Rollback

It’s one of those painful good news/bad news events once more. Consumers are happy, but the economic managers should be fretting.

The oil companies rolled back pump prices again. The rollback reflects sharp declines in global crude prices, mitigated only by the appreciation of the US dollar (the currency by which oil is priced) against most other currencies.

The most recent precipitating factors are a host of disconcerting news: most of Europe sliding towards recession; the euro is plunging amidst fears concerning Greece and Spain; manufacturing output dropped sharply in China; India and Brazil (expected drivers of global growth) are slowing down; the US did not create as many jobs as anticipated.

There is growing concern the global economy cannot sustain its present level of expansion. Perhaps a new round of global recession is in the offing. This means there will be declining demand for oil. That, in turn, pushes down oil prices.

We might celebrate the rollback. This will relieve inflationary pressure that harms the purchasing power of wageworkers. It will take us out of that vicious cycle of rising gasoline, power and transport costs.

An even sharper fall in oil prices will happen if expectations of a global slowdown widens. The decline in oil prices, therefore, is a barometer of economic pessimism. That pessimism is expressed, as well, by the declines in stock markets all over the world the past week.

If we were a closed economy, the drop in the prices of fuel might be an unadulterated source of joy. However, we have to export to the global economy to pay for the oil we import. A looming global recession means our markets will likely decline. Even demand for the labor we export could weaken.

Weaker global economic conditions will not be immediately palpable here. Fortunately, we seem to be lifting our economy on the basis of strong consumer demand and more robust public sector spending. Data for the first quarter of this year indicates a level of growth exceeding projection.

If we are able to sustain the strong momentum shown in the first quarter, we will be better able to insulate ourselves from the generalized global slowdown. Sustaining the momentum ought to be the first task on the board for our economic managers.

The largest factors influencing our own economic performance are beyond our control, of course. We can never influence how the Europeans attempt to sort out their financial mess. The advocates of tough fiscal discipline and a strong euro are being forced from office one by one, replaced by successors who seem more inclined to yield to populist pressures.

If Europe sinks, it will be very hard for the rest of the world, us included, to keep growing our economies at a pace meaningful for the poor.

Facts

BIR Commissioner Kim Henares might have gone beyond the pale in her enthusiasm for seeing hefty increases in excise taxes on so-called “sin products.”

Recently, Henares said that large-scale smuggling of tobacco products will not likely occur when excise taxes are dramatically raised. She cited the cases of Sweden, the UK and Singapore.

Cagayan de Oro Rep. Rufus Rodriguez, one of the harder working legislators, challenges the factual accuracy of the commissioner’s statements. Rodriguez advocates a more moderate, more calibrated and more viable approach to the increasing excise tax rates.

In the case of Singapore, Rodriguez mentions during the plenary hearings at the House, tobacco excise taxes were increased by 135 percent from 2000 to 2005. During that period, the volume of illegal cigarettes seized by Singapore Customs rose from 8 million to 106 million. In 2005, further increases in tax rates were frozen. Singaporean Prime Minister Lee Hsien Loong admitted that revenues were declining “not because people were smoking less but because smuggling was increasing.”

The UK had the same experience. Escalating taxes on tobacco products were imposed from 1993 to 2000. By 2001, smuggled cigarettes reached over 30 percent of the market. This peaked at 40 percent of the market by 2007. British authorities estimate the lost revenue from smuggling at £45 billion. They eventually modified their tax policy.

Canada shared that experience. From 2002 to 2008, Canada implemented high excise taxes. During that period, legal cigarette sales dropped by 27 percent due to smuggling and government lost 2.4 billion Canadian dollars.

In the case of Sweden, taxes on cigarettes were actually lowered by 25 percent to 30 percent as a measure to curb smuggling of the commodity. In 2006, Sweden again imposed higher taxes and smuggling of the commodity spiked. By 2009, the country decided on a tax freeze.

In the State of New York, sharp increases in excise tax rates saw an actual decline in revenue. Illicit tobacco trading now accounts for 40 percent of the market in that American state.

None of the cases mentioned above even remotely approximates the whopping 708 percent increase in excise taxes being contemplated in the bill now being discussed at the House plenary. All of the cases mentioned above have strong customs agencies certainly superior to what we have. In all the cases cited by Rodriguez, none of the revenue expectations justifying increases in tax rates were met.

Few would quarrel with imposing higher “sin taxes.” It is always imagined that would do society some good.

However, when the tax schedule is poorly designed, the measure is bound to backfire as we see in the cases cited. Some fantastic numbers might be swimming in the minds of revenue bureaucrats contemplating a hike in tax rates several times greater than what most countries actually implemented. They should study the facts of comparable cases more carefully.