VAT Hike Will Stir Social Unrest – Economist
‘Government has lost its power to tax’

A noted nationalist economist said that an increase in the value-added tax (VAT) rate from the present 10 percent to 12 percent will stir up social unrest. Because of plunder, anomalies, and economic mismanagement, the government “has lost its power to tax,” he also said.

BY ALEXANDER MARTIN REMOLLINO
Bulatlat

A noted nationalist economist believes that an increase in the value-added tax (VAT) rate from the present 10 percent to 12 percent will stir up social unrest.

Reacting to a recent study by the socio-economic think tank IBON Foundation showing, among others, that a VAT increase will hit the poor hardest, Dr. Alejandro Lichauco said in an interview with Bulatlat that he agrees with the observation. “Of course, there is no question about that because that is an indirect tax,” Lichauco said. “It is going to hit the consumers, regardless of their income bracket.”

Lichauco is a long-renowned economist who has written several books and papers promoting nationalist industrialization and opposing U.S. neocolonialism.

The economist’s argument is similar to the views expressed in a Jan. 17 position paper of the Bagong Alyansang Makabayan (Bayan or New Patriotic Alliance). In its paper, Bayan said that a VAT increase will trigger widespread price increases “affecting the most basic commodities and services,” which would be significant since the tax covers a big part of daily consumption and expenditures.

The VAT-liable sectors include food products (processed meat, canned fish, coconut and vegetable oil, bakery products, noodles, milk, dairy products, coffee, sugar); clothing, footwear, tannery and leather products; drugs and medicine, furniture, pulp and paper; glass and glass products; cement, steel, iron, wood and most construction materials; electrical lamps and equipment; machinery and equipment both for manufacturing and agriculture; wholesale trade and retail trade; pawnshops; restaurants, cafes and other eating and drinking places; employment and recruitment agencies; motion picture production; hotels and motels, telecommunications (including landline, post-paid and pre-paid mobile phone services.)

In a separate phone interview, Bayan secretary-general Renato Reyes, Jr. said a VAT increase would enhance the country’s “regressive” tax system. “It is a system in which large corporations enjoy tax exemptions,” he said, “while the ordinary citizens carry heavy tax burdens.”

Lichauco also dismissed as “crazy” the recent claims by businessman Raul Concepcion, who chairs the Consumer and Oil Price Watch (COPW), that a VAT increase will have only a minimal effect on the prices of consumer goods.

Concepcion’s arguments are being cited by Malacañang in its efforts to convince the public of the VAT hike’s supposed merits. “These are all based on research and not on emotion and grandstanding of others that we know what kind of agenda they are pushing,” Press Secretary Ignacio Bunye had said in a Jan. 30 radio interview.

Lichauco said however that because a VAT increase will hit the poor the hardest it may spawn social unrest. “You cannot tax hungry people,” he pointed out.

Political analyst Luis Teodoro of the Center for People Empowerment in Governance (CenPEG) agreed with Lichauco. “A VAT increase would trigger price increases everywhere, which will hit the masses,” he told Bulatlat. “So I absolutely agree.”

Social consequences

Lichauco said that the possible social consequences of a VAT hike may be the reason the American Chamber of Commerce of the Philippines (AmCham Philippines) came out in August 2004 with a position paper also opposing a VAT hike.

In the AmCham Philippines paper, Cirilo Noel, who chairs the business group’s Taxes and Tariff Committee, said that a VAT increase will “weigh heavily” on the poor sectors of Philippine society.

“Increased VAT rate merely translates to higher prices of goods to consumers and end-users,” Noel wrote. “With the current minimum wage rates, it is highly doubtful if the Filipino wage earner could absorb price hikes to be triggered by the increase in VAT as well as other taxes.”

A recent IBON study showed that the average daily cost of living for a family of six – the average Filipino family – amounts to P492.19 ($8.79 based on a $1:P56 exchange rate). IBON used data from the National Statistics Office for its study.

Conversely, the daily minimum wage amounts to only P202.59 on the average nationwide - P289.60 short of the national average for the daily cost of living for a family of six – based on data from the National Wages and Productivity Commission (NWPC).

Lichauco said that even foreign investors are going to be hit hard by a VAT increase. “If government insists on a VAT increase, the political and social climate will become more unstable, so how can they operate?” he explained.

The results of the Social Weather Station (SWS) survey for the last quarter of 2004 revealed a prevalence of pessimism about the economy – a phenomenon that previously occurred only in March 2003, the beginning of the U.S.-led attacks on Iraq; September-October 2000, the explosion of the “Juetenggate” scandal involving then President Joseph Estrada; and 1984, a year after the assassination of Sen. Benigno Aquino, Jr. Estrada was ousted through a popular uprising in 2001 – thus repeating the 1986 fate of Ferdinand Marcos, who was president in 1984.

The results of an IBON survey for end-2004 also revealed that 79.89 percent of the respondents rated President Gloria Macapagal-Arroyo’s performance as “unsatisfactory.”

No more taxing power

Asked to comment on the Malacañang line that the VAT hike is needed to raise revenues and rescue the country from the fiscal crisis that gripped it last year, Lichauco said:

“What everyone needs to understand is that government has lost its power to tax. After all the plunder committed, all the anomalies, the mismanagement of the economy, it has no more power to tax.”

Reyes agreed with this reasoning. “The government has no more moral authority to go on taxing the people, because taxes do not go to productive use: they instead go to debt servicing and bureaucratic corruption,” he said.

Foreign debt payments eat up as much as 40 percent of the annual budget. Rep. Eduardo Zialcita (1D Parañaque City, Lakas-Christian Muslim Democrats) estimates that with a P3.35-trillion foreign debt, every Filipino now owes P40,000 to international creditors. He further computes that a renegotiation of the country’s odious loans could generate an additional P200 billion for the government.

A 2004 study by the United Nations Development Programme (UNDP) placed the yearly revenue losses from corruption at 13 percent of the national budget. However, the National Tax Research Center (NTRC) estimates annual corruption losses at 20-30 percent.

Former Finance Secretary Juanita Amatong also revealed last year that in 2003 alone, the government lost P229.4 billion in potential revenues due to tax incentives for large corporations. IBON, for its part, estimates an annual loss of P100 billion in potential government revenues due to tariff removal policies imposed by the World Trade Organization (WTO).

Meanwhile, yearly losses due to tax leakages amount to P215-P285 billion.

“Of course we need to raise revenues. But if they want to raise revenues, they should tax the rich. Why tax the poor? Is it their fault that the government is bankrupt?” Lichauco said. Bulatlat

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