Thursday, October 6, 2005

Economic Terror: E-VAT and the Looming Consumer Crisis

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Together with the political crisis that grips the presidency of Gloria Arroyo comes another crisis brutal in its scope and consequence. With a vote of 15-0, the Supreme Court (SC) finally decided that the Expanded Value Added Tax (E-VAT) Law is constitutional. While hopes of the administration for greater revenues are high after a legal success, the Filipino public in turn succumbs in fear of astronomical prices.

In an 84-page decision, the SC moved to lift within 15 days the Temporary Restraining Order (TRO) it had earlier imposed on the implementation of E-VAT, consequently junking the petition filed by the opponents arguing that the standby power the administration used to raise VAT rates from 10 to 12 percent constitutes undue delegation of the legislature’s exclusive taxing power.

According to the paper “The deepening crisis: the real score on deficits and the public debt” by the UP 11, the strengthening and expansion of the VAT system is the most preferred tax measure because of the transparency of allocation. The system is so efficient in revenue generation, in fact, that every percentage of increase in VAT yields 0.3 percent of our GDP. This means a total of P25 billion pesos additional take for the government.

Unlike net or gross income taxes which are subject to the discretion of the internal revenue bureaucracy and thus more likely to be lost in corruption or ineffectiveness in collection (particularly in the black economy), VAT can easily be assessed and collected – assuring the government of revenues it needed to survive the fiscal crisis.


British economist Adam Smith argued that a good taxation system will always be governed by the principles of efficiency and fairness. The taxation system of the country, however, seems to defy both. The tax-effort fell from a high of 17 percent of GDP in 1997 to only 12.5 percent by 2003 due to rampant tax evasion facilitated by a corrupt revenue bureaucracy.

The greatest misgiving, however, of the government policy on taxes is the fact that it depends more on unfair regressive taxation. A regressive tax is one that takes a smaller percentage of income as income rises. Accordingly, poor people pay a larger fraction of their incomes in taxes than rich people.

How is this done in the status quo? In a VAT system, a highly favored form of consumption taxation system in Canada, Europe and, during this decade, in our country, the seller pays the government a percentage of the value added to goods or services at each stage of production. The value added at each stage of production (due to capital and labor) is the difference between the seller’s costs for materials and the selling price.

In this scenario, each of those in the production line manages to recover from the tax they paid on purchasing the materials or services they need by imposing an adjustment (i.e. an increase) to the selling price. For example, a log mill imposes a 10 percent increase in his prices due to tax. The furniture corporation that buys wood from the log mill in turn raises its prices by 10 percent. In the end, as we can see, it is the end-product consumer that carries the full brunt of the taxation since he cannot pass anymore the VAT.

It is this reason that why VAT, as a taxation system, is considered regressive – individuals with higher incomes spends a smaller proportion of their incomes on consumption taxes than those with lower incomes. Even if a rich person earns more, he only needs to pay the same amount of taxes as a poor person pays when he consumes.

Furthermore, we can see that the bulk of the burden is carried by the poor, being the majority. Nevertheless, the government chooses to tax them more instead of restructuring tax policy and improving the tax collection system. Consequently, about P175 billion each year due to tax incentives and privileges on enterprises and an estimate of P150 billion each year due to tax evasion are put to waste.

Government priorities
The expenses of government, according to French economist Anne Turgot, having for their object the interest of all, should be borne by everyone. The popular belief, however, is that the government no longer functions for the interest of the people.

As stated by the benefits principle of taxation, only the beneficiaries of a particular government program should have to pay for it. The deterioration of government welfare and social services particularly government subsidy in education, healthcare and social security, however, tells us that the government no longer benefits the people.

According to a report by the Freedom from Debt Coalition, the percentage share of General Public Spending steadily decreased from 18.2 percent in 1999 to merely 16.21 percent in 2004. Spending for Social Services is worse – from 33.2 percent in 1999 it dwarfed to 28.73 percent in 2004.

In contrast, government spending for debt ballooned from 18.3 percent in 1999 to a staggering 31.4 percent last year. This year, debt servicing for interest payments already amounts to P301.692 billion or a third of the proposed P907.589 billion national budget. Another P344.149 billion is automatically appropriated for principal payments. The total expenditure then for debt services reaches a combined total of P645.841 billion.

Since the expected revenues of the government for this year is only about P758 billion, only P113 billion will be left for the rest of the rest of the budgeted expenses. This tells us that revenue measures by the government, including the E-VAT, will only be used for debt servicing and not to increase government’s potential to provide social services.

The E-VAT law, which is supposed to make the government survive its fiscal crisis, might very well cost us our economic condition. The decrease in purchasing power of consumers will eventually cascade into a decrease of economic activity.

According to the IBON Foundation, higher consumer prices would further weaken domestic demand, slowing down growth of the local economy. This is because personal consumption accounts for 70 percent of the domestic economy. Family expenditures will also shoot up, despite the fact that wage levels remain stagnant.

Moreover, the higher taxes imposed on products would cause a distortion of demand. People then would buy less of the taxed goods and more of the other goods, causing the strengthening of the black (unofficial) market. The tax-induced behavior, called an excess burden, will result into less tax paid by consumers.

Thus, both the tax-paying industries and the government are at a lost. Arroyo’s holiday economics policy wherein all holidays are moved near weekends to create longer days of consumption will not work anymore, as prices are already high. The administration will no longer be able to maximize consumption taxes – because people will simply be reluctant to consume taxed goods anymore.

There will also be less income for companies, who may then resort to retrenchments and layoffs in an effort to trim down costs. This will increase the number of unemployed people which, as of April 2005, is already pegged at 13.2 million.

Economic terrorism
Albay Rep. Joey Salceda, chairman of the House committee on economic affairs, said that the implementation of the E-VAT law will be the economic equivalent of Hurricane Katrina, which recently devastated the United States of America. He thereby challenged the administration to convince “the hungry, jobless masses of Tondo” that the E-VAT would not hurt them.

Aside from increasing VAT from 10 to 12 percent, it would also be expanded to include electricity, fuel, and transport among other previously exempt sectors. Department of Energy itself claims that E-VAT will impact most on liquefied petroleum gas (LPG), which will increase the August 15 price of P392.50 per cylinder by P30.42, resulting into a selling price of P422.92.

Unleaded gasoline is next, which will increase by P2.80 per liter, followed by regular gasoline at P2.21. Even with the excise tax on oil products removed, it is feared that the people cannot simply adapt to such drastic price increases. The situation is further aggravated by the fact that the rise of prices due to E-VAT will be compounded by the rise in prices due to the world-wide Oil Crisis.

In an attempt to beef up its fiscal condition, the government will be willing to sacrifice and squeeze to death the very electorate that placed it in power. On that count, E-VAT is a menace more frightening than any Al-Qaeda-scale terrorism, being an assault to the very capability of Filipinos to stay alive.

More than any other threat in survival, the threat of not being able to obtain basic needs is the most fearsome of all. It is up to the people, however, whether to simply endure and cut down their expenses or to act to protect the very thread of their survival. In the end, it would take much more than not buying to survive and eventually overpower the economic terror.


E-vat implementation will further slow down economy. IBON Foundation, Inc. September 1, 2005
Fast Facts on Debt. Freedom from Debt Coalition.
Microsoft Encarta Encyclopedia 2003.
Praymer sa Krisis Piskal: Krisis sa utang, krisis sa badyet. Institute of Political Economy. September 2004.
Praymer sa VAT. Sanlakas. February 2005.
The deepening crisis: the real score on deficits and the public debt by Emmanuel S. de Dios, Benjamin E. Diokno, Emmanuel F. Esguerra, Raul V. Fabella, Ma. Socorro Gochoco-Bautista, Felipe M. Medalla, Solita C. Monsod, Ernesto M. Pernia, Renato E. Reside, Jr., Gerardo P. Sicat, and Edita A. Tan.

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