BWorld 107, Top 10 myths for oil tax hike

* This is my article in BusinessWorld last January 17, 2017.

An excise tax is defined by the Department of Finance (DoF) as “a tax on products that have a negative effect on health or the environment... on nonessentials and luxury items.” With this definition, the DoF therefore, should abolish the tax on oil products, not increase it.

Here also are the 10 myths and alibi why the DoF and other sectors tend to demonize oil and are proposing oil tax to be as high as possible.

MYTH 1

OIL IS BAD FOR THE ENVIRONMENT.

Truth: Transportation of people and goods via cars, jeepneys, buses, and trucks that use oil is good for the environment because there will be no need for millions of cows, carabaos, or horses that produce tons of animal manure on the roads daily. Sure, there are particulates and other polluting gases but they are minor compared to tons of animal manure everywhere, more dirt, flies and worms in the environment. Also, cheaper LPG will encourage poor households to stop using firewood and charcoal for cooking which will result in more trees being saved.

MYTH 2

OIL IS BAD FOR PEOPLE’S HEALTH.

Truth: Cars, vans, jeepneys, and buses that use oil spare the oldies, sick, babies, pregnant women, etc. of hard labor and more diseases due to exposure to heat, rains, dust, and exhaustion if they were to ride bicycles or skateboards or animals that do not use oil. Also, transport of agricultural products from Ilocos, Cordillera, Cagayan Valley, or Bicol to Manila via animals not trucks will only lead to food spoilage. People will have little or no access to fresh vegetables and fruits, resulting in poor health.

MYTH 3

OIL IS NOT A PUBLIC GOOD.

Truth: Oil is a public good. As shown above, no petroleum, no modern and comfortable life, no mass production of food and transportation of people and goods. Public goods like public education, public health care, roads, bridges, etc. are either provided to the people for free or highly subsidized prices. Oil as a public good only needs zero tax, or at least low tax.

MYTH 4

MORE CO2 EMISSION FROM OIL MEANS MORE POLLUTION, MORE “MAN-MADE” CLIMATE CHANGE.

Truth: CO2 is not a pollutant gas; it is a useful gas. It is the gas that humans exhale, the gas that our pets and farm animals exhale, the gas that plants use to produce their own food via photosynthesis. Climate change is natural and cyclical. Planet Earth is 4.6B years old, there was climate change ever since marked by warming and cooling cycles.

MYTH 5

INCREASING THE OIL TAX IS NECESSARY TO FINANCE MORE PUBLIC INFRASTRUCTURE.

Truth: Government has trillions of pesos already from income taxes (corporate and individual), VAT; excise tax from alcohol, tobacco, mining, new vehicles; from documentary stamp tax, franchise tax, from annual vehicle registration tax, withholding tax, capital gains tax, travel tax. And from various regulatory fees (passport fees, driver’s licenses, terminal fees, etc.)

Government simply has too many personnel, officials, employees, consultants and pensioners; too many offices, travels, trainings, and meetings. Perhaps these items alone constitute about 70%-80% of the annual budget. So little is left for public infra, school buildings, government hospitals, etc.

MYTH 6

THE OIL TAX INCREASE WILL HAVE MINIMAL IMPACT ON THE POOR.

Truth: Oil is used by the poor not only in jeepneys but also in tricycles, farm tractors and harvesters, irrigation pumps, fishing boats, interisland boats, generator sets in off-grid islands. While the DoF plans to introduce “Pantawid Pasada” for jeepneys, nothing has been allotted for farm tractors and other equipment used by poorer farmers, fisherfolks, hunters, etc.

As shown below, fishing boats that use gasoline, tractors and irrigation pumps that use diesel, tricycles that also use gasoline, will be slapped with 12%-19% price hike simply because of the proposed tax hike (see table).

MYTH 7

THE OIL TAX INCREASE WILL HIT THE RICH MORE THAN THE POOR.

Truth: Oil use is a small portion of the overall consumption of the rich. The rich buy more expensive but more fuel-efficient cars and SUVs, they spend more on expensive restaurants, hotels, schools and universities, condos and subdivisions, etc.

MYTH 8

FOOD PRICES WILL NOT GO UP SIGNIFICANTLY WITH OIL TAX HIKE.

As mentioned above, oil is used not only by trucks, jeeps, and boats that transport agriculture, meat and fishery products. Oil is also used by farm tractors and harvesters, fishing boats. A 3.6% food inflation in 2016 (despite around 50% hike in diesel prices) is not small for the poor.

MYTH 9

NO OR LOW EXCISE TAX MEANS SUBSIDIZING THE OIL CONSUMPTION OF THE MIDDLE CLASS AND RICH.

Truth: There is no subsidy, zero, unlike subsidies for public education and health care or rice price subsidies using tax money. When you walk down the street and encounter a mugger who didn’t demand your money, you do not owe that mugger anything.

MYTH 10

GOVERNMENT IS LOSING SOME P145 BILLION/YEAR POTENTIAL OIL TAX REVENUES.

Truth: Government has no entitlement to more income and savings of the people other than income taxes that are already high, and other existing taxes. Government is losing more from wasteful spending or stolen money via corruption. Government can save more money for infrastructure by reducing too many personnel and consultants and by abolishing and defunding old welfare programs that do not work before it creates new welfare programs.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a Fellow of SEANET. Both are members of Economic Freedom Network (EFN) Asia.

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See also:

BWorld 103, How to improve the RORO system, January 11, 2017 

BWorld 104, Top 10 positive news in Asian trade, January 14, 2017 
BWorld 106, Top 10 projections for Asian economies, January 23, 2017

Tax cut 26, Excise tax on petrol products should be reduced/abolished, not increased

"People try to live within their income so they can afford to pay taxes to a government that can't live within its income." - Robert Half

This bad tax measure has been proposed by the DOF and some legislators many years ago but never succeeded. This time, it looks different as the new Duterte government is hell-bent on having this become a law within the year or next year.

"The excise tax adjustment will entail, in the case of regular fuel, raising the levy from P4.35 a liter at present to P10 a liter next year, P10.40 a liter in 2018 and further to P12.17 a liter by 2022.

For diesel, from zero at present, an excise tax of P6 a liter would be slapped next year, P6.24 a liter in 2018, until it goes up to P7.30 a liter by 2022."

Bad. Very bad. But can be acceptable if personal income tax rates will be slashed to 20% max, better if 15% max. Otherwise, bad. Very bad.

This government can be bad if such huge tax hike in petroleum products is not compensated by huge income tax cut. 

Last July 12, 2016 during the first BusinessWorld Economic Forum, among Sec. Dominguez's proposals was a zero income tax for those earning P1 M/year or less, which is very good. Things have changed in just two months.

It is misleading for the DOF to say that only the top 10% of the population are the biggest consumers of gasoline. The most affected will be the small and micro entrepreneurs who can not easily raise prices because of the competitive environment.

The only mitigating or compensating measure here would be a huge income tax cut, so that people will have more money in their pockets that they must shell out back to government in the form of higher consumption taxes like excise tax for gasoline and diesel. Imagine, from zero to P6/liter. Very parasitic thinking by government. And obviously inspired or pushed by the WB, IMF, ADB, other foreign aid.

Now, the DOF proposed income tax cut is small.

Those earning zero to P250,000 a year, P2,500 in income tax in the first year;

more than P250,000 to P400,000, P2,500 plus 20 percent of the excess over P250,000;

more than P400,000 to P800,000, P32,500 plus 25 percent of the excess over P400,000;

more than P800,000 to P2 million, P132,500 plus 30 percent of the excess over P800,000;

more than P2 million to P5 million, P492,500 plus 32 percent of the excess over P2 million, and

more than P5 million, P1.45 million plus 35 percent of the excess over P5 million.

From 7 to 6 tiers. What Sec. Dominguez did here is to retain the 32% for those earning P2M to P5M, then 35% above P5M. Pakonswelo for those earning below P2M a year, they will pay only P132,500 + 30% of the excess over P0.8M.

It is very parasitic to claim that petroleum products are "public bads" that must be taxed as high as possible to have a "clean environment". NO. Petrol products are public goods, without them, there will be massive poverty, massive underdevelopment, massive hunger in this country.

People want to walk or ride bicycles or horses/cows over long distance because cars, buses, trucks, jeeps that use petrol products will be limited or curtailed? Huge volume of animal manure on the roads alone will make our environment dirty, foul and ugly.

If fisherfolks will use manual paddle of their fishing boats, if farmers will use carabaos or cows instead of faster and stronger tractors in tilling their farms, or harvesting and threshing their harvest, see the negative impact of very low agri and fishery productivity.

A friend, Peter A. commented,

"I'm all for this, our petroleum taxes are among the lowest among importing countries. I'd split the tax so that you can incentivize certain behavior. Higher taxes for fuel but a lower category similar to the current jeepney diesel subsidy to public transport (commercial passenger and trucks) , for private vehicles keep the higher tax category. In the long run you want to disincentivize individual car use as this makes livable cities difficult. This goes hand in hand with many other urban planning tools, like zoning, parking subsidies etc. Besides even with a Php 7 and Php12 tax, this is still lower than a few years ago so the economy can take it."

The low oil prices were important contributor for very low inflation rates in the PH in the last 2-3 years. Bringing back gas prices to near P50 or near P60 a liter, and diesel to near P40 a liter, will automatically push overall inflation rate to higher levels. And more poor people will complain. Then govt will say, "we need to raise further oil taxes to finance more subsidies to the poor." Vicious cycle.

If petrol taxes will rise at high levels, more people will buy motorcycles, or small cars with low oil consumption per kilometer, and the same traffic congestion we will experience. Meanwhile, the cost of transpo of rice, vegetable and fruit dealers, fish and meat dealers, both in trucks and boats, will rise. Which means they will pass the additional cost to the consumers. Petroleum is a public good, not public bad.

Peter added, "actually all we've learned from centuries of urban planning and learning how cities work show that this blunt initiative is effective in curtailing car use. It would work even better if, as I mentioned in my comment to Butch , we add more taxes on cars , parking ( add taxes and take out the inherent subsidies) and do congestion pricing. On a world wide level where cities have done this,it works. As for the inflationary aspect, take note that I'm for expanding the current subsidy on public transport, that includes any sort of regulated transportation that has a certificate of public convenience. We already have this with the jeeps, so expand this to buses, cargo trucks, taxis etc. So that the public good aspect is not affected. 80% of vehicles on the road is taken by 20% of the private vehicle owning public, we need to reverse this . If we take a look at the most succesfull capital cities private car use is but maybe 10%. This at least give the car owner a choice, to use public transport however ineffcient or pay a bit more. Add in all the other measures we'll surely have a more livable city."

Another reason why I want the PH to disintegrate into many countries. A central government will always impose a one size fits all policy. Whether a province or island has efficient mass public transport or not, the policy applies uniformly. The Manila-based government thinks that taking out more cars, motorcycles, buses from the roads to be replaced by trains (even if the infra in many areas are not there yet) will also apply to island-provinces like Masbate, Catanduanes, Bohol, Romblon, Camiguin, Biliran, Guimaras, Basilan, etc. For these islands, reliance on petroleum is very high, they cannot bike or run or ride a bus from their province to the next. They must ride a boat, then take a tricycle or jeep or bus to their destination. A rise in petrol prices by at least P6/liter will significantly affect their mobility, the cost of their goods and services traded across islands.

Instead of raising the excise tax for gasoline and imposing the tax on diesel, the government should do the opposite -- remove or drastically reduce the tax for gas, retain the zero excise tax for diesel. This will help reduce inflationary pressures. Government should learn to cut its spending, not the people's take home pay.

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See also:

Tax Cut 23: Tax Competition in Asia, Hikes in Europe, May 10, 2015 

Tax Cut 24, Tax reform forum in Ateneo, March 26, 2016 

Tax Cut 25, Presentation at Ateneo Ignite's Tax Exchange, June 04, 2016

Tax Cut 20: On the Excise Tax on Gasoline, Various Regulatory Fees

Prof. Amado "Bong" Mendoza of the UP Political Science Department wrote another good article yesterday on tax policy.

Part of his paper mentioned a low tax-GDP ratio (T/GDP) of only 12 percent in 2011, in reference to other data and points raised by WB consultant and now UPSE visiting Prof. Rosa Maria Alonso  Terme. I commented that those measurements of low T/GDP ratio are wrong because such measurement counts only the collections of the BIR + BOC in computing T. It excludes other collections: 

1. Collections by local government units (LGUs) of various taxes (real prop. tax, residence tax, various business taxes) and regulatory fees (sanitation fee, fire dept fee, bldg permit fee, Mayor's permit fee,...).

2. Collectios of various regulatory fees by other agencies: DFA's passport fee, DOT/PTA's travel tax, NAIA's terminal fee, DOTC's vehicle registration tax, driver's license fee; PNP's police clearance fee, DOJ's NBI clearance fee, NSO's birth cert fee, death cert fee, marriage cert fee, and so on.

3. Collections of various fines and penalties by both national and local governments. More prohibitions in society, more violations to catch and penalize, more revenues to collect.

4. Collections of mandatory and forced monthly contributions by the SSS, GSIS, PhilHealth, PagIBIG, etc.

If these various payment to government, by hook or by hook, are included in the tax collections by BIR + BOC, a T/GDP ratio of 25 percent or higher is possible.

Singapore, Hong Kong, other governments with no or little LGUs have tax revenue that are almost equal to total revenues. In governments with many LGUs, many government corporations and financial institutions, many departments having their own collections and mandatory fees system, the total revenues are much much larger than the usual T/GDP ratio. It is an old trick by the WB, IMF, ADB, other foreign aid bodies to justify and rally a rah-rah-rah, more-taxes-rah campaign and lobbying.

Talking about government provision of public goods, the best "quality public goods" that the PH or any government can give its citizens is to have rule of law. The law rules over governors and governed, administrators and administered. The law applies equally to unequal people, no one is exempted and no one can grant an exception. Thus, the law against stealing and robbery, the law against killing and murder, the law against abduction and rape, the law protecting private property, applies to all. 

Then people will have peace of mind and have high respect for government. When there is government failure in rule of law promulgation, then one can expect government failure in many of its avowed welfarist functions. All other axation to justify multiple, endless welfarist functions lose their value.

Some sectors are proposing that taxes on petroleum products should be raised further. They are echoing the old WB and other foreign aid lobbying. They are wrong of course because petroleum is a useful product, it should not be penalized with more taxes. If people think that petroleum is a socially-bad product and hence, must be taxed as high as possible to discourage its frequent use, then they may be suggesting implicitly that we should ride carabaos, horses or bicycles to work or bring our kids to school so that we will use less or zero petroleum products. 

But petroleum is a socially-useful product. Government should in fact reduce taxes on it, and in particular, abolish the excise tax on gasoline, only VAT, import duties and related taxes should apply.

The main arguments by those advocating for more, higher petroleum tax, are: (1) Gasoline pollutes and creates traffic; increasing the tax will alleviate these twin problems; (2) Gasoline is mainly consumed by the rich and the middle class; hence a higher tax on gasoline is progressive; and (3) Petroleum products are imported, and scarce resources.

I disagree with these arguments of course.

1. Non-gasoline transportation of goods and cargo (via carabaos, horses, cows, etc.) creates more animal dung and urine pollution, creates more traffic as they move very slow. To transport Dagupan bangus or Batangas tilapia to Manila via animals will take several days, the bangus and tilapia reach Manila either rotten or in dried fish form.

2. Gasoline is used by tricycle drivers, taxi drivers, and other non-rich people. Besides, what is wrong with the middle class and rich driving a car? People work hard to have more convenience in life and this is not a bad or criminal goal. Those who demonize car ownership may consider not owning or driving one and ride bicycles only.

3. All imported products from mobile phones, laptops, flat tv, buses, boats, medicines, processed foods, etc. are also scarce. The price of a product or service is a reflection of its scarcity or non-scarcity. Gold and diamond are very scarce to find and hence, their prices are very high. Air is non-scarce, it is abundant hence, its price is zero. Unless one is into scuba diving, then air in scuba tank has a price and not free.

So government should either abolish the excsie tax on gasoline, or all other imported goods should be slapped with excise tax too.

Many environmentalists and anti-capitalism activists who demonize fossil fuel capitalism are actually car-owners too; they frequently ride planes for their meetings and activities across the country or around the world. And all airplanes use that "bad" (if not "evil") product called petroleum.

Back to the basic function of government -- yes, there is a need for government. Promulgate the rule of law. Of what use to a poor man that he gets free PhilHealth card, free education for the kids, free conditional cash monthly, subsidized train rides, etc. but his tricycle or 2nd-hand jeep or car can be easily stolen by other people; or the kids can be easily abducted and raped or murdered; the small piece of land he inherited or bought can be easily land grabbed by influential people?

Protection of private property, protection of human life, government role is needed and recognized, and taxation to allow government to do this job is needed. All other functions are secondary or unnecessary, as most functions can be provided by the private sector under a voluntary exchange system. Thus, the various taxes and mandatory fees to justify those secondary or non-necessary government functions should be significantly cut, if not abolished.

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See also:
Tax Cut 16: Conserving Fishery Resources by Taxing Demersal Fish Catch?, May 27, 2013 
Tax Cut 17: BIR vs. Physicians, March 06, 2014
Tax Cut 18: On 10% Flat Tax, Greco Belgica and GDP Growth, March 27, 2014
Tax Cut 19: Letter to Sen. Sonny Angara Re. SB 2149, June 06, 2014

Mining 23: On the Proposed 10 Percent Gross Revenue Tax

As the new Congress will officially convene in late July this year, various sectors and government agencies are preparing their respective “legislative agenda”, the things they want Congress to enact for their sector. And among the sectors seeking a new law is the mining sector, about the proposed new mining tax regime.

The move now is to replace the (a) corporate income tax, 30 percent of net revenues, (b) excise tax, two percent of minerals value, (c) royalty tax to indigenous people, five percent, plus several others, with a 10 percent gross revenue tax. 

It is not clear though what to do with these taxes imposed on companies, most likely they will be retained: capital gains tax, documentary stamp tax, value added tax, tax on interest income and payment, vehicle registration tax, real property tax, community tax. And the various regulatory fees -- occupational fee, business permit fees, registration fee, etc.

This 10 percent tax seems big as there are many other costs to consider, like (a) labor wages, benefits and social insurance, (b) mandatory community projects/CSR, (c) capex and machinery, trucks depreciation, (d) insurance against natural accidents (heavy flooding, landslides) and man-made terror (NPA attacks, other armed groups), (e) various maintenance and operating expenses (fuel for trucks, electricity and equipment for offices, etc.), (f) mining rehabilitation and reforestation of mined out areas, (g) other taxes and regulatory fees by local and national government units.

However, if this looks big for government, then it will have few reasons to further bureaucratize and delay the entry of new investors and continued operation of existing investors. Thus, in cases where a municipal or provincial government will order the cessation of operation of a big mining company for whatever reason, the national government through the DENR-MGB and DOF-BIR will overrule the LGUs so that the national government can continue collecting high taxes.

The advantage here is that things should be made simpler and more transparent. It is up to the metallic mining companies to cut costs somewhere, like getting more fuel-efficient trucks and bulldozers, so that a reasonable or attractive profit can be realized for the various investors and shareholders of the companies.

Real debates will occur in Congress, in various Committee hearings, as the hardline "No mining whatsoever" and "Allow mining but over-tax and over-bureaucratize it" groups will mix with the more realistic groups.

There were several news reports recently on the proposed new mining taxation policy in the country. I saw these four stories from the Philippine Star, BusinessWorld, Philippine Daily Inquirer, and Mining.Com.

(1) From the Philippine Star, May 3, 2013,

Mining council seeks 10% gov’t share from miningrevenues

Environment Secretary Ramon Paje, who co-chairs the MICC, told reporters yesterday that the draft bill prepared by MICC stipulates a government share of seven to 10 percent to be obtained from gross earnings and windfall earnings of mining firms.

The enlarged government share from mining revenues would replace the two percent excise tax as well as other taxes imposed on mining firms such as corporate income tax, customs duties and fees on imported capital equipment among others.

Paje said that of the proposed range of government share from mining revenues, the bulk should ideally come from gross revenues so that the government would have a guaranteed income should the company not have windfall earnings.

“If we use the 10 percent sharing scheme, for instance, we can get seven percent from the gross and we have already achieved our objective. The three percent can come from windfall income. Whatever percentage we use we are more inclined on the gross,” he said.

He said that using this revenue sharing scheme, the government could reap P10 billion annually from the current average of P800 million annually.

If Sagittarius Mine Inc.’s $5.9 billion copper-gold project in South Cotabato commences operations, annual revenues from the mining industry could reach P18 billion.

(2) From BusinessWorld, May 27, 2013

Proposed mininglaw readied

Mr. Paje said the MICC wanted a single, simplified regime applicable to all types of mining agreements, adding that whether or not this will be retroactive depends on Congress.

Fat-Free Econ 27: Sin Tax and Nannyism

* My article yesterday in TV5's news portal,
http://www.interaksyon.com/business/46120/fat-free-economics-sin-tax-and-nannyism
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The bill raising the excise tax for tobacco and alcohol products – a.k.a. “sin tax” bill - is a tax bill mainly, and a health bill only second. It is a tax bill because its main goal is to raise revenue for the government, from a minimum target of P20 billion on year one alone, to a maximum target of P60 billion.


It is also a health bill because its second purpose is to discourage more people from smoking and drinking more by raising the price of cigarettes and alcoholic products. Various studies cited by physicians and health groups who supported the tax hike bill show that many debilitating diseases that affect millions of Filipinos each year are directly or indirectly related to smoking. Hence, less smoking, less diseases. And that makes the bill plausible and worthy of public support. This writer is among the many supporters of the tax hike for these products.

Certain sectors though go far beyond and suggest that the tax hike should be as high as possible while some suggest that cigarettes should simply be banned and prohibited, and government should not expect revenues from this “sin” and unhealthy product.

And that is how governments become more interventionist because many people themselves are interventionists. They have a particular worldview or opinion on how the rest of humanity should behave and run their own lives, so they concoct or devise various forms of regulations, restrictions and prohibitions. There is intolerance, explicit or implicit, in the diversity and spontaneity of the lifestyle of other people, so the “solution” is to invite and impose new regulations and restrictions by government so that the specific worldview as advanced will hopefully be realized.

And so while this writer is in favor of raising the excise tax on tobacco and alcohol products, preferably with just one rate and not two or three, the public should also recognize that people own their bodies, not the government or physicians or media or anybody else. Thus, even if government will raise the price of cigarettes to P500 per pack, people who want to smoke will always find a way to smoke, like usingnga-nga, buy smuggled cigarettes, make their own cigarettes or sell low-keykarinderia type, and so on.

And this brings us to three issues.

First, banning and prohibiting the consumption of cigarettes is wrong and unenforceable. There are many services that are currently banned by the government now, like prostitution, dangerous drugs, jueteng and other forms of gambling. And the result is more corruption in government as all these services and goods are available in many places in the country. Government officials simply allowed these in exchange for huge bribe money.

Second, using taxpayers’ money to subsidize the healthcare of people who deliberately abuse their body is wrong and economically distortionary.  If many people will over-smoke, -drink, -eat, or -sit,  and they become sickly later on, the rest of society should not be penalized by taxing them more, or denying the tax cut proposal. If those guys can buy lots of cigarettes and/or beer/alcoholic products, fatty food and drinks, and can afford to be couch potatoes, then it is assumed that they also have some resources to buy private health insurance to augment their Philhealth membership benefits.

Third, potential revenues from the excise tax hike should be delinked from funding universal health care. The new tax revenues should instead be used to reduce the public debt, or reduce the programmed annual borrowings. Any savings in interest payment can be used to expand the funding for UHC. For 2013, for instance, interest payment is projected at P334 billion, up from P317 billion this year. If such spending can be reduced to, say P300 billion, the P34 billion savings in one year can be used for UHC and other social programs. 

Reducing the public debt and the high interest payment is possibly the single biggest anti-poverty program that the government can do. To achieve this, raising the sin tax is one measure, privatizing some government corporations like Pagcor is another, and cutting the budget of certain agencies is another measure.

Of the three issues mentioned above, only the last two are problematic due to the nanny-state thinking in many sectors in the country. The first issue is not getting wide public support and this is a piece of good news.
The second issue in particular is tricky. A friend asked (a) if sin taxes are issue of civil liberties, (b) if every adult citizen should have an unabridged right to smoke cigarettes and drink alcoholic products, and (c) whether we should valorize individual freedom above all other values.

For this writer, the quick answer to the three questions is, yes. If people will say no - that government has the right to curtail an individual’s itch to smoke and drink as much as he wants, say inside his own house and not disturbing the neighbors - then they are implying that the state has jurisdiction and even ownership of a person’s body.

If that is true, then the government will have the “right” to prevent or restrict other people from eating fatty and oily food, carcinogenic food, as their healthcare later on will be assumed by the government. Or the government can also restrict or prohibit people from climbing steep mountains, trees and rooftops because if they fall, their treatment will fall again under public healthcare spending.

People should recognize that they do not own other people’s bodies. Let other people do what they want with their body. Since there are potentially adverse health outcomes, then let the people get private health insurance from various service providers -- NGOs, corporations, local governments, others. This is on top of the state-run Philhealth system.

This way, the “negative externality” of people’s unhealthy or risky lifestyle will be internalized solely by them, and the rest of us will be spared more taxes and fees to finance more public healthcare spending.

There is a limit to nannyism. As the world modernizes further, people’s lifestyles will continue to evolve. People should learn to be more tolerant of other people’s lifestyle evolution and modernization. And they should learn to protect their turf by opposing government moves to further socialize and collectivize their incomes and savings, purportedly to expand healthcare for others, including those who deliberately abuse their own body.


See also:
Fat-Free Econ 23: Penang Workshop on Markets in Healthcare, September 10, 2012
Fat-Free Econ 24: Government Fat and Public Expectations, September 21, 2012
Fat Free Econ 25: Property Rights and the Cybercrime Prevention Law, October 01, 2012
Fat-Free Econ 26: US Public Debt and the November Elections, October 10, 2012

Tobacco Tax 3: When Supply is Killed But Demand Persists, November 15, 2010
Tobacco Tax 4: Finding the Optimum, Not Maximum Cigarette Tax, May 26, 2011
Tobacco Tax 5: Consumer Demand After Tax Hike and Smuggling, February 23, 2012
Tobacco Tax 6: On Cigarette Smuggling, February 27, 2012.
Tobacco Tax 7: DOH on NCDs and Tax Hike, March 04, 2012
Tobacco Tax 8: Ban Smoking, or Raise its Tax? March 15, 2012

Tax Cut 13: Remove the Excise Tax on Oil Products

* This is my article today in the online magazine. After this paper, a brief exchange with fellow UPSE alumni, Gary Makasiar, in our SEAA ygroups.
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Excise Tax on Fuel Products is Wrong

http://www.thelobbyist.biz/perspectives/less-gorvernment/1326-excise-tax-on-fuel-products-is-wrong

An excise tax is a specific or fixed tax rate imposed by the government on certain “public bads” like alcohol and tobacco products because of their harmful effect on public health. The government also considers petroleum products and automobiles as among the “public bads” because of their supposed contribution to air pollution and the “destruction” of the planet.

The claim that human emission of CO2 via fossil fuel burning causes global warming is a debatable, if not rejected, theory. I have written a number of articles here in the past about climate alarmism.

Fuel products, those liquid-gas substances that help move our cars, buses, trucks, planes, motorcycles, pumpboats and some power plants, which allow us to produce and transport more goods and services, including bringing our kids to their schools, are not "public bad". We buy and import petroleum products because we need them. Without petrol products, our kids will be walking to school or riding bicycles, carabaos or horses. Without petrol products, vegetables from Benguet and other provinces will all be damaged and wilted when they reach Manila via carabao or horse transport, and there may be mass starvation in big urban areas like Metro Manila.

Currently, the Bureau of Internal Revenue (BIR) collects these excise tax rates on the following petroleum products, in Pesos per liter:

Regular gasoline, P4.80; unleaded gasoline, P4.35; aviation turbo, P3.67; diesel, P1.63; kerosene, P0.60; bunker fuel oil, P0.30; LPG, 0.

(source: BIR, National Internal Revenue Code, NIRC Online, http://www.bir.gov.ph/taxcode/2063.htm)

So there are two taxes that are slapped on fuel products, excise tax and value added tax (VAT). There used to be import tax too, but this has come down to zero in recent years.

From these excise tax rates, here is the government excise tax collections from 2010 to 2012, in Billion Pesos.

Excise tax on:	2010	2011	2012
Fuel and oils	9.83	9.41	10.11
Automobiles	2.42	2.65	2.91

Source: DBM, BESF 2012, Table C.2, http://www.dbm.gov.ph/

Since the volume of our national petroleum consumption is rising, not declining (see the big number of new cars and motorcycles, new buses and trucks, etc. that are added to our roads each year), the small or marginal increase in excise tax collection from 2010 to 2012 can mean one thing – that the extent of oil smuggling, or plain tax evasion, could be rising. Smuggled oil are not slapped with VAT and excise tax, the smugglers only pay off some BIR, BOC, local officials and police, to allow such smuggling and under declaration of sales to happen. The smugglers are then able to sell their products at a cheaper price, which attracts many buyers.

A friend who is a high official at the Department of Finance (DOF) said that excise taxes are not just slapped on so-called "public bads", but also on “products whose consumption must be regulated because of relative scarcity. We import petroleum products and it behooves us to be more prudent in the consumption of such products. That is part of the sumptuary nature of excise taxation.”

But wait, almost all commodities have "relative scarcity" -- computers, cell phones, cars, bicycles, rice, hamburer, beer, etc. So this rationale is not valid. The main reason why the government slaps excise tax on petroleum products is simply to get more money from the pockets of the people.

The cost of taxation, especially multiple and complicated taxation, is not just the actual amount being remitted to the government. There are three actually: (a) hiring auditors and/or lawyers to properly comply with various tax obligations, (b) bribes if necessary, to hasten and simplify tax assessment and payment, and (c) actual taxes paid.

Tobacco Tax 6: On Cigarette Smuggling

I posted my paper last February 23,  Tobacco Tax 5: Consumer Demand After Tax Hike and Smuggling, to some of my discussion yahoogroups, it attracted many good comments and counter-comments. I am posting them below. Get your favorite snacks, this is 11 pages long, cheers.
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Noy,

As usual I am amused by the graphical presentations. To begin with, it is quite amazing that anyone has been able to locate the curves at all in the x-y quadrant, when there have been no references made to previous reserach studies, that have computed for the coefficients of the cigarette demand or supply function, say in an urban setting. As you well know, slopes, inflections, and elasticities matter. Without these information, we will not know exactly where final prices and consumption will end up. Even granting the general directional shifts that you posit, without providing the precise location of the starting curves and their elasticities, one could arrive at any set of prices and consumption outcomes, and their ordinal relationships with each other, that would be different from the ones you concluded.

First off, there may be more lines in the graphical presentation than is necessary. If we limit movements to sin taxes alone on local cigarette manufactures and legit imports, there would be no reason for the demand curve to shift. One would think that final equilibrium price (and consumption) will just move along the original curve, not necessarily outside of it. Dont you agree? It will be the supply curve shifts that will determine the movement along the demand curve and the final outcomes wrt price and volume. . If this is true, then straightaways we can do away with or remove two cluttering lines from the chart.

Secondly, I agree that the supply curve will experience a shift, if the level of sin taxes change. As this will affect the marginal cost of making (legit) cigarettes available to the relevant market. But it will affect only those portions of the supply curve that represent the MC of local 'manufactures' and legit imports. I seem to recall from 101 that the supply curve is the MC envelop curve for all stocks made available to the market (i.e., in this case, local manufactures, legal imports, all the way up to contraband and smuggled). The 'stacking' or consumption order is from cheapest to most expensive. New sin taxes will certainly rearrange the original stacking order. But I doubt that the portion of the curve depicting contraband stuff will necessarily change. We are only sure of is that the final transaction or clearing prices in the relevant market will change.

Thirdly and lastly, the critical gap in the graphical presentation is the omission of the externalities ( social or health costs of smoking in a populated setting), which probably would impact the demand curve more since it is actual smoking that 'kills'. Like all pollution issues, this is the toughest nut to crack. But I think that only with these refinements, can discussions on sin taxes become more informative and productive. And that without them, we simply would remain in the dark, if not actually even be misleading.

Pardon this humble intervention but it has been a while since I last engaged. The real reason is I finally got a new internet connection with a cheaper provider. More power to you..

- Gary

Ahhh, the beauty of being criticized by Gary's wisdom. And that's the irony of it -- you won't draw him in unless you post something that is amusing to him, and I'm glad that I made one :-)

My additional points to your comments, Gary.

The graph is hypothetical, no assignment of figures and numbers. So P1 can be P5 per pack, or P22.25 or P49.50 or other random or estimated numbers that one can assign from some empirical studies out there. And yes, there can be as many supply curves and demand curves at different micro levels (demand curves by Mr. Smoker A, by Ms. Smoker B, byTherapist Smoker C, by Magician Smoker D, by Smokers ageing 15-19 yrs old, 20-24 yrs old, etc.). Likewise, Smuggler A will have his own supply curve different from the supply curves of Smuggler B, Smuggler C, and so on. But I limited the S and D curves to only 3 each for simplicity purposes. In fact I wrote that paper mainly for the various health NGOs and health professionals as my target audience, as they are the ones who are relatively active in pushing for really high tax rates for tobacco and alcohol products, mainly for public health reason, not so much for public finance. Thus, the need to simplify the graph.

It is possible that only the different supply curves will be moving and the demand curve will stay as is, and so the new equilibrium price will just lie along the original curve, I agree. But the probability of the demand curve moving rightwards or leftwards is larger than the probability of it staying in the same place. As Alex Magno wrote, if the tax is hiked from P2.70 to P30 and the retail price will go up to P100 per pack, then one option for him and other smokers is to totally quit smoking and so, DOF will collect not P30 but zero from each smoker who quit. And as I discussed in the paper, another option for smokers is to totally abandon the known brands that were hit by the tax hike and shift to lesser known cigarette brands that pay zero tax because they are entirely smuggled. The smuggler definitely paid bribes to certain government officials to make his smuggling easier, but the upward influence of bribes to the retail price is much lower than the upward tick due to the tax hike if the smuggler was a formal supplier.

The proposed larger state intervention via higher tax rate is supposed to address the social externality issue. About 7 of the 10 leading causes of death in this country are smoking related, directly or indirectly. It's good actually that we do not have elaborate and expensive welfare system that gives free hospitalization, free healthcare, etc. to people who abused their body and we ordinary mortals contribute for their healthcare so that they won't meet their creator much earlier than what they really desire.

Meanwhile, I am curious of the various simulations and elasticities. the major assumptions by the DOF in coming up with the magic number, P60 billion per year of additional revenue collections; ie, P60 B on top of existing tax collection from tobacco and alcohol products. Did they assume that tobacco smuggling is totally or partially curtailed?

- Nonoy

Noy,

I dont want to belabor this issue, but the actions of Alex Magno and his tribe (reacting solely to retail price signals) can very well be accomodated by, and along, one and the same demand curve. There is no real need for that curve to shift just because his group is constricting consumption due to market price changes. .Anyway, I get the drift of your argument and would now want to beg off this interesting debate. It may be well to remember that tax people feel it their duty to continually come up with measures that will keep tax revenue levels from falling, since expenditure levels are not within their immediate sphere of control. Thats within Congress's prerogatives. They know how unpopular that task is. So we can appreciate that they start off with really atorocious tax proposals, which they can then whittle down until it finally meets with public acceptance. You are doing a yeoman's job speaking for consumers. .

- Gary

Really? You assume that smuggling will ensue when we raise taxes on cigarettes? Even with the rate of tax hikes which brought Alex Magno to such fits of hilarity, cigarette prices domestically will still be much lower than those sold in other countries. When domestic prices are lower than international prices, what is the incentive to smuggle?

- Ms. H.

Tobacco Tax 4: Finding the Optimum, Not Maximum Cigarette Tax

This afternoon, I attended a round-table discussion sponsored by the Alternative Health Cluster and 3CPNet, about tobacco regulation and taxation. Venue was the Oxfam-Manila office.

There are at least three taxes imposed on cigarettes and other tobacco products: excise tax, value added tax (VAT) and local government taxes. For imported cigars and cigarettes, there is a 4th tax, import tax and duty.

The "sin taxes" or taxes on "sin" products, aka "public bads", that people are talking about, that are being discussed in Congress, refer only to excise tax. Such tax measures do not include or touch the two or three other taxes on those products, namely the VAT, local government taxes, and import tax.

Currently, there are four tiers of taxes on cigarettes in the country. The cheapest brands are slapped with P2.70 per pack, and the premium, more expensive cigarettes are slapped with P28 per pack. This multi-tier tax rates is an opening for loopholes and will definitely invite cheating in tax payment, in connivance with government tax assessors and collectors, namely the BIR people.

The important tax reform in this sector therefore, is to introduce only one tier or one specific tax for all types and brands of cigarettes, from the cheapest to the most expensive ones. Two House Bills propose a P30 per pack flat rate.

I think this rate is a rational and optimal one. Some can propose that the tax should be "as high as possible", perhaps P500 or P1,000 per pack, in order to drastically drive people away from smoking. This is not going to happen. The higher the tax, the higher the incentive to cheat, to resort to smuggling. As long as the demand is there -- people who smoke even if they are fully aware that smoking is bad for their health -- supply will also be there. So higher tax rate, higher smuggling incidence, and more people will still be smoking with cheaper, smuggled cigarettes.

So we should be looking for that "optimum", not maximum, level of tobacco tax. A P30 or P40 per pack, flat rate, should be fine. It is considered as "optimal" because (1) it will help raise tax revenues for the government -- so that income tax cut, if not income tax abolition, can be introduced someday, and (b) it will not encourage more smuggling.

Being a non-smoker (I tried smoking in the past, but my tongue simply rejects it, so I have not finished smoking even a single stick of cigarette all my life), I have little or zero sympathy for smoking. But I also recognize that people own their lives. If they wish to smoke and smoke -- and over-drink, over-eat, over-sit, etc. -- it's up to them. Somehow they should know that such abuse of their body will attract some undesirable bacteria, virus or other diseases into their body soon.

Taxation and other forms of government regulation can only achieve so much. I would add that a tax-hungry government can actually be jumping with joy (but silently, of course) if there are more people smoking because that would mean more tax revenues. So government is not the best institution to rely on to tell people to control or quit smoking. Individuals and civil society groups campaigning for tobacco control should instead go straight to the public, approach schools and universities, public and private, to spread awareness to students that smoking is not good for their health and that it can be addicting. Cut the demand, and supply will soon be cut.
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Last January 5, 2011, I wrote this:

Smokers, taxes and Pfizer

There is this interesting news report today in NYT, In Japan, Pfizer Is Short of Drug to Help Smokers. Japan's government imposed a tobacco tax hike law in December 2009, and its implementation would be in October 2010. A pack of cigarette in Japan was selling for 300 yen, about $3.60. By October 1, it jumped to over 400 yen, including 70 yen in taxes.

This tobacco tax hike plus various strict regulations and restrictions on smoking made thousands of Japanese smokers to consider quitting. It is estimated that some 130,000 Japanese die each year on average due to tobacco-related illnesses. Pfizer's Chantix was a blockbuster anti-smoking drug there. But not totally.

Prior to October 2010, Pfizer was selling the drug to about 70,000 patients a month. By September 2010, or a month before the tobacco tax hike, demand rose to 170,000 persons, and went much higher the next month. And Pfizer did not have enough supply for the huge increase in demand, resulting in many grumbling Japanese would-be-smoking-quitters.

There are two important factors why the Japanese government raised the tobacco tax, and would be raising it further in the near future. One is the high incidence of tobacco-related deaths among Japanese people. And two is the high budget deficit and high public debt that requires more tax revenues.

One may say that Pfizer is only capitalizing on the growing health consciousness of many people and the awareness to limit, if not quit, smoking. Well, that's how business works. Where there is a new demand, big or small, just supply it and make money from it.

Meanwhile, this is one of the few instances where government taxation can help promote public health.
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See also:

Tobacco Tax 1: Telecom and Medicine Taxes Too, September 15, 2009 
Tobacco Tax 2: Higher Tax + Corruption = Lower Revenue, June 06, 2010
Tobacco Tax 3: When Supply is Killed But Demand Persists, November 15, 2010

Higher taxes next year?

(Note: this is my article for thelobyist.biz today)

Taxes are indirect way of government saying to the people, “Give me your money, I can spend it better for you than you yourself.” So the higher the tax rates and the plentier the number of taxes, the higher is the level of distrust of government to the personal discretion of the people to do what they think is good for themselves.

The painting on the wall is becoming louder and louder with each passing day. The Philippine government needs more money to finance the following: (1) More money to chieve the Millennium Development Goals (MDGs), especially on MDG 2, basic education for all. (b) More money for the conditional cash transfer (CCT), especially paying the new loans from the WB and ADB for this program alone. (c) More money for universal healthcare (UHC). (d) More money for housing for the poor. (e) More money for AFP and PNP modernization. (f) More money to fight man-made warming and climate change. (g) More money to control high population growth via the proposed RH bill.

All sorts of justifications and alibi are flying left and right with one central message: the government wants more money to be confiscated from the citizens, so that the government can spend more for the citizens. Say that again?

Sometime last February this year, former NEDA Director General and former UPSE Dean Philip Medalla, presented a paper at the Bangko Sentral ng Pilipinas (BSP) on fiscal policy and mentioned that we may have to accept the reality of more taxes in the near future. I questioned him on that during the open forum, see Cut income tax movement, part 1.

And sometime in January or February this year, the government economic think tank, Philippine Institute for Development Studies (PIDS) also produced a paper that in order to attain the MDGs, there is a need to hike taxes. I criticized that PIDS paper in MDGs, taxes and PIDS.

Today, there is a news in BWorld, Government working on new tax measures. The report was referring to the DOF plan to work on the proposal by former DBM Secretary and UPSE faculty member, Benjamin Diokno, to raise taxes on 3 areas: (a) raise the excise tax on cigarettes and liquor; (b) raise VAT from 12% to 15% in exchange for a cut in income tax; and (c) raise the real property tax (RPT).

Personally, I favor the first two proposals of Dr. Diokno who was my former professor two times (undergrad and graduate) at the UPSE. Raising taxes on tobacco and alcohol products I think, is long overdue. Since the government thinks – which I disagree – that healthcare is not much personal responsibility but government responsibility, then people can over-drink, over-smoke, over-eat, over-fight, etc. and when their lungs, liver, heart and other internal organs are dilapidated, they can run to the government to demand that “health is a right.” So government should raise lots of money from tobacco and alcohol products to finance its massive healthcare spending.

On raising VAT and cutting income tax, my favorite formula is a rise in VAT from 12 to 15 percent, in exchange for an income tax rate, both corporate and personal, between zero to 10 percent flat. This need not be attained within the next five years or so. A transition period of declining income tax rate from an initial flat 18 percent (again, both corporate and personal income tax) down to flat 15 percent after say five years, down to flat 10 percent after another five to ten years, ultimately to zero, or the abolition of income tax.

I have discussed the merits and advantages of raising consumption-based taxes like VAT, excise tax and entertainment tax, in exchange for drastic cut and ultimate abolition of income tax, in the above article on Cut income tax movement, part 1.

The increase in RPT is something that I think is not wise. Government should not tax, or slap only low tax, on productive land and areas. It should instead tax idle and unproductive land. An area that is full of buildings, malls, offices and houses means thousands of jobs are created there. When people have jobs, they are not likely to run to government to ask for welfare and subsidy. Developed areas also tend to be self-reliant. Malls, commercial business districts (CBDs) and residential villages usually have their own street lighting, garbage collection, road construction and maintenance, private security, so that their demand from local government for those services is minimal if not zero.

Taxing idle lands and areas is a clear message to the owners of those lands that “Your area is not creating jobs, better pay up taxes or sell your land to other people who can make it productive and create more jobs.”

Government is coercion and is financed only by coercion, taxes and other mandatory fees and contributions. Let the coercion be kept to the minimum.