Dangerous revenue idea: Indirect taxes on the poor

REVENUE PACKAGE: Probably the most contentious item in the State of the Nation Address of President Gloria Macapagal-Arroyo at the opening of the 13th Congress on July 26 will be her formula for pulling the country out of the financial hole it is in.

To address the budget deficit, the ballooning foreign debt and lackluster revenue collection, the President is expected to propose some drastic tax measures and collection reforms. We expect a spirited debate on that.

This year, the government needs about P197 billion in additional cash for it to meet and pay all obligations under its 2004 expenditure program. In the next five years, it will need an average of P100 billion every year just to balance the budget.

This does not include yet the administrative cost of running the government. Where to get all that money?

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REGRESSIVE TAXES: To condition the public mind to the inevitability or even the necessity of more or higher taxes, administration strategists have started talking of the need for more imaginative revenue measures.

Some Malacanang allies have been lobbying for the passage of measures for additional excise tax on fuel and other petroleum products, a tax on cellphone text messages, increased excise tax on tobacco and alcohol products, higher value-added taxes, levies for motel users, and more.

Sadly, all these tax proposals are in the form of indirect taxes. By applying the tax rate on quantity used or consumed, indirect taxes are regressive because they hit defenseless poor families more than those who can better afford it.

This was among the findings of the National Tax Research Center (NTRC) in a 2003 study.

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POOR SUFFER MORE: In the proposed tax on cellphone text messages, the idea is to slap a 10-percent tax on every message, which would raise to P1.10 the one-peso charge on pre-paid users.

This tax will devastate the small users who constitute 96 percent of the 25 million cellphone users in this texting capital of the world.

The proponents are looking for ways to shift the burden to the cellphone companies such as by slapping them (and the rest of public utilities) with a 3-percent franchise tax instead. But watch carefully, because until a revenue measure is signed into law, we can never tell its final form and implications.

Another example is cigarettes. A lowly factory worker can smoke as many sticks per day as a highly paid executive. If the government charges one peso per stick, then both individuals, rich or poor, would have to pay the same tax in pesos.

In so doing, government puts a heavier burden on the small wage-earner because his take-home pay is way below that of a wealthy executive. In short, the poor who can least afford it end up carrying the heavier load.

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GROSS TAX IDEA: The NTRC study discovered that in the basket of taxes shouldered by Filipinos, most are in the form of regressive indirect taxes.

The study showed that the tax system has only made distribution of income across Filipino families more unequal because of the dominant impact of indirect taxes. Yet, government wants to impose more of them.

The government better focus on direct taxes such as individual and corporate income taxes. Compared to indirect levies, direct taxes are progressive. As a rule, direct taxes tend to take more from the rich than from the poor.

Gross corporate income taxation is another idea that has never taken off, but it is worth looking at again. Government’s proposal is to make gross income, rather than net income, the basis for computing corporate income taxes.

A number of tax experts have been attesting that gross income taxes are easier to compute and simpler to collect. Hong Kong has long been using this system, while the Philippine version of it has been languishing in Congress for over a decade now.

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REVENUE LEAKS: But more than imposing an additional burden on a suffering nation, government should plug revenue leaks by finally going after the staggering amounts of public money lost to corruption, income under-declaration and smuggling.

"The national government loses half of its income to tax cheats," Finance Undersecretary Gil Beltran has said.

A UP professor with a doctorate in economics said the same thing: "Take a road project. The government may make it appear to be P3 million on paper, but the project costs only P1 million."

Aside from corruption, income under-declaration has been a problem also. While no one will say it publicly, most businessmen I know admit searching for ways to make their earnings look smaller than what they really are.

In the case of smuggling, the government is dealt a deadly one-two punch:

(1) The government fails to collect the proper customs duties, and (2) Businesses whose products lose out to the smuggled competition are unable to pay more taxes because of lower sales income.

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WHY THE KIDNAPPING?: Some remarks of an Iraqi tribal leader who helped convince the abductors of truck driver Angelo dela Cruz to free him may shed light on: (1) the alleged ransom paid, and (2) why the Filipino worker was kidnapped.

The Agence France-Presse reports that sheikh Jamal al-Dulaimi, from a Sunni region of western Iraq where Dela Cruz was seized two weeks ago, met with the freed hostage and Filipino officials at the Philippine embassy in the Iraqi capital.

In that meeting, although Dulaimi denied being involved in any negotiation to release the father of eight from Pampanga, he said he had issued "a humanitarian appeal to his captors," and thanked them for responding to it.

He denied that any money was paid to secure Dela Cruz’s release. His simple explanation as reported by the AFP is enlightening:

"Iraqis don’t need money. We are just an occupied country, and as you know these things like hostage-taking happen in an occupied country. They only wanted Philippine troops out of Iraq and when Manila carried that out they released Angelo."

As background, the AFP added: Tribal ties run deep in Iraq’s patriarchal society especially in the western regions that include the flashpoints of Fallujah and Ramadi.

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