Who wants high in­ter­est rates?

What the gov­ern­ment should do in­stead is to tax the sale of cars, with rates go­ing up the more ex­pen­sive the units. Then charge them with higher road user’s fee when they reg­is­ter their cars.

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