Fear factor works in tax collection

Over breakfast at the Tuesday Club, I asked BIR Chief Jojo Buñag if it is true, as reported by the House Oversight Committee that the increase in tax collection is more the result of better enforcement and performance of his collectors than the increase in the VAT rate to 12 percent. Jojo said it is true. The impact of the higher VAT rate is not as significant as improved collection by his agency. Jojo surmises that because the input VAT is also 12 percent the net increase is only about one percent. "We did collect as of September P12.43 billion from the RVAT which is 2.58 percent of the total collection as of September of P480.8 billion."

I then asked him if the improved performance of the BIR was more because of the fear factor… and he just smiled. It seems to be the case. Taxpayers are paying more taxes than before out of fear that computerization of tax records makes it easier to catch the usual tax evaders. On the other hand, tax collectors are collecting more taxes because they are afraid lackluster performance is punishable with separation from the service under the Attrition Law.

The story I am hearing from the grapevine is that even the corrupt tax collectors are now issuing official receipts for a larger portion of what they usually got from their "clients" to fix their cases. It looks like the tax reform laws passed by Congress even before Ate Glue took office, are starting to bear fruit. If this trend keeps up, the Arroyo administration would be able to attain a balanced budget by 2008, two years earlier than what was promised by Ate Glue.

I chanced upon Rep. Danny Suarez, the pragmatic brains behind much of the tax reform measures passed by Congress over the last six years and he confirmed my suspicions. Indeed, he says, "the collection performance of the Bureau of Internal Revenue and the Bureau of Customs are quite astonishing." There had been a 10.1- percent average increase in government revenues since 2001, Rep. Suarez reports, and a phenomenal increase of 28.21 percent in revenue collection in 2005, from P636.42 billion to P816.02 billion.

The congressman from Quezon who is part of the Attrition Board that will evaluate the performance of our tax collectors, sounded pleased by the reported numbers as contained in a two-page spread in this paper last week. Comparison of the BIR’s August collections from 2001 to 2006 shows a steady increase in collection, he observed.

"Noteworthy is the dramatic increase from 2004 to 2006 which is instrumental in meeting the revenue target of the Bureau. The same is true with respect to the Bureau of Customs as the Report shows a huge surge in collection during the period 2004-2006."

Rep. Suarez agreed with my observation that the fear factor generated by the Attrition Act of 2005 is probably the most significant reform measure, even as the laws increasing sin taxes, reforming the DST and raising the E-VAT rate all helped as well.

He found it amusing that in a recent news report, BIR and BOC officials said they will even forego holidays to achieve the tax collection targets assigned to them. As Rep. Suarez explains it, the attrition law enhances and facilitates the process of detecting and penalizing corruption by expanding the grounds for the removal from office of erring or incompetent officials in the BIR and the BOC. When the Board meets early next year, some will get the boot.

On the other hand, the Attrition Law removes the incentives for corruption by providing ample and legitimate rewards and incentives through a system that automatically allocates proportionate amounts of collections in excess of target for distribution to deserving employees and their agencies.

The congressman, who denied he is a technocrat, said he designed the tax reform measures by putting himself in the position of the taxpayers who want to pay the least amount of taxes and the tax collector who wants to enrich himself in office. By simulating how their minds work, what motivates them, the congressman said he was able to craft the tax measures to address the problems arising from this culture of corruption and self interest.

So, I remarked that it takes one to know one. The congressman could only smile and say, but my system works and that’s what matters.

Stability dividends

I got this e-mail from an expat Pinoy working out of New York in reaction to a previous column.

I’m skeptical about the chances of stability dividends from market gains translating into benefits for the poor and middle class. There are two things missing in the development equation that Mexico and the Philippines have in common. The first is a successful role model that would justify optimism for stability dividends. As Joseph Stiglitz wrote in his book "Making Globalization Work", successful East Asian economies pursued broad-based socio-economic stability first before and in tandem with the development of their markets.

Malaysia, for example, used currency controls and affirmative action while Korea implemented aggressive genuine land and health care reform programs under Syngman Rhee in the late 1940s to 1950s before becoming industrialized under the Park administration in the 1960s.

The second is a clear and detailed plan from the political establishment for facilitating the trickling down of stability dividends. This should have taken the form of social "equalizers" like stronger transparent institutions and better public hospitals and schools.

The Arroyo administration’s Medium Term Development Program, the blueprint of its economic strategy, is sorely lacking in detail on how this trickling down will be facilitated by the government. For example, it estimated an average public school class size of 50 students in 2004, and has targeted an average size of 50 students by the plan’s completion in 2009 to 2010. In other words, there will be no improvement in this important educational statistic by the end of the Arroyo administration.

Or how about pre-need policyholders of Pacific Plans and CAP? Will they get the same kind of blind justice that those who were victimized by Enron got when Jeff Skilling and Andrew Fastow were sentenced to jail terms?

Market pundits like the ones who write in the Financial Times and Wall Street Journal blindly assume that stability dividends will automatically result in equal opportunity for all. Yet experience has shown that the opposite effect is more likely to happen.

Letting special interest elites accumulate wealth without previously and simultaneously uplifting the majority will only allow these elites to consolidate economic benefits for themselves at the expense of the majority. They have used their clout to manipulate the political system and divert government funding away from public schools and hospitals. Instead, they have lobbied for programs that serve their own interests, like building big business infrastructure, tax cuts on capital gains, lower benefits for their employees and additional BOI incentives.

Furthermore, some quarters have a distorted belief that the creation of more jobs will mean that more people will be able to afford paying for private school tuition and health insurance. They have overlooked the fact that job security has become more unstable relative to the need of children staying in school or maintaining health coverage, and that the costs of these necessities have risen faster than wages.

It is therefore understandable why the majority would be impatient. I would even say that being impatient is the right thing for them to do. It is unfair to make them wait while the elite have their fill, because wage earners pay a greater portion of their earnings in taxes than the rich who make money from capital gains by playing the markets.

In a democracy, the only way to ensure that more people share in economic benefits is to keep hammering politicians, kicking and screaming, to find creative ways to provide equal opportunity for all today, because people pay taxes today and their needs materialize today.

American voters who got fed up with their deteriorating standards of living did this in the recent midterm elections. In 2004, Indian voters rebuked the BJP and installed the Congress Party even when the BJP was responsible for their country’s rapid but inequitable economic growth.

Let’s see if Filipino voters can do the same in 2007.

Muscular contractions

Here’s something from Dr. Ernie E.

A professor was giving a lecture on "Involuntary Muscular Contractions" to his first year medical students.

Realizing that this was not the most riveting subject, the professor decided to lighten the mood slightly.

He pointed to a young woman in the front row and said, "Do you know what your ass hole is doing while you’re having an orgasm?"

She replied, "Probably deer hunting with his buddies."

Boo Chanco ‘s e-mail address is [email protected]