Taxing virtues, subsidizing vices
Taxing virtues, subsidizing vices
Updated 00:53am (Mla time) Dec 08, 2004
By Michael Tan
Inquirer News Service
Editor's Note: Published on page A15 of the December 8, 2004 issue of the Philippine Daily Inquirer
MONDAY'S Inquirer featured a full-page open letter to our Senate with most impressive signatories: former National Economic and Development Authority (NEDA) director general Solita Collas-Monsod and several former finance secretaries: Vicente R. Jayme, Jesus P. Estanislao, Roberto de Ocampo, Ernest Leung.
The gist of the letter was simple: Bite the bullet and push through with the increases in cigarette taxes. The letter was written in response to Congress' reluctance to support the Enrile Bill (Senate Bill 1815), itself a compromise around the heavily contested proposal to increase so-called "sin taxes" on cigarettes and alcohol.
The rationale behind sin taxes is that practices such as smoking and drinking should be taxed more heavily because they have social consequences, costs that are passed on to taxpayers. Congress' snail's pace in dealing with sin taxes once again shows our distorted priorities, and which can be summarized as taxing virtues and subsidizing vices. Since much has been said about the sin taxes, including Monsod's incisive column about three weeks ago summarizing the reasons we need to hike the tobacco taxes, I'm going to concentrate instead on the matter of "virtue taxes."
Promoting illiteracy
For starters, I'd suggest our former finance secretaries look into the Department of Finance's refusal to reconsider a plan to tax the sale, importation, printing and publication of books. The book trade has been exempted from the 10-percent value-added tax (VAT) but the finance people now want to lift the exemption, despite protests from the Philippine Educational Publishers' Association and the Catholic Educational Association of the Philippines.
Currently, Filipinos read far less than many of our Asian neighbors. There are many reasons for this, but the high cost of books is certainly the main obstacle to reading. Just look at the enthusiastic crowds at our book fairs, people of all ages browsing but many unable to buy because of the high prices. If current prices of books already seem astronomical, an additional 10-percent tax will send book sales plummeting even more rapidly. I wouldn't mind if the taxes are plowed back into developing a local book industry but that isn't happening either.
All around us, our neighbors have actually reduced import taxes on books to encourage their citizens to read more. Not only that, in Indonesia, Thailand and China, they've poured in money to translate as many books as possible. For all the international publicity around censorship in China, you'd be surprised at all the books they've been translating: from ponderous French philosophers to management gurus like Covey. Likewise, when I go to India, I go crazy running through their bookstores because they reprint, through special arrangements with the publishers, all the latest books.
We will pay for this neglect of books. Just think of the next generation of Filipino semi-literates teaching in our schools and writing textbooks far worse than the ones exposed recently. I predict, too, that we will lose out to our book-reading neighbors in the globalized international economy. It's not surprising we end up exporting Filipinos mainly to do mechanical work, rather than capturing a greater share of segments of the outsourcing market -- software development, for example -- where critical thinking skills are essential, skills honed from reading.
Penalizing hard work
Let's move to another example of "virtue taxes."
I have been getting complaints from “tiangge” vendors about the Bureau of Internal Revenue visiting and checking if they are issuing receipts. I know these vendors are making money but it's not like they're raking in millions. Many of them come from outside Manila, investing in transportation costs and using their Sundays to bring in extra income, some with homegrown vegetables and home-cooked products.
The government seems to go out of its way to tax entrepreneurship. It's not just the small businesses that are victimized. One reason for our economic stagnation is that we have a very low savings rate. But I'm not surprised here-people aren't strongly motivated to save because interest rates are so low and because the government imposes a 15-percent withholding tax on those tiny savings.
It just doesn't make sense, the way the government taxes frugality and small-business people trying to make an honest living, while corporate tax evaders go scot-free, while we postpone sin taxes.
Wages of sin
Let me get personal here as we move back to the sin taxes. I used to be a heavy smoker. How heavy was heavy? Here in the Philippines there were three-pack days, but overseas, I'd sometimes survive on one pack. Cigarette prices in the Philippines were, and still are, among the cheapest in the world, thanks to low taxes.
The same applies to alcohol. I enjoy my beer and I know that there's always a greater temptation to binge on a night out in Manila because alcoholic drinks are far too cheap here.
Sin taxes can help moderate consumption of cigarettes and alcohol, even as it generates government revenues. Yet we seem so reluctant to work on the sin taxes. Pardon the religious metaphors, but society will reap the wages of sin, if we continue to act so slowly. We hear propagandists for the tobacco firms arguing that impoverished tobacco farmers in Ilocos stand to lose from the proposed hike in sin taxes. But are they aware that diseases caused by alcohol and tobacco consistently rank among the leading causes of death in the Philippines?
Tobacco use isn't just linked to cancer but also heart diseases and chronic obstructive pulmonary diseases (asthma, bronchitis and emphysema). Much less has been said about the problems around alcohol abuse but liver disease -- much of which is associated with alcoholism -- now ranks 13th as a cause of death. We also don't talk enough about social problems around alcohol dependency, from work absenteeism to domestic violence.
We have to reduce our subsidies on vices. Let's push through with the sin taxes and allocate part of the revenues to public health programs. And yes, let's use part of it to develop alternative livelihoods for tobacco farmers.
A final word here: The government should rethink the cost-effectiveness of its tax strategy. It just doesn't make sense that the government is rushing to impose VAT on books to generate P272 million while dragging its feet on the sin taxes, which could bring in P11.3 billion. As for cracking the whip to collect taxes on small businesses' Christmas sales, amid government neglect of social services, the environment, the economy -- why does the word "extortion" come to my mind?
Updated 00:53am (Mla time) Dec 08, 2004
By Michael Tan
Inquirer News Service
Editor's Note: Published on page A15 of the December 8, 2004 issue of the Philippine Daily Inquirer
MONDAY'S Inquirer featured a full-page open letter to our Senate with most impressive signatories: former National Economic and Development Authority (NEDA) director general Solita Collas-Monsod and several former finance secretaries: Vicente R. Jayme, Jesus P. Estanislao, Roberto de Ocampo, Ernest Leung.
The gist of the letter was simple: Bite the bullet and push through with the increases in cigarette taxes. The letter was written in response to Congress' reluctance to support the Enrile Bill (Senate Bill 1815), itself a compromise around the heavily contested proposal to increase so-called "sin taxes" on cigarettes and alcohol.
The rationale behind sin taxes is that practices such as smoking and drinking should be taxed more heavily because they have social consequences, costs that are passed on to taxpayers. Congress' snail's pace in dealing with sin taxes once again shows our distorted priorities, and which can be summarized as taxing virtues and subsidizing vices. Since much has been said about the sin taxes, including Monsod's incisive column about three weeks ago summarizing the reasons we need to hike the tobacco taxes, I'm going to concentrate instead on the matter of "virtue taxes."
Promoting illiteracy
For starters, I'd suggest our former finance secretaries look into the Department of Finance's refusal to reconsider a plan to tax the sale, importation, printing and publication of books. The book trade has been exempted from the 10-percent value-added tax (VAT) but the finance people now want to lift the exemption, despite protests from the Philippine Educational Publishers' Association and the Catholic Educational Association of the Philippines.
Currently, Filipinos read far less than many of our Asian neighbors. There are many reasons for this, but the high cost of books is certainly the main obstacle to reading. Just look at the enthusiastic crowds at our book fairs, people of all ages browsing but many unable to buy because of the high prices. If current prices of books already seem astronomical, an additional 10-percent tax will send book sales plummeting even more rapidly. I wouldn't mind if the taxes are plowed back into developing a local book industry but that isn't happening either.
All around us, our neighbors have actually reduced import taxes on books to encourage their citizens to read more. Not only that, in Indonesia, Thailand and China, they've poured in money to translate as many books as possible. For all the international publicity around censorship in China, you'd be surprised at all the books they've been translating: from ponderous French philosophers to management gurus like Covey. Likewise, when I go to India, I go crazy running through their bookstores because they reprint, through special arrangements with the publishers, all the latest books.
We will pay for this neglect of books. Just think of the next generation of Filipino semi-literates teaching in our schools and writing textbooks far worse than the ones exposed recently. I predict, too, that we will lose out to our book-reading neighbors in the globalized international economy. It's not surprising we end up exporting Filipinos mainly to do mechanical work, rather than capturing a greater share of segments of the outsourcing market -- software development, for example -- where critical thinking skills are essential, skills honed from reading.
Penalizing hard work
Let's move to another example of "virtue taxes."
I have been getting complaints from “tiangge” vendors about the Bureau of Internal Revenue visiting and checking if they are issuing receipts. I know these vendors are making money but it's not like they're raking in millions. Many of them come from outside Manila, investing in transportation costs and using their Sundays to bring in extra income, some with homegrown vegetables and home-cooked products.
The government seems to go out of its way to tax entrepreneurship. It's not just the small businesses that are victimized. One reason for our economic stagnation is that we have a very low savings rate. But I'm not surprised here-people aren't strongly motivated to save because interest rates are so low and because the government imposes a 15-percent withholding tax on those tiny savings.
It just doesn't make sense, the way the government taxes frugality and small-business people trying to make an honest living, while corporate tax evaders go scot-free, while we postpone sin taxes.
Wages of sin
Let me get personal here as we move back to the sin taxes. I used to be a heavy smoker. How heavy was heavy? Here in the Philippines there were three-pack days, but overseas, I'd sometimes survive on one pack. Cigarette prices in the Philippines were, and still are, among the cheapest in the world, thanks to low taxes.
The same applies to alcohol. I enjoy my beer and I know that there's always a greater temptation to binge on a night out in Manila because alcoholic drinks are far too cheap here.
Sin taxes can help moderate consumption of cigarettes and alcohol, even as it generates government revenues. Yet we seem so reluctant to work on the sin taxes. Pardon the religious metaphors, but society will reap the wages of sin, if we continue to act so slowly. We hear propagandists for the tobacco firms arguing that impoverished tobacco farmers in Ilocos stand to lose from the proposed hike in sin taxes. But are they aware that diseases caused by alcohol and tobacco consistently rank among the leading causes of death in the Philippines?
Tobacco use isn't just linked to cancer but also heart diseases and chronic obstructive pulmonary diseases (asthma, bronchitis and emphysema). Much less has been said about the problems around alcohol abuse but liver disease -- much of which is associated with alcoholism -- now ranks 13th as a cause of death. We also don't talk enough about social problems around alcohol dependency, from work absenteeism to domestic violence.
We have to reduce our subsidies on vices. Let's push through with the sin taxes and allocate part of the revenues to public health programs. And yes, let's use part of it to develop alternative livelihoods for tobacco farmers.
A final word here: The government should rethink the cost-effectiveness of its tax strategy. It just doesn't make sense that the government is rushing to impose VAT on books to generate P272 million while dragging its feet on the sin taxes, which could bring in P11.3 billion. As for cracking the whip to collect taxes on small businesses' Christmas sales, amid government neglect of social services, the environment, the economy -- why does the word "extortion" come to my mind?
posted by Dante at 5:45 PM
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