The art of collecting taxes

ONLY half-way into the first 100 days in office, the cash-strapped Aquino government is already scraping the bottom of the barrel to fund projects that would deliver its promises to the people.

And the best way to fill the coffers, as a quick-fix solution suggested by several quarters – including or particularly, the Philippine Chamber of Commerce and Industry – is to again increase the excise tax rates on alcohol and tobacco products.

Fiscal managers know that alcohol and tobacco products contributed 78 percent of the P60.5-billion total excise tax collected in 2009.

And the collection from alcohol and tobacco products is expected to continue increasing, especially as there is another mandated tax increase by Jan. 1, 2011 as required under R.A. 9334 or the Excise Tax Law on Alcohol and Tobacco and Tobacco Products.

As far as this space can figure out, alcohol and tobacco products are the only businesses that are slapped with a scheduled, graduated, and increasing tax rate every two years.

No other industry has been taxed the same way in this country.

What baffles me personally is why, whenever the country needs revenues to address the budget deficit, it does not turn to any other source except alcohol and tobacco products. They bear the brunt. They are the favorite whipping boy but there are other boys to whip.

The popular, though not exactly just and reasonable, least of all acceptable reason is the belief alcohol and tobacco are “sin” products, and the official reason for bleeding them nearly dry with excessive taxes is to minimize their consumption

The question that must be asked but is never really asked, is whether or not taxing the sin products to the hilt – there is another round coming starting January 2011 – will shore up the budget deficit or plug the loophole in tax collection deficiency.

We do not think it will make a meaningful dent on the estimated P250 billion deficit in the National Appropriation measure.

Our belief is based on empirical data obtained from the Bureau of Internal Revenue.

We discovered that while alcohol and tobacco products contributed 78 percent of total excise tax collection in 2009 – total excise tax collections from tobacco, alcohol, petroleum and other products subject to such kind of tax – contributed only 5.4 percent of total government revenues for that year.

Let us stretch the argument further and assume that the excise tax on alcohol and tobacco products will be doubled. What is the result? The total collection from this source will be only 11 percent of total revenues.

Will that be enough to substantially cut the budgetary deficit? We think not.

The Aquino government claims it has the political will to do what is right and therefore good for the country. Music even to the ears of the deaf. President Aquino gave us hope when he said that.

What we are eagerly waiting for now is how the President will do it. We believe that the other better and surer sources of higher tax take is the improvement in the collection of income tax which accounts for 38.8 percent of total revenues.

The value added tax contributes 18.8 percent while duties provide a hefty 19.6 percent of the total.

Are these sources soaked? Not really. Collection of income tax is bracketed when applied on corporations. There is a percentage limit. On individuals, let us say they earned an income and must share a small portion of it with the state for their own benefit, in the end.

The implementation of the VAT is messy. It must be straightened out. Duties are worse. Inthe case of customs, the examiners or assessors are given wide leeway in the interpretation of the rates stated in the Customs and Tariff Code.

A product levied a duty of say, 15 percent, can be classified as one falling under the 5 percent duty category.

Some money in duties is lost. The bigger loss, however, is in smuggling. Where no tax is paid at all.

We took our hat off to President Aquino after we heard him say his government will first run after tax cheats and plug tax loopholes before coming up with new tax laws.

Big people in big business are getting scared. We note that it is them who always propose new tax measures or raise the existing rates.

Why? Because, if you examine the new measures or higher rates carefully, they are hardly affected.

But will the deficit be adequately addressed? Past tax measures and higher rates on existing laws do not prove that.

On the contrary, the problem of shortfall in collections compared to expenditures gets even worse.

We go back to the extremely high excise tax. As far as sin products are concerned, the obvious purpose is not just money. The government wants to help cut the smoking and drinking habit.

And incidentally, we talk only of health hazards related to cigarettes. There must be alcohol-related deaths. How many people have been killed by other people in their moments of drunkenness?

There are no statistics.

Okay so we look at the proposal of anti-smoking groups to tax cigarettes at P90 per pack. Very definitely, the consumption of locally-manufactured cigarettes will decrease.

But will that decrease be a result of kicking the smoking habit? Definitely not. Even without that proposal at work, the market is already flooded with imported cigarettes that are not taxed.

They come in through the duty-free shops. I buy Marlboro Lights from a store in Harrison Plaza. I pay P120 per pack. The left-upper hand side of the pack states “for duty free sale only.”

The store I buy my cigarettes from is not a duty free shop. The cigarette I smoke is made in Switzerland.

If the tax on cigarettes is slapped P90 per pack, the retail price of local cigarettes will be higher than the duty-free cigarettes.

The smugglers make money. Smoking is not reduced. Government collection does not increase. On the contrary it can go down.

We take the case of impoverished Romania. Reuters reported “criminal gangs and impoverished communities near borders with countries where prices are lower – Serbia, Macedonia, Moldova, and Ukraine – have taken to smuggling which has wiped out gains from higher excise duties.

I hazard the guess that Health Secretary Enrique Ona clarified that he never made commitment to support the proposal of anti-smoking groups because he knew that higher taxes will not necessarily reduce smoking.

I remember the days of President Diosadado Macapagal when smuggled cigarettes called “blue seal” was most prevalent. The contraband was transported to Philippine shores by “kumpits” which were faster than the cutters of the Philippine Coast Guard.

Let us not forget that smuggling creates a bargaining situation between the smugglers and the law enforces. That is why smuggling will never be stamped out. That is why local industries are brought closer to the grave. The cigarette industry is next in line. But smokers will never kick the habit.


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