Collecting more taxes by way of government investments in infrastructure and utilities

Last Monday BIR Commissioner Guillermo Parayno spoke before the Management Association of the Philippines on the bureau’s tax collection program. He was targeting to reverse the downward trend of the bureau’s revenue collection which has lasted five years now coinciding with the Asian currency crisis. We express full support with the bureau’s salutary program of increasing government revenues even as we express some observations and suggestions of our own.

We note from the Commissioner’s data that the biggest sector that contributes to government revenues is the manufacturing group, followed by the services sector, and thereafter the financial sector. Surprisingly, the Value-Added-Tax was not contributing much to revenue generation. Income tax remains the primary source of government tax revenues.

In retrospect, government should have even at the very start of the Asian currency crisis immediately embarked on an emergency program to reverse the downward trend in tax collection and avoid a gaping budget deficit that is the consequence of such an economic downturn. The fiscal and monetary solution to this problem of a fall in government income is neither difficult nor new as it has been the successful formula of all countries that were affected by the same economic virus that plagued their economies. The solution is for government to do the spending during bad times instead of cutting down on government expenditures which only worsens the economic situation.

Let us dissect the matter further. Government revenue is falling because there is a downturn in the economy. The slackening of business activities and transactions makes for a lesser government coffer in terms of taxes. Now, if government will rely simply on this small and even lessening tax base how can it initiate and spur economic activity if even the meager tax collection can hardly meet government expenditures for basic services and maintenance of the bureaucracy? By natural reaction, perhaps, our government in this situation cuts-back as it did cut-back on its spending and expenditures. Ironically, this reaction even worsens the already economically critical situation as the refusal of government to spend during these hard times itself contributes to the economic inactivity that further exacerbates the downtrend in the collection of government revenues.

The more effective and responsive action of government in such a situation is to take a more aggressive stance by spending more through investments in infrastructure and utilities precisely to spur government initiated economic activity and growth during the economic doldrum. It is specifically in this depressed times that government should invest massively in infrastructure such as the building of roads, highways, ports, airports, schools, hospitals, markets and in utilities such as power-plants, water sources and tele-communications in order to increase the Gross Domestic Product and prime the economy back to a healthy condition. This is exactly how the United States of America industrialized itself from the Great Depression of the 1930’s. And so did China, Korea, Japan and Malaysia, among others, use the same successful formula to become the economic might they are today.

It is the very essence and principle of economic development that during good and prosperous times it is the private sector that does the investment and spending to maintain the economic momentum. On the other hand, during difficult economic periods where the private sector is hard-put to sustain their economic activity due to the lack of money, it is particularly the government, as the partner of the private sector, that should shoulder the investments and spending to sustain the economic inertia.

Of course the primordial question is asked. How can government do the investment and spending at these difficult times when precisely it does not have the adequate revenues and budget from which to source the spending? The answer is for government not to source the investment and spending from the existing budget or the collection of government taxes and revenues as they are obviously terribly inadequate. Instead, as we have always impressed in our earlier articles, government should borrow against future taxes by floating 30-year bonds with at least seven to 10-year grace periods which our Central Bank shall be mandated to buy by creating and issuing the corresponding new money. This new money, securitized as it is against future taxes, shall now be used by government to pump-up the economy by investing massively in infrastructure and utilities, both physical and social, and thereby rev-up the sputtering economic engine to its full power and potential.

Again, the question is naturally posed: How does government pay these bonds? As we have repeatedly stressed, the bonds being long-term with from seven to 10 years grace period provides a long enough time frame for the government to collect the revenues from transaction taxes that will be used to eventually retire the bonds.

In this regard, we cannot help to keep on noting that it seems that government policy has always been to resort to foreign borrowings to support and finance our infrastructure and utilities projects, the ills of which have already been extensively dissected in our earlier articles. Our financial and monetary authorities do not seem to understand that while we cannot rely on our meager tax collections to fund our development requirements, we need not invariably run to foreign funders to capitalize our infrastructure and utilities. To repeat, there is a practical, viable and effective alternative that is already a tested formula used and advocated by the strong economic countries, including our newly economically developed Asian neighbors. And that is by financing development through borrowings against future taxes. We shall never achieve the desired level of full economic development at the rate things are going until and unless our monetary and financial authorities erase the ghost of inflation that they always imagine from the creation of new money from the floatation of bonds secured against future taxes.

It is, indeed, sad to note that even now Congress is attempting to put a cap to the national debt which, when analyzed, is an innocuously harmful policy in the effort to help our country and people prosper. For the meaning of a cap on the national debt is that government will be prohibited from borrowing against future taxes. This will effectively disable government from executing its ultimate power of raising its own money now to invest in the building of all our infrastructure and utilities.

The saying goes "if you want me to clean the house then provide me with the broom." Commissioner Parayno is in an unenviable position of being made to be responsible for the collection of taxes without, however, being made to be a participant in the management of the economy. For really, without him having a hand in the formulation of policies that will enhance the economic condition and increase revenues of government, how can we expect the good Commissioner to increase tax collections or meet his tax collection targets when the economy is in a downturn such that the people are not making enough to pay taxes enough? Indeed, one cannot squeeze blood from turnip.

It is submitted that the BIR Commissioner must not only be made responsible for the tax collection efforts of government but must likewise be given the authority to participate in the policy-making process to assist taxpayers earn more money in order for them to be able to pay more taxes. Commissioner Parayno should be made a member of the NEDA that lays down the policies for the economic growth of the country. Another suggestion is for all SEC registered companies to be monitored by the BIR as to their profitability or lack of it with the end in view of government helping those who are losing money to reverse their business losses so they can be profitable again and be in a position to pay more taxes.

Most importantly, government especially must realize the need for a solid partnership between government and the private business sector. Government must treasure and value their partnership not in words alone but in concrete deeds and action. As it is, government seems to be a partner with business only in good times – a partner only in fair-weather. For in good times private business is on the upturn so much so that it contributes massively to the coffers of government by way of taxes.

However, during bad times when private business is losing money government is nowhere to be found. Worse, government itself puts roadblocks in the business highway by making it difficult for businessmen to secure the necessary government permits and approvals for their business.

Government, to stress, must instead be a partner with private business both in good and in bad times. And it is precisely during difficult times when private business is strapped with cash that government must do the spending by investing in infrastructure and utilities to lift the economy and help the private sector recover and earn money once more to be able to pay higher taxes again.

The relationship works on the principle that there can never be more revenue for government without private business making more profits and the people earning more income because it is from these profits and earnings that more taxes are paid. Really, the critical partnership between government and the private sector is a symbiotic relationship.

Finally, we can only state the obvious that our national problems are growing in magnitude. The present solutions being offered, that is the use of the meager tax collections and the resort to foreign borrowing to fund local projects, are inadequate, disproportionate to the magnitude of the problem and even exacerbate the already critical economic condition. If we are to yet finally get out of the economic gutter and join our Asian neighbors in the pedestal of economic prosperity, we must adopt an equally bold solution to the enormous problem. The ultimate solution is to borrow for all our developmental needs now which borrowings shall be confidently securitized against future taxes.

Our articles dissect the national problems and offers practical, viable solutions. The articles are not meant to criticize. With the voice and sentiments of our people reflected in the articles, this column hopes to be a springboard for reform and development of our country.

(You may write your comments/suggestions at 15/F Equitable Bank Tower Paseo de Roxas, Makati City or through e-mail at [email protected])

(Editor’s note: Atty. Roxas is writing a limited series of articles dealing with financial matters and other important business topics. – Ed.)