May 26th, 2022
I largely agree with the need for fiscal consolidation, and it broadly aligns with the proposals that I laid out last weekend to the press.
I have some points for discussion, especially regarding the VAT exemptions. I believe we need to work on the VAT gap first – revenues we should be collecting anyway, before we work on withdrawing some exemptions. We cannot migrate the loopholes of the existing VAT system to new lines subject to VAT.
That said, it has always been the major flaw of our tax system that we have hundreds of lines of exemptions on all sorts of taxes, but very high rates. That hurts the middle class, who have to foot the bill.
For example, for businesses to afford the VAT exemptions we impose, they have to raise general prices for everyone, since you can’t really get refunds out of VAT exemptions at the final consumer level. That means the middle class, who are not senior citizens, not PWDs, or not exempt from VAT, pay for the price increases. For the government to afford these exemptions, we also have to keep VAT at 12%, which is the highest in the region. Again, that hurts the middle class the most – who have enough income to be within the VAT threshold, but who are vulnerable enough to feel the tax pinch.
Let’s reduce the leakages first: fraudulent issuance of VAT exemption IDs, inaccurate sales invoices, excessive declaration of input VAT on capital goods, and underdeclaration of value in Customs.
My proposal for how we should phase tax reforms is this: Fiscal protection, fiscal consolidation, then fiscal expansion.
On fiscal protection, that basically means a ‘first-do-no-harm’ rule. So, let’s make sure we don’t pass too many new exemptions first, and we prevent a deficit of confidence in our tax authorities. That is why I’ve been very agitated and displeased about the BIR tussle with Megaworld. Over the next six months, we should be focused on that.
Second, let’s do fiscal consolidation. I understand fiscal consolidation to mean the strengthening of existing tax bases and tax rates. The DOF has a different conception of the term —extending it to mean the overall expansion of fiscal space. For me, fiscal consolidation just has to mean strengthening our existing tax structure – through administrative action and enforcement. The first year of the Marcos administration can be devoted to that: streamlining tax collection, improving tax administration, and making tax compliance easier.
And then, let’s do fiscal expansion. That means new taxes and the lifting of old exemptions. With the Comprehensive Tax Reform Program, we took about 18 months to legislate the first package. So, that’s the timeline you’re probably looking at for new laws as well.
Otherwise, the public might not be willing to make the necessary sacrifices to sustain our public investments in the future.
I think we will know who the next Secretary of Finance will be in the coming days. I have an idea who he is, but I will not disclose my guess, out of my respect for this very good friend. Let’s wait for President BBM to make this very important announcement himself. Suffice it to say, we need a seasoned Secretary of Finance with both the credibility to boost our country abroad, and to sell difficult but necessary reforms to a Congress that tends to be reluctant about new taxes.
I also expect to work with the next Secretary of Finance as closely, if not closer, as I have with Secretary Dominguez, whom I congratulate for the job well done.
The next few months will be heated, especially given the need to affirm our commitment to fiscal reform. But, that comes with the job, and I am confident PBBM has the mandate, the will, and the means to set our fiscal house in order.