Ate Glue is right about VAT
DEMAND AND SUPPLY By Boo Chanco
Friday, July 25, 2008

I respect Mar Roxas a lot more than Ate Glue. But in this case, I think Ate Glue is right about VAT and Mar Roxas appears to be politicking. Reducing VAT or removing it, isn’t going to bring down oil product prices at the pump. Worse, a respected local economist, who isn’t an Ate Glue fan either, expressed the view that “a major U-turn in VAT can cause a significant widening of the spreads on the Republic’s sovereign bonds (which will cause the peso to fall and domestic interest rates to rise).”

The VAT cut is not likely to have a real impact for example, in the case of diesel. Demand for the product is increasing and not just because more and more BMWs, Audis, Benzes and SUVs are hitting the road using diesel. As such, any reduction or elimination of VAT will just allow the “oil company take” to go up. Supply of diesel is not likely to increase because oil companies today look at diesel as a money losing product with substantial politically induced under recoveries.

The only thing keeping the oil companies from increasing diesel prices even more than the peso or two per liter per week is government pressure. Remove or reduce the VAT and they can increase their take at the pump. And why allow the rich to get a free ride?

This VAT debate reminds me of a similar debate in the US. Hillary Clinton and John McCain wanted a reduction in gasoline taxes in reaction to pump prices going over $4 a gallon. It was Barack Obama who pointed out that “the proposal could actually raise prices by increasing demand. And by taking revenue away from the Highway Trust Fund, which finances road and bridge repairs, the gas tax holiday could delay badly needed improvements and cost thousands of construction jobs.”

Economist Paul Krugman, who isn’t exactly a fan of Obama, agreed with the senator. “Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.”

In our current case, it is important for us to remember that the VAT was instituted precisely to address the country’s fiscal health. This is a long- term proposition. We cannot turn back every so often for short term political expediency.

Besides, the high price of oil is not a short-term crisis that a knee jerk response can cure. This is a long term reality we must learn to live with. The era of cheap oil is over. We must address this reality by adopting serious lifestyle changes that will dramatically reduce demand for oil.

In fact, we should use the 12 percent VAT as a means not just to increase potential fiscal revenues but as a means to induce appropriate consumer behavior modification, e.g. forcing energy conservation, energy use efficiency, alternative fuel search, etc. The Europeans have long used high oil product taxes to make the people put the proper value on a fast depleting natural resource. This is why the Europeans are better prepared than the Americans to manage this era of rising oil prices. Asian governments, on the other hand, had to withdraw subsidies they foolishly had on oil product prices.

The other point is… removing VAT on oil would benefit the rich far more than the poor. The rich consume far more oil than do the poor. The benefit to the poor would, in fact, be marginal. Of the total oil consumption, the rich and upper middle class account for 40.3 percent; the lower middle class, 54.3 percent; and the poor, a mere 5.4 percent, according to the latest available family income and expenditure data. If we want to help the poor, use oil VAT proceeds to put up programs that directly benefit them like school feeding, diesel discount coupons for public transport and population control programs.

And while it is fashionable to claim “a windfall of excess revenues” on the part of government because as oil prices increase, so would ad valorem VAT collections, this may not happen in reality. VAT on oil is projected to be P18.6 billion above target for this year (it was P9 billion in excess of target in the first half). But with industries slowing as people consume less, as people use cars less, and profit margins are squeezed (some companies will even suffer losses), the tax base falls, so the “excess revenues” from the VAT on oil simply offsets the likely below-target performance elsewhere.

I have been told that the minimal 0.6 percent improvement in tax collection in the first quarter includes the higher-than- target VAT collections on oil. So without it, there would have been a shortfall. The downward adjustment in economic growth by the government itself indicates the difficulty to be expected in meeting targeted revenues of P1.109 trillion.

Without the “excess revenues” from the oil VAT, one analysis I read estimated that collection would be short by about P19 billion this year, even if we assume that the minimal improvement in tax collection efficiency in the first quarter is sustained. And if the oil VAT is entirely removed, the shortfall would be P73 billion (the originally projected yield of P54 billion plus the P19 billion shortfall in other taxes).

In short, it was pointed out to me, the government would have already incurred a budget deficit even before the contemplated extra spending of P93.6 billion just to grow the economy by a modest 5.7 percent. The risk of a fiscal crisis increases, a risk we cannot afford to take.

Stimulus or dole outs?

The other concept I agree with Ate Glue is the need to help the bottom of our pyramid even if it means actually giving them some cash to help them survive the harsh realities of our times. As in the US, our economy can use some stimulus through a well directed application of resources to those who need it most.

But I am concerned about two things: reinforcing a mendicant mind-set among the beneficiaries and most important, how to prevent such funds from being misused by an administration notorious for using such resources for political purposes. The ghost of JocJoc’s fertilizer scam still haunts the nation’s collective nightmare.

Still, I can appreciate the point of Joey Salceda when he proposed “to build a Noah’s Ark of basic needs to shelter the poor so no one would be left behind once the surging waters of economic adversities sweep over our shores. This combines income augmentation targeted at poor and middle class families and increased public goods spending on agriculture, education, health and housing.”

But there is also a lot of merit to suggestions that instead of mere dole-out, the administration must only give money for work done, not just for nothing. This demeans a person, and does not respond to the root problems of poverty.

Thus, it is proposed that instead of the Meralco bill type of dole out, jobs should be created for them like repairing roads, filling potholes, building classrooms, putting in small irrigation dams and bridges, and many more. Something like the Emergency Employment Administration (EEA) of Ate Glue’s father, the late President Diosdado Macapagal. This approach would have the additional benefit of not just a short-term stimulus to the economy as people spend that money, but a long-term improvement in the infrastructure for the economy to grow.

Ate Glue is right about VAT and on the need to directly help the poor cope with rising prices. But her problem is her sub zero credibility. Anything she does is suspect to a large majority of Filipinos. But that’s her fault too because she can’t seem to act as a crisis leader should — as a statesman above anything else.

i think may ara pa man dutay nga ga salig sa iya ah. i am one of them..