Analysis

Bleeding the Poor Dry is UP-11 Professors’ Least Concern

The 11 UP economics professors who prepared a discussion paper on the proposed 12 percent value-added tax (VAT) are definitely experts in economics. But what framework did they use in coming up with a study in support of the measure? What does one make of the arguments raised by those opposed to it?

BY DANILO ARAÑA ARAO
Bulatlat

When Congress resumes its session on April 11, pro-administration legislators are likely to push for the approval of the 12 percent value-added tax (VAT). There are now several proposals on the refinements of the VAT. Regardless of its final version, the Macapagal-Arroyo administration has already embarked on a media campaign to make the VAT acceptable to the people.

In an attempt to make the administration’s voice heard in the ongoing debate, 11 University of the Philippines School of Economics (UPSE) professors whom media called the “UP 11” prepared a treatise in support of the 12 percent VAT and proposals to make it more contributory to economic development.

A cause-oriented group branded it as using outdated data. At this point, there is a need to analyze the framework used to better appreciate why conclusions turned out to be in support of what the former deems as an anti-people measure.

The arguments raised in the 17-page UPSE Discussion Paper 05-05 titled “The Economy on a Cusp: The Proposed VAT Amendments and Their Larger Significance” only prove that those who support the increase in the VAT accept the latter as a necessary measure to, among others, raise government funds and make the tax collection more efficient. Their reformist tendencies are also exposed by the acceptance of macroeconomic policies and programs, recommending only changes that, in the view of the 11 professors who prepared the paper, would result in the perpetuation of an economy that is export-oriented, debt-driven and investment-led.

While the UPSE paper disagreed with the government’s claim that the fiscal crisis is over, it stressed the need to increase the current VAT from 10 percent to 12 percent and to broaden its coverage as proposed by some sectors, except for petroleum products and electricity generation whose inclusion must be properly timed in order not to earn the people’s ire. It also rejected any trade-off as a result of the passage of a 12 percent VAT, particularly the lowering of other direct and indirect taxes. Lastly, the paper urged Congress not to impose a multi-tier VAT rate system (i.e., different rates for particular products and services).

These conclusions are not surprising since the authors were just adhering to the original idea of a VAT as a uniform taxation system which economists Paul Samuelson and William Nordhaus described as “essentially the same as a national sales tax.” In the case of the United States, the two economists argued that VAT is a “tax on consumption and many economists think that the (U.S.) should change its tax structure toward one based on consumption and away from one based on income.”

As a uniform taxation system, it made sense for the 11 UPSE economics professors to make sure that the VAT does not have varying rates. That it called the VAT “mildly progressive” may also be attributed to their view that the VAT is collected from those who consume, which means that the more an individual buys VAT-covered products, the more he or she has to pay this particular tax. This implies that the rich who have higher purchasing power will shoulder the VAT in the end and that the poor will not be affected much.

What about the poor?

Since its implementation in 1988, cause-oriented groups and individuals have opposed the VAT given that it directly affects the poor. It covers, after all, products and services mainly consumed by them. Worse, the VAT gives an opportunity for those engaged in export to avail of tax credits since their transactions are zero-rated. In other words, the VAT is biased for exporters and this sends a message to domestic industries that in order for them to benefit from VAT, they should forget about the needs of the Filipino people and focus instead on export.

The authors of the paper, not surprisingly, did not see such situations as alarming. In proving the point that VAT is not anti-poor, for example, they argued that the VAT-covered noodles and canned sardines are not just consumed by the poor since the premium items of these are patronized by the rich. They failed, however, to provide data as to the consumption of these products along different household incomes. They also did not take into account that while the rich will indeed pay for VAT-covered goods and services they avail of, their higher purchasing power will make the impact more bearable to them. On the other hand, the poor will end up shouldering the burden of increased prices as they have less purchasing power mainly due to low wages.

As regards zero-rated VAT transactions, the authors were silent on this issue apparently because export orientation is seen as a key to development. VAT, therefore, can be used as an incentive to ensure that more local and foreign businesses will engage in the export sector.

Cause-oriented groups and individuals, however, have a different take on the matter. For them, it is ironic that the VAT penalizes local manufacturing as the processing of products through various stages are subjected to this indirect tax. The more a VAT-covered product gets developed (i.e., with more value added to it), the more VAT is collected by the government. Reading the 17-page discussion paper, this irony was glossed over and was apparently not seen as a problem.

A challenge to the UP 11

Through the paper, the authors prove that they are experts in economics and that they have studied in great length the nuances of the VAT. However, the question remains as to how much they have invested in learning the nature of opposition to the VAT. Since they accepted as a given the implementation of the VAT, they did not see the need to analyze the views of those who are calling for the junking of the VAT altogether.

Their “hard sell” of the 12 percent VAT does not take into account the nature of the VAT when it was implemented in 1988 and expanded in 1996 and the years after. The challenge at this point is for the authors to deeply analyze its impact since 1988. Perhaps only then can they truly appreciate the anti-poor character of this indirect tax and why the opposition to the VAT is growing. Bulatlat

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