Friday, August 01, 2008

Abolish Income Tax 2: VAT and tax extortion

As the price of petroleum products remain high, the call for the lifting or abolition of value added tax (VAT) on these products remain loud. While the goal of such measure -- help reduce the price of oil products -- is laudable, the policy tool being proposed is wrong.

The single most important element of the "rule of law" concept is that the law applies to everyone and exempts no one. Any exemption to the rule immediately invalidates the "rule of law" and automatically becomes "rule of men". When applied to commodities, the law should apply to all sectors or products and exempt not a single sector or product.

In the crafting of the current VAT law that was enacted in 2005, a few products were exempted from the coverage of VAT. These include agricultural and fishery products in their original forms, meaning raw vegetables, meat, fish, fruits, etc. Once they are processed, like dried mangoes or canned sardines, the processed product is covered by VAT.

The exemption of these products, and the attempts by many other producers that the products or services they produce be exempted from VAT, was both a proof and indicator that the 12% VAT rate was high, so that almost everyone wanted exemption from the tax law.

Now that it is a law, the spirit of "apply to everything and exempt nothing" should be retained. In this sense, I am not in favor of lifting or abolishing VAT on oil products. Or any other products and services.

There are other alternatives to lifting or abolishing the VAT on oil products and/or other commodities or services.

One is to reduce the VAT rate from 12% back to 10% or even lower, but the spirit of the tax law that applies to everything and exempts nothing should stay.

Two, abolish excise tax on gasoline products, if it's not abolished yet. Current excise tax is about P5.60 per liter.

Three, a lower, flat income tax, especially on personal income tax. Any income tax cut is equivalent to "salary increase". Such de facto "pay hike" especially for fixed income earners, will enable many people to have higher take-home pay and they can better adapt to higher oil prices since it is a global phenomenon anyway, and other commodities with higher prices.

How "low" should the flat tax be to have a maximum positive result to the people? Zero income tax is the best. But the best is not always the most practical and feasible. A 10% flat income tax, to my mind, is the second-best alternative. At this rate, many people, from public school teachers and policemen to private sector ordinary employees to struggling small entrepreneurs, will benefit. And the State will still collect taxes at a much broader tax base as more people will be encouraged to pay income tax because the rate is lower and complying with it is simpler.

Commodities' prices are "high" mainly because many households have low take-home pay because of high personal income tax, even after the recent "tax relief" law. Companies also have lower pay for their workers, lower shares for their stock owners, and high price for their consumers, because the cost of corporate income tax, both the actual payment and cost of compliance (hiring accountants, lawyers, etc.) are high, and all those costs are ultimately passed on to the 3 groups of people – company employees, stockholders, and consumers.

Four, reduce the number of various taxes and fees that citizens are forced to pay to the State. Consolidate and/or abolish some of those taxes and fees. Here in the Philippines, below are the major taxes slapped on the people, rammed down on their pockets, savings and investments, directly or indirectly:

1. tax on income and salaries -- personal income tax
2. tax on profit – corporate income tax, capital gains tax
3. tax on consumption – value added tax
4. tax on inheritance – inheritance tax, donor's tax
5. tax on savings -- final withholding tax
6. tax on oil, tobacco, alcohol products -- excise tax
7. tax on various documents -- documentary stamp tax
8. tax on owning a car -- vehicle registration tax (plus emission test fee, CTPL)
9. tax on public transport business – franchise tax, common carriers tax
10. tax on various businesses and investment -- business permit tax, franchise tax, percentage tax
11. tax on imported commodities -- import tax, VAT on imports
12. tax on travel and amusement -- travel tax, amusement tax
13. social security tax -- SSS or GSIS "contribution"
14. housing tax -- Pag-IBIG "contribution"
15. health tax -- PhilHealth "contribution"
16. tax on owning a house, condo, building -- real property tax (RPT), special education fund (SEF) tax
17. tax on owning land – RPT, SEF, ad valorem tax on idle land
18. other local taxes – community residence tax, barangay clearance tax (for business)
what else...

Then there are dozens of other fees: driver's license fee, passport fee, terminal fee, NBI clearance fee, PNP clearance fee, birth and death certificate fees, marriage and annulment certificate fees, garbage collection fee, etc.

I call these multiple taxes as tax extortion. Their real goal is not so much to raise revenues for the State since this can be achieved by higher tax rate on a few tax laws, but to complicate things and that will open up opportunities for extortion and corruption.

I have discussed the need to reduce the number of taxes and fees that businesses have to pay to the government, both national and local in another article last December here,

During the VAT hike debate in 2004 to early 2005, our group, Minimal Government, opposed the proposed VAT hike in Congress unless the government would compensate for cutting taxes somewhere, especially income tax. Personally I would have supported the VAT hike from 10% to even 14% or 15%, provided that income tax be cut to a 10% flat rate. But the State as always only wants tax and tax, spend and spend.

People are more transparent on their consumption than on their income source/s. Even those with no legitimate income sources like criminals and extortionists, corrupt government officials, and dependents of remitted income from abroad, flaunt their new house, expensive car/s, jewelries, cell phones, alcoholic products, travels, and so on. They are evasive where they get the money to buy those things but nonetheless, they brag and flaunt their purchase and consumption of those goods and services. This is one important reason why taxing consumption is much easier to administer than taxing income. There is less hassle and less corruption here.

Government's tax revenue increases as the suffering of the public increases. That is one aspect of "public service" that those who work for the State enjoy, funded by those who work in the private sector.

Nonetheless, the windfall VAT revenue from higher prices of petroleum and other commodities is already there. While none of the four above-mentioned alternatives (or other tax cut options) are in place, the State can minimize the pain of the public if the entire windfall revenue from higher VAT collections will be used to retire public debt, then reduce current and succeeding years' borrowing, and later cut some current taxes and fees that are earmarked to pay those public debts.

The country's politicians and legislators can serve the people who pay for their salaries, travels, pork barrel funds, future pension and other perks better, if they will shift their attention away from selective removal of VAT application to certain commodities. They should focus their attention in possibly lowering the VAT rate that applies to all commodities, or reducing income tax, or reducing the number of many other taxes and fees that opens the gate for tax extortion. Any or a combination of these fiscal policies will greatly enable the public to cope with high oil and other commodity prices.

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