The UP 11 vigorously campaign for the IMF recommended 2% increase of the current 10% VAT rate
by Dr. Edberto M. Villegas
The IMF irritated and impatient about the delay in the congressional approval of a 2% increase of the current 10% value-added tax(VAT) rate for all kinds of Philippine products and services, has let loose once again their ever-trusted 11 UP economics professors to push the government to finally pass the VAT bill as recommended by their mentors. The UP 11 in a new position paper “The economy on a cusp: the proposed VAT amendments and their larger significance”, a follow-up of their first paper on the fiscal crisis, have even gone to the extent of scaring the public if the increase of VAT rate is not approved. Without such an amendment of the current VAT law, the UP 11 warn that there would be a continuous credit-downgrading of the Philippines in the financial capitalist market and a “massive loss of confidence” in its sovereign debt with borrowings costs for the country rising. Thus, there would be “profound social, economic and financial costs to the nation if one considers –as one should – the macroeconomics instability and uncertainty that are bound to follow upon a debt-payment crisis.”
Conscious that their avid rooting for the payment for our foreign debts may seem overly callous at this time when government spending for social services is constantly declining through the years (and the UP 11 is very aware of this) , the UP professors as an afterthought recommend to the government to raise an extra P54 billion from other measures to fund social services and infrastructure after first collecting P54 billion for 2005, the latter to “placate financial markets and pave the way for the refinancing of maturing debts(thereby avoiding a future default).(p.1) This stance of the UP 11 is play-acting to the crowd at the most and naïve-thinking at the least for when did the government ever concerned itself with giving priority to increasing the budget for social services? The UP 11 themselves admit that social service as a proportion of GDP has suffered a constant decline with spending for education dropping from 3.4 % of GDP in 1999 to only 2.7% in 2004, and that for health fell from less than half a percent to less than a quarter of GDP. As for budget for infrastructure, this is now barely one percent of GDP. (p.1) With their vehement clamoring for the settlement first of our foreign obligations to avoid being blacklisted by the capitalist market, all the affected regards of the UP 11 for the welfare of the majority of Filipinos can be seen as just mere crocodile tears.
To hide their anti-people orientation, the UP 11 claim that the increase in VAT rate is not regressive( a tax which burdens the poor more than the rich) but “mildly progressive” as a form of taxation since records show that the rich pay more of VAT than the poor. And they used as basis for their argument, the Phililppines Family Income and Expenditures Survey( FIES) statistics for the year 2000 of the percentile share of the richest 10% of the population which accounted for “35% of all spending in the country” for that year. (p.5) They contend that less than half of consumption in the poorest half of the population is subject to VAT, but “that this figure rises to 64% for the next-richest nine percent and to more than 75 percent for the very richest (sic) one percent of the population.”(p.5)
Besides using old FIES data of 2000, the above position of the UP 11 is contrary to the very nature of a consumption tax in that it erodes the incomes of the poor more than those of the rich. It does not matter whether the rich consume more VATable products and services than the poor, since in the first place they have higher spending capacity. What matters is the proportion of an income that the VAT captures. The UP 11 concede this characteristic of a consumption tax, when they say that it is not the main purpose of a consumption tax to be progressive, (their italics), (p.6),especially a uniform tax which the VAT is. They even cite a National Tax Research Center(NTRC) estimate that effective VAT rate is 5.2 percent for people who earn P20,000 or less, while those earning P500,000 or more pay 3.66 percent of their incomes as VAT. But they quickly take back this admission by insisting that the proper basis for measuring progressiveness is tax on consumption rather than on income, “since not paying taxes on income saved at most postpones but does not avoid tax payment”. Does this mean then that a 1% income tax on the poorest 20% of the population compared to a 60% tax on the income of the richest 10% is not progressive? Could it be then regressive, but this is absurd. With their convenient definition, The UP 11 then call the increase in VAT as “mildly progressive” and “mildly regressive”! This kind of double-speak in which the UP 11 engage in, as also used by Big Brother in George Orwell’s novel 1984 to obtain public support, would characterize the general tenor of their paper as we will soon see.
Another major point of the UP 11 in batting for the rate increase of VAT from 10 to 12% is that this will simplify the implementation of the VAT which is expected to raise an extra income of P35.12 billion for the government. Let the VAT be passed first as originally crafted by the IMF and not to insert other provisions which promote social equity like exempting noodles and ordinary sardines from the increased VAT rate since these may mangle and deviate from its original intent which is to raise government revenues to please our foreign creditors and investors that we are not on the road towards defaulting on our huge foreign debts. This bias towards foreign interests of the UP 11 is further seen in its pushing for the temporary exemptions from the VAT of such big businesses in the Philippines (if not the biggest) like the petroleum industry, electric companies (particularly the independent power producers, the IPPs) and buyers of capital equipment (particularly heavy equipment), the latter dominated by foreign TNCs in the country(pp. 9-13). They argue that imposing VAT in the case of petroleum and electric generation, besides being unwise economically speaking, may promote political instability at this time when oil and electric prices are all going up. The oil and electric companies may just pass the VAT costs to their consumers. It is to be remembered that in their earlier paper “The deepening crisis….”, the UP 11 were against the decrease by the government of electric costs for the consumers, since they see such a measure as a “politicization of prices” and they would rather leave the movement of prices to the neo-liberal mythical free market. But when it comes to imposing VAT on petroleum and electricity, among the reasons that they oppose their inclusions is one based on political grounds, (p. 10), which is that it may cause social instability. Thus their use of the argument of the “politicization of prices” is used according to their convenience whether it favors the wealthy or the poor. And their class preference for the rich, who succor them, is obviously showing.
While the UP 11 claim that they are for lifting exemptions for those formerly excluded from VAT like doctors, lawyers, entertainers, and others, and therefore they can be called anti-rich, they argue for the exclusion from VAT coverage of the very rich as was mentioned earlier. Again, while they are for the lifting of VAT exemptions for the travel costs of Filipino nationals who travel internationally and locally, they are for exempting foreign nationals in this regard. They assert that exempting from VAT foreign travelers who use Philippine international carriers and ships would promote the international competitiveness of the country.(p. 8) The foregoing are just some examples of the persistent double-speak of the UP 11 in their attempt to grandstand to the public and assume a pro-people posture.
The UP 11 and the government are caught in their narrow and selfish vision of options to weather the fiscal and economic crisis of the country. Assuming a neo-liberal outlook, the IMF UP 11 disciples would rather let the market be, avoid renegotiating for the abrogation of odious loans incurred by the government, and not call for the repeal of all disadvantageous trade treaties entered into by the country. For indeed, the IMF 11 disciples and the government are the main proponents of the capitalist globalization policy of liberalization, deregulation and privatization which has long placed the Filipino people in great misery. Their reforms to restore financial, economic and even political stability to the country would just exacerbate the present impoverishment of the majority of the people. While the IMF 11 UP disciples console themselves that in the long run all the poor will experience prosperity if their reforms(the immediate one which is the VAT increase) would be adopted, they enjoy the comforts extended to them by their foreign mentors in terms of generous consultancy fees and new projects. But the road to perdition offered by the UP 11 shall be rejected by a people who are beginning to see the path towards their true emancipation. And those who serve false masters who bring havoc to the land shall not be there with the people in their hour of victory.
 See The deepening crisis: The real score on deficits and the public debt, by E. de Dios et al, School of Economics, University of the Philippines, August 2004.
 E. de Dios The economy on a cusp: The proposed VAT amendments and their larger significance, Dios et al, School of Economics, UP, March 2005, p. 1.
 Department of Finance estimates(March 4, 2005), from Table 3, E. de Dios, et al, The Economy in a cusp, p. 4.
 de Dios, et al, The deepening crisis: the real score on deficits and the public debt, p. 24.
The date posted here is due to our website rebuild, it does not reflect the original date this article was posted. This article was originally posted in Yonip in April 19th 2005