Transcript Slide 1

4th Annual BSP-UP Professorial Chair Lecture
LECTURE NO. 4
Financing the Aquino Administration’s Fiscal
Program: Better Tax Administration and New Taxes?
Dr. Felipe Medalla
BSP-UP Centennial Professor
in Money and Banking
Financing the Aquino Administration’s Fiscal Program:
Better Tax Administration and New Taxes?
BSP Professorial Chair Lecture
Felipe M. Medalla
UP School of Economics
February 22, 2011
Basic Question in Public Economics:
Why is it so hard to collect taxes?
• Free Rider Problem: Unlike private goods and services where the
quality and quantity of goods and services that the consumer gets
are directly proportional to how much he pays, the quality and
quantity of public goods and services that a citizen/taxpayer gets is
very weakly related to how much taxes he pays.
• Information Asymmetry: Each taxpayer is better-informed about his
own sales, income and expenditures than anyone else.
(“Modernization” of the economy might aid tax collectors since
access to reports and information that economic agents share with
each other will reduce information asymmetry. For example,
holding sales and profits constant, it is “easier” to collect taxes from
publicly listed corporations than from family-controlled
corporations or businesses. “Tax handles” is the label Musgrave
gives to this phenomenon.)
• Weak Justice System: Tax-evasion is high-reward and low-risk
activity
What the Data Tell Us
• GDP is not a very reliable basis for bench-marking BIR collections.
(Different bases for target setting for each important revenue
source. GDP includes imputations for non-market activities.)
• Tariff reductions and international trade agreements significantly
reduced BOC’s capacity to raise revenue.
• Taxation of Corporations and the Withholding Systems account for
all the gains. (Adjusting for inflation and population growth,
collection from individuals and businesses that are not covered by
the withholding systems stagnated.)
• Inflation, decline in interest rates and the Asian Financial Crisis
(AFC) have reduced the ratio of BIR collection to GDP
• The Aquino Administration’s medium-term fiscal program requires
an increase in tax effort by 4 percentage points. That may not be
achievable without new revenue measures.
Government must increase spending on investments in infrastructure and
human capital. To some extent, it can finance its programs with higher tax
collections and increases in its debt stock without threatening fiscal
sustainability.
National Government's Prposed
Medium-Term Fiscal Program (% of
GDP)
Debt-GDP Ratio
70
25
60
20
50
40
15
Expenditures
Revenue
10
30
Deficit
20
5
0
2009 2010 2011 2012 2013 2014 2015 2016
10
0
2009
2010
2011
2012
2013
2014
2015
2016
We have had seven consecutive years (and counting) current account surpluses. Before the seven straight
years of surplus, there were only two years (1986 and 1998) when the current account was in surplus. In both
cases, the surplus was the result of huge drops in imports brought about by a huge drop in the growth rate of
GDP. The current account surpluses are effectively excess savings that government can tap if it has credible
fiscal plan.
Real GDP Growth and the BOP Current Account Balance (CAB): 1975 to 2009
10000
20%
8000
15%
6000
10%
4000
5%
CAB from BSP Webiste, New Concept
Mil. US$ 2000
0%
CAB from BSP Website, Old Concept
CAB from 1989 Phil. Statistical Yearbook
GDP Growth (right scale)
0
-5%
-2000
-10%
-4000
-15%
-6000
-20%
It should be noted, however, that off-budget expenditures account for as
much as the NG deficit in the increase of the National Government’s Debt
Stock. (PSALM alone is likely to add seven billion dollars to the NG’s debt.)
Evolution of National Gov’t Debt
5000
4500
4000
3500
Actual Debt
3000
Predicted Debt (based on Exchange Rate
Changes and NG Deficit)
Billion Pesos 2500
Debt Not due NG Deficits and Exchange Rate
Changes
2000
Cumulative Deficit
1500
1000
500
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
One of the reasons why the official budget is not the main source of fiscal
non-sustainability is that , with a two or three year lag, expenditures get
compressed when revenue targets are not met. (But expenditure
compression is precisely what the Aquino administration wants to avoid.)
Trends in Key Fiscal Variables: Dec 1986 to Sept 2010
(Nominal Values deflated by CPI and Population, 12
Mo. Running Total)
Real NG Tax Revenue and Primary Expenditures Per
Capita
14,000
14,000
12,000
12,000
Per Capita Real
National
Government Tax
Revenue
10,000
6,000
Expon. (Per Capita
Real National
Government Tax
Revenue)
4,000
Expon. (Per Capita
Real Primary NG
Expenditures)
2,000
Real NG Tax
Revenue Per
Capita
8,000
6,000
Real NG Primary
Expenditures Per
Capita
4,000
Real NG Tax Rev.
per Capita ,
Lagged 2 years
2,000
0
1986:12
1989:02
1991:04
1993:06
1995:08
1997:10
1999:12
2002:02
2004:04
2006:06
2008:08
2010:10
0
1986:12
1989:12
1992:12
1995:12
1998:12
2001:12
2004:12
2007:12
Pesos Per
Capita Per
Year
Per Capita Real
Primary NG
Expenditures
8,000
10,000
BIR and BOC tax-effort ratios are now both two to three percentage points lower than
their previous peaks. But that does not imply that tax effort can be increased by four
percentage points (relative to GDP) without new tax measures.
Tax-GDP Ratios
Tax-GDP Ratios Relative to Peak
Values
14.0%
2009
2006
2003
2000
1997
1994
1991
1988
12.0%
1985
1982
0.0%
-1.0%
10.0%
-2.0%
8.0%
6.0%
BIR
Collections/GDP
-3.0%
BOC
Collections/GDP
-4.0%
-5.0%
4.0%
-6.0%
2.0%
-7.0%
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
0.0%
-8.0%
BIR/GDP minus
peak value
BOC/GDP-Peak
Value
The growth rate of GDP after the Asian Financial Crisis was higher than the growth rate of the
gross sales of the Top 1000 and Top 5000 corporations.
Comparison of Nominal GDP Growth with the
Revenue Growth of Large Corporations(Compounded Annual
Growth Rate)
Revenue of Top 1000
Revenue of Top 5000
GDP
GDP vs Top 1000
GDP vs Top 5000
CAGR: 1996 to 2008
9.2%
9.2%
10.8%
1.6%
1.6%
CAGR: 1998 to 2008
8.5%
8.7%
10.8%
2.2%
2.1%
A Large part of GDP is imputed, not measured. Estimates are based on very old, possibly obsolete,
census frames and parameters. See quote below from a study on the Philippine National income
accounts done by Ross Harvey, an expert in national income accounting. (“Assessment Report on the
Philippine System of National Accounts” 25 September, 2008).
• “The general approach to compiling estimates for the
unorganized sector is to derive an estimate of employment
not covered in the establishment collections and to assume
that value added per employee in the unorganized sector is
the same as that for small establishments operated by a sole
proprietor.”
But even if one uses a less demanding measure of revenue performance (revenue
adjusted for inflation and population growth), BOC collections are now just about the
same as they were 25 years ago in spite of RVAT. Tariff reductions and free trade
agreements have reduced revenue from import duties.
Real Per Capita BOC Collection (pesos, 2009 price level)
6000
5000
4000
A. Import Duties
3000
B. Import Taxes
V. DUTIES AND TAXES ON IMPORTS
2000
1000
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0
VAT, the corporate income tax, and withholding systems account for all the increase in
BIR collections. (But this part of the tax system is also the most vulnerable to
economic and financial crisis.) Per capita real excise tax collections declined
significantly and per capita real collections from the rest of the system barely
increased.
BIR Real Per Capita Collections
by Type of Tax/Method of
Collection (pesos, 2009 price
level)
Distribution of BIR Collections by
Type of Tax/Method of
Collection
90.0%
80.0%
12000
a. Corp./Co.
Income Tax
10000
b. Withholding
Systems
8000
c. VAT
6000
a+b+c
4000
Excise Taxes
2000
70.0%
Corp. Inc
Tax+VAT+W/holdin
g System
60.0%
50.0%
Excise Taxes
40.0%
30.0%
Rest of System
20.0%
10.0%
2009
2006
2003
2000
1997
1994
1991
1988
0.0%
1985
Rest of the
System
1982
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
0
Real per capita collections of taxes on net income and profits are cyclical but
rising. In spite of RVAT, real per capita collection of domestic taxes on goods
and services on domestic goods and services are stagnant after cyclical effects
are factored out.
Real BIR Collections Per Capita by Type of Tax
(Pesos, 2009 Price Level, GNP IPIN deflated)
9000
8000
I. TAXES ON NET INCOME AND PROFITS
7000
II. TAXES ON PROPERTY
6000
III. TAXES ON DOMESTIC GOODS & SERVICES
5000
IV. OTHERS
4000
3000
I.A. TAXES ON NET INC AND PROF: Comp.,
Corp, & Enterprise
2000
I.B. TAXES ON NET INC AND PROF:
Individual
1000
I.C. TAXES ON NET INC AND PROF: Bank
Dep and Tbills
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
Revenue from excise taxes have been eroded by inflation (and
healthier life styles?) Shift from domestic production to imports
explains a very small part of the decline in BIR excise tax collections.
Real Per Capita Taxes on Goods
and Services (Pesos, 2009 Price
level)
Real Excise Tax Collections Per
Capita (pesos, 2009 price level)
3000
3000
2500
A. VAT
2500
2000
2000
B. Selective
excise on
Goods
1500
C. Selective
tax on services
1000
500
D. Franchise
Tax (property
tax)
BOC
BIR+BOC
1000
500
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2009
2006
2003
2000
1997
1994
1991
1988
1985
0
1982
0
BIR
1500
Due to falling interest rates, FWT on T-Bills on interest on bank deposits and
T-bills have declined (in spite of the rise in bank deposits and outstanding
government debt.)
Real Per Capita Tax Collections: Bank Deposits and Treasury Bills
1000
900
800
700
600
500
Bank Deposits
Treasury Bills
400
300
200
100
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
It took ten years for corporate income tax revenues to recover from
the AFC, but the growth of real per capita revenue from coporate
withholding at source was high and uninterrupted by the AFC.
Real Per Capita Taxes on Income
and Profits: Company, Corporate
and Enterprise
5000
Real Per Capita Taxes on Income
and Profits: Company, Corporate
and Enterprise (1989=100)
700
4500
600
4000
3500
3000
A.Company,
corporate
enterprise
2500
1. Corporate
500
A.Company,
corporate
enterprise
400
1. Corporate
300
2000
2. Withholding at
source
1500
2. Withholding at
source
200
1000
100
500
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
2009
2006
2003
2000
1997
1994
1991
1988
1985
0
1982
0
Withholding on wages account for all the gains in
revenues from taxes on individual income.
Real Per Capita Taxes on
Individual Income and Profits
3000
Composition of Taxes on
Individual Income and Profits
90.0%
80.0%
2500
70.0%
I.B. Individual
2000
60.0%
1. Individual
50.0%
2. Withholding on
wages
1. Individual
1500
2. Withholding on
wages
3. Capital Gains
1000
4. Withholding at
source
500
40.0%
3. Capital Gains
30.0%
4. Withholding at
source
20.0%
10.0%
2009
2006
2003
2000
1997
1994
1991
1988
1985
1982
2009
2006
2003
2000
1997
1994
1991
1988
1985
0.0%
1982
0
Like it or not, VAT is a very important
pillar of our tax system.
Real VAT Collections Per Capita
6000
5000
4000
BIR
3000
BOC
BIR+BOC
2000
1000
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009