Friday, July 10, 2009

Foreign Aid 9: WB Wants Hike in Gasoline Excise Tax

Multilateral institutions like the WB, IMF and UN are not exactly as bleeding-heart do-gooders as they portray themselves to be. They are international bureaucracies that live off on taxes and more government intervention and taxation.

I read today a news report where the WB is proposing that the excise tax on gasoline products in the Philippines be raised to increase government revenues. The main reason is that taxes/GDP ratio is projected to fall from 14 percent in 2008, to only 13.1 percent this year.

Tax bureaucrats and WB developmentalists are targeting 15 percent or higher tax/GDP ratio in order to “finance development”.

Even if we take the “feared” ratio of 13 percent Tax/GDP ratio, so what? National government taxes are only one of several government revenues, composed of:

Taxes + fees, charges and fines (aka non-tax revenues) + PAGCOR/PCSO income + privatization proceeds + foreign grants + local government taxes and fees.

Huge incomes by SSS, GSIS, PhilHealth and Pag-IBIG that make mandatory and coercive collections from the monthly income of salaried individuals should actually be considered as additional government revenues, but we leave it aside for the moment.

Many local governments act like little welfare states in terms of high taxation and supposedly comprehensive welfare programs for their constituents. In Makati for instance, they have free vitamins, free goodies on birthdays, free movies (everyday) for senior citizens. So some of the developmentalist functions of the national government are slowly being taken over by some local governments.

The WB says gasoline products are used mostly by the rich anyway, that gasoline emission contribute to global warming anyway, that more vehicular trips contribute to traffic congestion anyway.

Great bleeding heart arguments. The WB and other groups and institutions that buy this alibi might as well propose that VAT for petroleum products be raised from 12 percent to 24 or 50 percent. Gasoline is an “evil” product anyway, so why not discourage its use, in order to raise more money for the government, in order to “save” the planet, in order to reduce traffic congestion?

But almost all economic and social activities require input from gasoline and other petroleum products. Even marathon and cycling races where participants do not use a single drop of gasoline, need marshals, paramedics and race officials who ride on cars and motorcycles, that run on gasoline or diesel. So it is not true that gasoline and other petroleum products are "public bads".

If government revenues are falling, then the appropriate policy response is to reduce government expenditures. Why raise more taxes or borrow more? Aren’t Philippine taxes among the plentiest in the world? The WB itself, in partnership with the Price Waterhouse Coopers, produce the annual report “Paying Taxes”, and that report shows that supposedly capitalist Philippines has 2x to 3x more taxes than socialist Vietnam and China.

And instead of raising the excise tax on gasoline, it should be abolished. There are lots of taxes on petroleum products already existing -- import tax, import doc stamp tax, local tax, value added tax, etc. These can be retained but the excise tax should be abolished.

The WB should better admit that it wants the Philippine government to raise more taxes, to cause more public misery, because the WB has lent lots of money and projects to the government, and it wants to lend more, and it wants to be assured of regular payment for all the loans that it has made and about to make in the future.

Below is the news report.

WB pitches gas excise-tax hike

Written by Jun Vallecera / Reporter
THURSDAY, 09 JULY 2009 23:11
THE World Bank (WB) has recommended increasing the excise tax on gasoline to help arrest the country’s deteriorating ability to generate a limited array of taxes as a percentage of the gross domestic product (GDP).
At the Department of Finance on Thursday, officials said they are evaluating the merits of this recommendation in anticipation the 2008 average 14-percent tax-to-GDP ratio will fall this year, as the World Bank has projected, to 13.1 percent. It’s a level prevalent during the preconsolidation years when reforms to the value-added tax (VAT) system were mere plans.
The WB noted that petroleum products are “lightly taxed” considering the Philippines is an oil-importing economy, although retail prices of the various petroleum products are not particularly low…

Meanwhile, I wrote this related short paper last February 03, 2009:

Foreign Aid and Underdevelopment

There's a recent news in WSJ on foreign aid and corruption. It's true. Countries that live off on foreign aid until now -- Indonesia, Vietnam, Cambodia, Philippines (the ADB headquarters is in Manila), etc. remain underdeveloped. While countries that never relied on foreign aid, spent their energies on entrepreneurship and trade -- Singapore, HK, Korea, Taiwan -- are now developed.

The main defect of foreign aid is that it is government to government. Or bureaucracy to bureaucracy. If one or both sides of the money flows is/are corrupt, then tax money for foreign aid is simply wasted, and a culture of bureaucratism and robbery is cultivated in the recipient country.
Foreign Aid and Bad Government
Helping entrepreneurs is the right approach.
Pakistan has been one of the key recipients of U.S. aid over the last six decades, but there has been no real progress as a result. Pakistan is riddled with problems that are rooted in the disproportionate power of the state. Aid has only boosted that power.
In contrast, Malaysia saw its economy grow at twice the rate of Pakistan's over the same period of time. Fueled by trade rather than aid, Malaysian economic prosperity is decentralized, and its reliability as an ally much greater.
Tragically, the Cold War aid approach actually preserves suffering in poor countries. Aid empowers bureaucracies, promotes statism, and weakens government incentives to boost tax revenues through growth. Economic assets are often kept in the hands of the state, leading to monopolies, stagnation and extortion. All of this hurts entrepreneurs, who have the potential to create wealth and promote governmental accountability.

See also:
Foreign Aid 5: Failure in East Timor, May 31, 2006
Foreign Aid 6: IMF is Engineerable and Abolishable, September 05, 2006
Foreign Aid 7: Wolfowitzoellickation of the WB, May 30, 2007
Foreign Aid 8: Abolish the IMF, August 08, 2007

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