What are the people at DOF smoking?
It must be something truly hallucinatory, judging from the numbers they are throwing at us.
The DOF says government will raise an additional P60 billion in revenues by restructuring the existing excise tax system on cigarettes and tobacco. The agency proposes to raise tax rates on these “sin” products by as much as 1,000%.
What this means for ordinary consumers is that, within the next two years, the excise tax collected per pack of cigarettes will rise from the current P2.72 to P30. The price per pack of cigarettes will rise, in two years, from around P40 to somewhere close to P100.
What this means for me, in particular, is that I will finally kick the habit. If I do that, government revenue from me in particular will drop from P2.72 to zero — not the P30.
If the people at Finance think they will get P60 billion from the measure they propose, then they are dead wrong. Basic economics tells us that demand is a function of price. If it were not, then I would have a Porsche instead of an Isuzu parked in my slot.
It is, of course, the easiest thing to raise “sin taxes.” People generally are reluctant (or embarrassed) to resist revenue measures aimed at vices. But the tax masters should not count the many golden eggs they want to have if their intent is to kill the goose that lays them.
Under the current excise tax structure, government was able to raise P31.6 billion in 2010 from the tobacco industry alone. That is more than the government estimate of P25.8 billion in excise tax collections.
When I light up, I am consoled by the thought that I contribute handsomely to the government coffers. But when the cost of the product goes beyond my reach, I will sadly abdicate on my patriotic contributions to national revenues.
A World Bank study shows that for every 10% increase in price, sales volume drops by 8%. That dazzling DOF estimate of raising an additional P60 billion from drastically jacking up excise tax rates assumed demand for “sin products” is inelastic. We know, however, demand for these products is the most elastic since they are not vital for subsistence.
Granted, there might be some public good served by severely taxing “sin products.” But there are also some economic costs to bear, such as the unemployment shock on our tobacco-growing regions or an uptick in cigarette smuggling when locally manufactured products become more expensive than imported ones.
Recall that pleasant age when the peso was overvalued, the quality of domestic manufactures generally poor, trade barriers were high and the value-for-price equation favored imports. At that time, smugglers ruled our politics.
Today, the revenues lost to smugglers remain high. The Federation of Philippine Industries estimates government’s annual losses to smuggling at between P127 billion and P170 billion. Those who seek a more robust revenue flow for government should perhaps look at this first.
The Philippine Tobacco Institute, representing local tobacco manufacturers, has been trying to cut some time with the Finance Secretary in order to dialogue on the economics of the proposed finance measure. Their small request has, thus far, been denied.
Capital
The Philippines, as we know, gets a miniscule share of the large flow of foreign direct investments to East Asia. There are many reasons for that, although we will not repeat them at this time.
On the other hand, however, we have world-class banking institutions, excess domestic liquidity in search of investment outlets and relatively stable foreign exchange and inflation rates. These are strengths that could be harnessed to help fuel our economic growth. All we need are precise adjustments in policy.
One such innovative policy adjustment of BSP Circular No. 304 (Series of 2001) which enables our banks to offer Long Term Negotiable Certificates of Deposit (LTCNDs) that the general public may invest their savings in. As deposits, the investments are covered by PDIC. Although they have longer maturities, these instruments are tradable, enabling depositors some flexibility with their money. The longer maturities, in turn, enable the banks to raise their capital for relending to domestic companies, helping our economy to expand.
LTCNDs are in Scrip-less form and registered with a third-party registry bank. Considering how low interest rates are these days, financial instruments such as this one will help boost the domestic savings and investment rate by rewarding depositors with a higher, inflation-proof return in a secure medium.
Security Bank, as a case in point, launched its initial offering this week for up to P50 billion in LTCNDs. The Filipino bank appointed the Manila branches of Deutsche Bank and Standard Chartered Bank as lead arrangers and book runners. Although it has maintained a low profile, Security Bank ranks as the third strongest bank in the country. It lends mainly to medium-scale industries, those that account for the larger number of our industrial labor force.
The launch of this particular financial instrument will give us an indication of confidence in our economic prospects and the capacity of our domestic savers to support major expansion of bank capital. Given the slowdown in our economic growth due to government under-spending, we have to rely more and more on the ranks of entrepreneurs making new investments.
To enable our entrepreneurs to dramatically expand domestic investments, our banks must have more capital to finance them. This investment program launched by Security Bank will be critically indicative of the dynamism of our domestic economy.