One of the objectionable characteristics of a tax system oriented toward excise taxes is its adverse effect on income equalization. A tax system that seeks to reduce income inequality should tax the poor—directly or indirectly—less than the wealthy. But that is not what excise taxes do; they take resources from the poor and the wealthy at the same rate. The result is that they afflict the poor proportionately more heavily than they do the wealthy.
That is the effect of indirect taxation—taxes on what people buy rather than on what they earn—at the level of the individual. Its effect at the level of the economy as a whole is arguably even worse.
The problem—and the risk—associated with excise-taxation-oriented policymaking is that the policymakers seek to generate the greatest possible amount of government revenue from their efforts. That means targeting (1) goods and services that carry high price tags and (2) goods and services that are widely consumed because of their basic nature. There is no problem with the first category of excise-taxable goods and services; goods such as high-priced motor vehicle and services such as cosmetological procedures have limited markets and thus can be taxed heavily without widespread resistance. But a problem arises when heavy taxes are levied on the sale and purchase of goods and services that are consumed by the broad mass of Filipinos on a daily basis.
The negative impact of such excise taxation is felt on two fronts, namely, the incomes of low-income consumers and the structure of prices as represented by the consumer price index (CPI). Indeed the deleterious effect of taxation of basic goods and services began to manifest itself even before the approval of the TRAIN (Tax Reform and Inclusion) law, as producers and sellers adjusted their prices upward in anticipation of the implementation of TRAIN’s excise-tax charges. Since then, of course, the upward movement of prices has proceeded in earnest.
The trick to—and the danger in— resorting to excise taxes to increase government revenue lies in the location of the excise-taxed goods and services in the cost/price chain. The Department of Finance (DOF), the National Economic and Development Authority (NEDA) and the Bangko Sentral ng Pilipinas (BSP) have been laboring hard to downplay the strength of the inflationary force that has been unleashed by the TRAIN increases in petroleum-products prices. It is wrong for these agencies of government to do so because petroleum products translate into transportation costs (fares and producer distribution charges) and housekeeping costs (lighting and appliance-use expenses). The addition of a few hundred pesos monthly to transportation and household expenses may not mean anything to a well-heeled family but it means a great deal to a middle-income or poor family’s budget.
Those who craft tax policy need to understand the psychology of inflation. That psychology embodies elements of anticipation and defensiveness. Looking around the marketplace, particularly at their competitors, producers and sellers may change the price structures of their merchandise in anticipation of probable marketplace changes or in defense of their profit margins.
Inflation may come in a single wave, such as we have seen in the months immediately preceding TRAIN’s approval. But the psychology of inflation suggests that we have not seen the end of the TRAIN-induced price upcreep and that at least one more wave of post-TRAIN price increases is coming. In adjusting the upward end of its 2018 inflation range to 4.5 percent, I trust that the BSP was keeping its institutional fingers crossed.
Taxes on income—individual and corporate—are difficult to collect, so those earning P250,000 or more per annum who no longer have to file ITRs (income tax returns) may not have filed ITRs anyway. On the other hand, there is no escaping taxes on sales and purchases of goods and services; the Meralco (Manila Electric Co.) collector, the gas-station operator and jeepney and taxi drivers will take care of collecting for the the proceeds of the increases in petroleum-products prices.
Rely more on excise tax revenues and rely less on income tax revenues: that appears to be the Duterte administration’s taxation strategy. Is it?
E-mail: romero.business.class@gmail.com