A buoyant tax system

Published October 29, 2019, 12:00 AM

by manilabulletin_admin

Milwida M. Guevara
Milwida M. Guevara

My Key Result Area when I was in government was to help keep the budgetary deficit on check. Without a corollary increase in revenue collection, we tool a huge increase in government spending as a danger sign. That meant that government revenues fell short of its spending. Government had no recourse but to borrow in order to finance its expenditures. This is so like a person who must use his credit card to finance his needs because he hoes not have cash.

My stance was subject to criticism especially from the proponents of supply side economics. It is given that government has the responsibility to prime the economy by creating opportunities for growth. Investments can only thrive if infrastructure and public services that are financed by government are adequate.
But doubts on the merits of deficit spending begin to linger if government spending is on activities that would not generate income, like the purchase of business jets, intelligence funds, and entitlements. There is more reason to be more apprehensive if the tax system does not show increasing strength and resilience to support increasing expenditures or a stronger capacity to pay government’s debts.

A simple test of the tax system’s strength is its buoyancy. Literally, buoyant means someone being cheerful, not easily depressed, and has the capacity to be “afloat”. In technical terms, it means tax revenues keep up or respond to changes in economic growth. If GDP grows by 6.2%, a buoyant tax system grows by as much. Using simple math, this means a buoyancy of 1. A buoyancy estimate that is higher than 1 means that tax revenues grow much more compared to the growth of the economy.

Why is a buoyant tax system important? It is an indicator of sustainability, i.e. that the growth of tax revenues is in line with the increase in economic activities. It assures that that government can finance its spending without having TRAIN 1, 2, 3, 4… It gives us confidence that we will not be saddled with debts that future administration cannot finance. More importantly, it is an indicator of efficiency in administration and improvement in tax compliance. Government is able to collect the taxes due from taxpayers with increasing incomes, and sales.

Our estimates show that BIR tax collection is becoming less and less buoyant. From a buoyancy estimate of 1.07 in 2015, its buoyancy has dropped to 0.997. While tax revenues are still increasing almost as fast as the GDP growth, its strength has decelerated.

The weakening buoyancy is due to the less buoyant collection from the personal income tax with a buoyancy estimate of 0.067 in 2018 compared to 1.06 in 2016. The withholding tax on wages, which used to be a strong tax handle had a negative slid. While incomes grew by 6.2%, the growth of tax collection from wages dropped by nearly thrice as much. The loss of steam in tax collection could have been brought about by the increase in the personal exemption level and the decrease in the tax rates. But a deeper analysis is called for considering that the corporate income tax has likewise weakened, from a buoyancy of 1.05 in 2016 to 0.06 in 2018.

The collection from the value-added tax is losing its steam. Collection has become unresponsive to growth with a negative buoyancy of 0.19 in 2018 compared to a strong 1.4 in 2016.

The reform of the excise taxes has shown its success with its buoyant growth. Collection grows 4 times as much compared to GDP growth. The DOF deserves the credit for its political will in pushing for this reform.

Buoyancy is a function of a broad tax base, efficiency, and integrity in tax administration, and taxpayers who see a strong reason for paying their taxes. These are the challenges that any government will face.
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