There is no country in this world where wealth is distributed equally among its citizens, with the degree of wealth disparity varying widely from country to country. Since the tax system is non-authoritarian governance’s approach to attaining a more even distribution of national wealth, democratic governments try to structure their tax systems so as to make their rich citizens less rich and their poor citizens less poor.
The way to do that in a non-confiscatory way is to make the government revenue system rely more on taxes that target what citizens earn and less on taxes that target what citizens buy. In other words, let the tax system be directed more toward incomes (income tax) and less toward consumption (excise taxes).
The reason for the profitability of taxes on income to taxes on consumption should be obvious even to those who are not considered as taxation specialists. The tax rates embodied in the income tax table of the National Internal Revenue Code (Tax Code, for short) tax income-earners according to the magnitude of their income—more heavily as income rises—whereas an excise tax on a piece of merchandise or a service has the same financial impact on all consumers, whether they belong to D/E group or live in gated communities. In short, income taxes differentiate; excise taxes don’t.
This is why the adjectives “progressive” and “regressive” are used to describe taxes on income and taxes on consumption. By taxing high incomes more heavily than low incomes, taxes directed at incomes promote progress toward reduction of wealth maldistribution. Taxes directed at consumption produce the opposite result; by effectively taking more money from the poor than from the wealthy, excise taxes regress away from the wealth-redistribution goal. The tax on a liter of LPG or 10 kilowatt-hours is more hurtful to the pocket of Juan dela Cruz than to the pocket of Manuel V. Pangilinan.
Their being conducive to the perpetuation of wealth maldistribution—and to social instability—is the socio-economic argument against a tax system that relies heavily on excise taxes. The purely economic argument such a system relates to its tendency to be inflationary. This tendency arises from the fact that governments desirous of generating maximum revenue from excise taxes invariably target goods and services consumed by the masses, who by definition account for the bulk of consumption spending. Petroleum products—gasoline, diesel and LPG —are among the favorites of government tax planners. Unfortunately, petroleum products translate into electricity generation and transportation prices, which cause household expenses and manufacturing costs to rise. Of course, the planners could exclude things like petroleum products from their excise-tax planning, but, as indicated above, that would not be a good idea if the object of the exercise was to generate the maximum revenue.
That excise taxes have a bias toward inflation is being shown by the inflation is being shown by the inflation rate rate as measured by the consumer price index. After staying within the 2-4 percent annual increase range set by the Bangko Sentral ng Pilipinas, the inflation rate rose by 4.5 percent in April. The monetary authority and the Philippine Statistics Authority have attributed the upward movement to the tax hikes on the so-called sin products, i.e., alcoholic beverages and tobacco products. I’m not a statistician, but I have to express a degree of skepticism about the principal role attached to the sin products in the ongoing inflationary movement. Drunkards, smokers and related sinners comprise a minority of this country’s population, but the higher electricity, transportation and production-fuel costs associated with higher taxes on sales of petroleum products affect every Filipino to one degree or another. Am I implying that the ongoing inflationary movement is mainly attributable to the raised prices of petroleum products? With all due respect to the PSA and the BSP, I most certainly am.
The Department of Finance has been selling Part I of its Tax Reform and Inclusion program as essentially a trade-off between the scrapping of the taxes on annual incomes below P250,000, on the one hand, and higher taxes on sales of petroleum products and a number of other goods. My view is that it is an uneven tradeoff. The number of people adversely affected by higher product prices—be it fares or electricity charges or manufactured goods—far outnumber the number of people benefited by the tax exemption on annual incomes below P250,000. The tax exemption for the favored income-earners does not directly give rise to an inflationary surge; excise tax increases do.
In the end, what concerns me most is the adverse impact of excise taxation on the drive to reduce the incidence of wealth inequality. If only it were easy to implement, excise taxation should be progressive too, with the wealthy praying higher sales taxes than the poor for the goods and services that they consume. But that isn’t the case. Filipinos living in gated neighborhoods pay exactly as much as Filipinos belonging to the D and E income groups.
Socially and economically, that isn’t right. That is why I am against a tax system that is oriented toward excise taxes, such as TRAIN. Tax administrators should be assisting the effort to reduce wealth maldistribution, not derailing it.