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.

Decentralization 4: Local Taxes and Provincial Airports

Posting here two related articles...

(1) Local Taxes and Decentralization

The Congressional Planning and Budget Department (CPBD), the economic think tank of the Philippines’ House of Representatives, recently produced a paper entitled “Public Sector Government and Decentralization in the Philippines”, authored by the office Executive Director, Dr. Romulo “Jun” Miral, Jr. CBPD was my former office for 9 years in the last decade, and Jun is my friend.

The paper was reported in at least one newspaper, “House think-tank pushes stronger taxing powers for local governments” by Iris Gonzales, May 10, 2009.
http://www.philstar.com/Article.aspx?articleId=465956&publicationSubCategoryId=66

Jun argued that local governments must be given stronger taxing powers or at least commensurate to the expenditure functions assigned to them, that while major expenditure functions have been devolved to local governments, the National Government (NG) continues to have exclusive authority over productive and broad based taxes.

Jun wrote further, “Government resources continue to be centralized, resulting in common pool problems and local governments remain very dependent on National Government transfers and the direct provision of devolved services. This undermines local autonomy and government accountability.”

The NG collects huge amount of money from income tax (personal and corporate), value added tax (VAT), import tax, excise tax (alcohol, tobacco and petroleum products, the so-called “public bads”), documentary stamp tax, franchise tax, travel tax, motor vehicle tax, etc. The various NG agencies also collect their own charges and fees – passport fee, driver’s license fee, NBI fee, police clearance fee, terminal fee, irrigation fee, etc.).

Local government units (LGUs) collect mainly real property tax (RPT), community residence tax (individual and corporations), business license taxes and fees (fire department fee, health and sanitation permit fee, garbage collection fee, building and electrical permit fee, business plate fee, etc.).

If one will visit a typical business enterprise (say a restaurant or computer shop), one will notice about a dozen compliance certificates from various NG agencies and LGUs, and business plates. The business plates issued by the barangay or village, and city or municipality, would normally include the name and face of the barangay captain, and city or municipal Mayor, respectively. That will give someone who is aspiring to become a start-up entrepreneur, the maze of government bureaucracies that he/she will face every single year. Consider also the monthly, quarterly and annual taxes and fees to be paid to all of those agencies, the cost of compliance, and one can possibly be terrified and would rather decide to operate as an informal and small or micro enterprise.

Back to LGU-NG taxation. Jun is proposing that to achieve a more effective government decentralization, the NG and LGUs can do joint taxation of major taxes such as income tax. I am glad that unlike many economists in the NG and multilateral institutions like the IMF, WB and ADB, Jun did not propose further gouging the pockets of Filipino taxpayers. Instead, he proposed that “To accommodate the additional taxes to be imposed by local governments without increasing the overall burden on taxpayers, NG tax rates could be commensurately reduced.”

I would add that some NG taxes should be abolished or drastically cut. This will have two important positive impact. First, it will put the Philippines on the league of modern Asian economies who are attracting big investors and entrepreneurs via tax competition – Hong Kong, Singapore and Dubai. Malaysia and Brunei are attempting to join this league too. Second, the “savings” by individual and corporate taxpayers will allow them some breathing space to pay any additional taxes and fees to be collected by LGUs. A competition among LGUs can happen – who has the best peace and order situation, who has the cleanest streets and parks, who has the most competitive and reasonable local taxes, etc. And people and firms can “vote with their feet” by moving to LGUs that offer the most business-friendly policies and projects. And leave those cities or municipalities or provinces whose LGUs have parasitic and extortionary policies.

But this is easier said than done. Many agencies in the NG, especially the Office of the President and Congress, are experienced parasites. They will never let go of those multiple and duplicating taxes and fees that feed their entrenched bureaucracies and give them enough arbitrary powers that force entrepreneurs to kneel before them and make “amicable settlements”.


(2) Globalization and Provincial Airports

While most people have elaborate definition of globalization, I have a simple one: Globalization = Mobility. Mobility of people, capital, technology, culture, sports and music across the country and across the globe.

Such mobility of people, their goods and services across islands, countries and continents, is facilitated by various modes of transportation – land, sea and air. For long distances covering hundreds or thousands of kilometers away, air transportation is the most cost effective and time saving. For the Philippines, an archipelago and geographically detached even from its nearest neighboring country, the presence of various airlines – both domestic and international, is very crucial. By extension, the presence of various international airports is equally crucial. International airlines can only come in if there are good and reliable international airports that can handle their huge airplanes and huge volume of passengers and cargo.

For a country with more than 7,000 islands and a population of nearly 92 million (12th largest in the world), and an estimated 8 million to 9 million living abroad, there should be plenty of international airports across the country. Currently there are only nine: 4 in Luzon (NAIA, Clark, Subic and Laoag), 3 in Mindanao (Davao, Gen. Santos and Zamboanga) and 2 in the Visayas (Mactan-Cebu and Kalibo). Some of these international airports do not get frequent international flights, like the one in Kalibo.

I think more international airports should be developed out of existing domestic airports. In particular:

1. Tuguegarao airport to serve the Cagayan Valley region and neighboring provinces in the Cordillera region.

2. Legaspi or Naga airport to serve the Bicol region which has a big population too and has several island-provinces like Masbate and Catanduanes.

3. Iloilo airport to serve Panay Island’s four provinces plus the island-province of Guimaras. Kalibo airport serves mostly the tourists going to Boracay island. It’s not a big and modern airport but it has a long runway that can accommodate big airplanes, unlike the airport in Caticlan.

4. Bacolod-Silay airport to serve Negros Occidental and Negros Oriental provinces. The former is among the five biggest provinces in the country in terms of population outside of Metro Manila.

5. Tacloban airport to serve the Eastern Visayas region and its six or seven provinces.

6. Cagayan de Oro or Butuan airport to serve the Northern Mindanao and Caraga regions, including the island-province of Camiguin and Siargao island. Both islands are famous for tourism.
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By saying international airports, the above-proposed airports need not serve flights going to and from the US, Europe and Australia. What is important is to accommodate flights going to and from the country’s selected Asian cities like Hong Kong, Singapore, Seoul, Tokyo, Taipei, Bangkok and Kuala Lumpur. One or two flights a week for any or all of those Asian destinations would be enough. And if one is going to several destinations in North America, Europe, Australia-NZ, South America and Africa, all those Asian cities mentioned have direct flights to the big cities of the above-mentioned continents.

Recently, the Regional Development Council of Western Visayas asked the Civil Aviation Authority of the Philippines (CAAP), formerly the Air Transportation Office (ATO), to open the Iloilo airport to international flights. The Council also told CAAP that it wants to retain at least 10% of the P200 per passenger airport terminal fee. I have been to Iloilo airport several times as my wife is from Iloilo City, and I can say that this airport is modern enough – typical glass and steel structure of modern architectures, and should be able to handle limited international flights. For now, I have several points to make.

One, if a national bureaucracy like CAAP will drag its feet for long, like in deciding whether to allow international flights at the Iloilo airport or not, then local governments will have no way of implementing their collective plan and program. This is another proof that decentralization of political and economic powers is not yet fully implemented. Certain bureaucracies in Metro Manila still decide what is good or bad for those in the provinces.

Two, CAAP gets the entire terminal fee collections of provincial airports. I did not know this before. I thought ATO, now CAAP, gets only a certain percentage from the terminal fee collections from those provincial airports. This is a huge collection, actually. Last year, toll and terminal fee collection was P215 million, and is projected to rise to P236 million.

Three, airports need not be owned and operated by governments. A consortium of private corporations including airlines should be allowed to buy and develop existing airports, or create a new one. Anyway, there are several government agencies that can regulate such privately-owned airports, including the CAAP, the provincial and city or municipal governments, and perhaps the Civil Aeronautics Board, among others.

To help encourage provincial and regional development, let the local government units compete with each other in developing and modernizing their own infrastructure facilities (roads, airports, seaports, etc.), improve the peace and order situation, and even engage in tax competition when necessary. The goal is to attract plenty of investors and visitors who will create plenty of jobs and entrepreneurial opportunities for their people.

The continuing centralization of power in the hands of certain national government agencies is a hindrance to the development of some local governments, a hindrance to faster globalization and economic integration of the people in the provinces with other cities and countries around the globe.
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See also: Decentralization 3: Challenges to Local Government, November 18, 2008