Leakage

When I get to be really old, I hope to still be able to pay value-added taxes (VAT) on the things I buy. The proposed law exempting senior citizens from paying VAT will force me to lie about my age when I get there.

This desire to pay VAT even after I turn 65 is not due to some fluffy sentimentalism about self-worth or even about patriotism. It is due to my understanding about value-added taxation works.

This form of taxation works well only if its coverage includes nearly all transactions in an economy. The less it covers, the weaker this revenue scheme will be. Every small loophole in the VAT system, in a most disproportional way, undermines the efficiency of what is otherwise a beautiful revenue scheme.

The beauty of VAT lies in its reliability. When a value-added taxation net has been put in place, there will be little uncertainty about the stream of revenues available for government. It will produce a volume of revenues more or less proportional to the growth of the economy.

This revenue measure is not prone to the vagaries and politics of the revenue-collection agencies. Recall that time when Rene Banez tried to push sweeping reforms in the BIR. The bureaucracy in the agency deliberately dropped revenue collection, holding the Republic hostage and forcing government to drop Banez instead.

If we were more reliant on VAT rather than on income tax collection, that sort of bureaucratic blackmail would never happen.

In addition, VAT helps us gradually shift the tax burden from the income side to the consumption side. Taxation on the consumption side is less prone to collector discretion, therefore less prone to corruption. Income can be concealed; corruption no. Income taxes penalize wealth-creation while consumption taxes encourage savings and investment. Consumption taxes are easier to collect; income taxes are easier to evade.

An effective VAT system follows the chain from primary producer to aggregator to processor to wholesaler to retailer to consumer. At each stage, input VAT is deducted, preventing a cascading effect on prices. The final consumer bears the full weight of the tax.

Because VAT is necessarily a system (or a net), it diminishes the underground economy and forces all transactions to be formalized for revenue purposes. Manufacturers, for their own sake, demand receipts from suppliers of inputs. Restaurants issue receipts to clients who need those for their own deductions. Doctors issue receipts.

Over time, a larger section of the economy moves from the underground to the formal sector. In turn, this allows us to more accurately monitor economic activities and produce better data. It broadens the tax base and forces greater transparency in all transactions.

When Noynoy Aquino, speaking before his fans at the Makati Business Club, announced there would be no new taxes if he becomes president, I nearly fell off my seat. That was a completely uninformed thing to say. Our taxation system needs to be continuously modernized — which means introducing new taxes to replace old and ineffective revenue instruments. The simplified net income tax scheme is an example.

Our taxation system is crying out to for renovation and reform. It must be made less dysfunctional for our economic growth, more equitable and more reliable. Fiscal weakness is the biggest vulnerability of our economic future.

The VAT system we have in place is less than ideal. From the onset, populist politicians have created a large black hole of VAT-exempt transactions: agricultural producers, informal retailers, staple goods, medicines and a host of others are exempted from the VAT.

That large black hole explains why the VAT system has been less effective in formalizing our economy and producing the needed revenues to avert deficits that lead to borrowing that, in turn, lead to debt crises. We have reached a point where we have privatized everything we can and we can no longer use privatization proceeds as a means for plugging deficits.

If Noynoy becomes president and does not continue modernizing our revenue system, we will court a fiscal meltdown. That will only multiply the misery.

Now, in addition to the yawning black hole of exemptions, our legislators have passed a bill exempting senior citizens from VAT. That simply tells us they failed to understand how VAT actually works: by closing the circle and encompassing all transactions.

With this bill, they are effectively creating a loophole that will open much room for evasion and corruption. They might as well scuttle the VAT system and return to the primitive methods of revenue-generation that consistently failed us in the past.

But this is an election year. People do stupid but popular things during an election year.

I can understand President Arroyo’s hesitance in signing this bill into law. But this is an election year and the exemptions are tremendously popular. Anyone who disagrees with the exemptions will be made to look like a heartless miser preying upon the aged.

The system of discounts already in place for senior citizens in disruptive enough. It forces retailers to cross-subsidize goods to comply with the prescribed discounts, charging the young but unemployed more to cover discount losses for the old but employed.

The bill will be signed into law, not because it is wise but because it is politically suicidal to go against political correctness, to disagree with pampering senior citizens. History tells us that once entitlements are given out, they can never be taken back except at tremendous political cost.