In recent weeks there has been a great deal of activity in Congress, the business community and the media regarding this country’s tax system. The proposals and opinions have been classified as reformist and have been said to have been offered in the interest of making the Philippine tax system more equitable and competitive with the tax systems of countries in East Asia, particularly Southeast Asia.
The proposed changes differ in objective and approach, but they have one thing in common. They will have the effect of reducing government revenues from the now-taxable activities of Filipinos, whether institutional or individual. Thus, some of the business-directed corporations and the proposals pertaining to individuals would have Congress amend the National Internal Revenue Code so as to lower income tax and value-added tax rates and entirely exempt some incomes from taxes.
The allegedly reformist proposals proceed from two conceptual sources. One, based on equity, suggests that certain individuals who are currently taxable should be made to pay less taxes or should pay no taxes at all. The other conceptual source, which is economics-based, suggests that the government will derive more tax revenues if business establishments – especially corporations – were made to pay reduced taxes or were given tax exemptions.
Undoubtedly, theoretical and empirical bases exist for some–but definitely not all–of the proposals. Will Filipinos whose incomes are currently taxable pay greater magnitudes of taxes? Possibly, there is no certainty of that. With a regionally more competitive tax regime, will Filipino corporations perform better and generate more corporate income tax payments than they now do? They well might, but, again, there is no guarantee of that happening.
The one certainty that exists is a a country’s tax effort. At any given time, every country has a tax-effort score. The Philippines is no exception. And how is a country’s tax effort computed? The method is really very simple. A government’s tax revenue is divided by its gross domestic product. For 2014 the Philippines’ tax effort was computed to be around 14 percent of GDP. The figure is an improvement on the past, when this country’s tax effort seemed to be stuck at 12 percent of GDP.
To whom is knowledge of a country’s tax-effort level important? It should be important, first and foremost, to that country’s government. Surely, the Aquino administration, with its Daang Matuwid orientation, should want to know how good a job the Department of Finance is doing. The knowledge of how much of a country’s GDP its tax establishment is collecting for the government is likewise important to that country’s creditors – the multilateral creditors, like the World Bank and the Asian Development Bank, as well as the bilateral (governments) and commercial creditors. Potential investors, too, will be keen to know how fiscally efficient – and, therefore, economically stable – that country is.
The rationale underlying the desire to know the ratio between a country’s GDP and its government’s revenues is this. A country that is able to generate most of its development financing requirements from internally generated sources has less need to borrow from foreign creditors and will thereby be more financially stable. In this regard comparisons – especially with other regional countries – is inevitable. The World Bank, ADB and other credit sources are aware that countries like Singapore, Thailand and Malaysia enjoy tax-effort levels of 20 percent and above.
Which brings us back to the current discussions on so-called reform of the Philippine tax system.
If the management of a country’s tax system were likened to a ball game, the advice that would have to be given to the proponents of, and commentators on, the tax proposals now before Congress is, keep your eye on the ball. That ball is this country’s tax effort. Or, if one were to put it in Bill Clintonesque language, it’s the tax effort, stupid.
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