Optimistic

Stock analysts are telling us that the market has largely dismissed as "noise" the political carnival that threatens to erupt as a consequence of the decision of the congressional majority to push ahead with the effort to renovate our constitutional order.

Over the last few days, since the House majority’s dramatic move to unhinge the inutile Senate from the reform effort, the peso maintained its strong position and the stock market held its ground. A slew of initial public offerings scheduled for January should provide enough investment openings to lift the market higher.

Economic growth fell below target for October. Some have blamed the natural calamities for this, although the most likely culprit is a drop in our exports. The largest component of our exports consists of electronics products which are susceptible to the downturn in global consumer demand.

We obviously need to diversify our exports and remove it from its gross dependence on electronics assembly. But to do that, we must make our economy more attractive to investments. The Philippines gets a very small share of capital flows into the Asian economies. That is a strategic weakness we must do something about.

Proponents of Charter change say we need to move out of the outdated economic orthodoxies enshrined in the present Constitution. But if the final effort by the House to move the Charter change process despite the resistance of the Senate fails, we will likely be stuck with this outmoded constitutional order for yet another generation.

In the interim, government needs to seed the domestic economy through expanded public expenditure, preferably through investments in infrastructure. That will help close the investment gap brought about by the reluctance of many foreign investors to come into our economy because of all the policy uncertainties and political discontinuities we are famous for.

In order to fund massive infra investments, expressed in the President’s "super regions" plan, we need to keep government revenues robust. This is to prevent falling once more into the cycle of deficits, borrowing and high inflation that plagued us in the past.

Fortunately, and against the odds, the BIR has been delivering.

This year, our ratio of tax collection to GDP is estimated to run at about 11.28%, the highest rate in six years. The improvement is significant compared to only 9.64% in 2004. The passage of the RVAT and improved tax collection administration is to be credited for this – although we still have some way to go to match the regional norm of 15% of GDP.

Our economic managers have put a tough target of 23% revenue growth this year, despite an anticipated GDP growth rate of less than 6%. Were it not for a classification problem, the internal revenue bureau might have comfortably met that target.

All value added and excise taxes are normally considered internal revenue. But the substantial VAT and excise taxes collected on oil products and other imports are now credited to the Bureau of Customs and not to the BIR. As a result, it now appears that, with very little reform effort, Customs comfortably meets its targets.

BIR collections were adversely affected by a decline in interest income from treasury bills. A smaller deficit has pushed down interest rates and decreased government reliance on borrowing. That positive condition has its negative effects on the tax take.

Some steps might have to be taken to rationalize our numerous tax incentive laws. According to a congressional study, revenues foregone from the grant of tax incentives to a wide range of business activities added up, in 2003, to P174.698 billion or 4% of GDP. If those legislated incentives were removed, our revenue intake should easily match the regional norm.

Unfortunately, a significant portion of the foreign direct investments we have attracted over the years despite poor infrastructure and policy uncertainties came in to take advantage of tax holidays. Tax incentives cover for our lack of competitiveness. But they should not be the excuse for inaction on improving our economy’s competitive standing.

Nevertheless, our internal revenue agency has undertaken a number of reform initiatives to build market confidence in the sustainability of our revenues.

All industries nationwide have been profiled and benchmarked to detect evasion. That provides the basis for the Run After Tax Evaders (RATE) campaign. Tax Credit Certificates, once a window for evasion, have been revalidated. More and more tax districts are being computerized. The BIR has even initiated a raffle promo to encourage consumers to demand receipts for their purchases.

There are limits to what an undermanned and under-funded agency can do, however. Despite the hefty increase in its target collection, the budget for the BIR has remained stagnant.

It is as if we want a Volkswagen Beetle to perform like a full-blown BMW.

With a budget of P7 billion, the BIR is expected to collect P675 billion in revenues. As has been a legislative habit, we have preferred to rely on penalties to force over-performance while avoiding capital outlay. We have an attrition law that penalizes employees who under-perform in collection but no package of rewards for those who do well.

While Congress has not acted on a proposal to set up an independent revenue agency that is less vulnerable to political intervention and funded by a percentage of what it collects, we expect the existing workforce to meet the huge targets.

The numbers put it starkly. The BIR has only 11,800 employees – of which only 5,000 are examiners. Vietnam, with less taxpayers, has 40,000 employees working in its internal revenue agency. Japan has a workforce of 66,000 tax collection personnel.

Our 5,000 examiners are expected to review and audit 12 million tax returns. That is a superhuman (or inhuman) ratio.

If we want to build confidence in our economic prospects and sustain the current optimism in our economic future, we must do something to modernize our revenue agencies and empower it with adequate equipment and personnel. Otherwise, the excellent fiscal picture we have managed to achieve today will be short-lived.