Breaking Away From The Fiscal Bind

Reforming The Fiscal System

Breaking AwayFrom The Fmcal Brad

Reforming The Fmcal System

Rosario G Manasan

pOsPhilippine Institute for Development Studies

Copyright eD 1994 by the

Phfl,ppme institute for Development Studies

Printed in the Philippines All rights reserved The findings interpretationsand conclusions m this book are those of the author and not necessarllythose of the Institute

This is Part II of a bigger study entitled 'PIDS Remew and Outlook of the

Philippine Economy for 1993 1994 which was presented m a symposium

jomtly sponsored by the PIDS with the Nat,onal Economic and Development

Authority (NEDA) and the Congressional House Committee on Socloeco

nomm Affairs on November 25 1993 at the Westm Philippine Plaza

Please address all mqumes to

Philippine institute for Development Studies4th Floor NEDA sa Makatl Bldg

106 Amorsolo St Legaspl Village Makatl 1229

Metro Manila Philippines

Fax No (632) 816 1091

Tel No (632) 893 5705 892 4059

ISBN 971 564 013 3

RP 9 94 500

Contents

List of Tables v11

List of Figures v111

List of _xes vln

Foreword IX

1 INTRODUCTION 1

2 rMPROVING GOVERNMENT REVENUE PERFORMANCE 5

Reformlnl the Tax System 6

Trends and eomposzhon 7

Tax structure 12

Taxes on income and profits 12

Import dutles and taxes 14

Excme taxes 18

Sales tax and hcenses 21

Tax euaszon 23

Evamon of the mdlvldual income tax 23

Evamon ofthe VAT 24

Sources of evaslon 24

Reformzng tax admm_strahon 27

Too much centrahzatlon 27

Weak systems and procedures 28

Low level of computenzatlon 28

Low compensatlon oftax collection_s_nt_l 31

Proposed tax enhancement meat_U_i_ . 31

Reformin I Local Government Taxation 34

Exploring the Potential of User Charges 4S

User charges zn government hosplta_s 50

User charges zn LGUs 53

3 IMPROVING THE ALLOCATION OF PUBLIC SPENDING SS

Trends and Patterns SS

Aggregate natlonal government expendztures 55

Economlc categories of natlonal government

expendztures 56

Current expendltures 56

Capital outlays 71

Functlonal categones of natlonal government

expendztures 72

General pubhc admmistratlon 72Social service sectors 72

Economic sectors 75

Publ,c Sector Investments and Growth 77

Composztzon of pubhc sector znvestment 77

By level of government 77

By sector 79

Trade off between current and capztal expendztures 82

Granger causality between economic growth and

public expenditures 82Results from macroeconometnc simulation 85

Impact of pubhc sector investment on pnuate sectorinvestment 85

Subsidies and Tax Expendltures 88

BOI incentz ues 90

Natzonal Food Authority 107

Petroleum product pnclng 109

4 CONCLUSION 111

BIBLIOGRAPHY 1 13

THE AUTHOR 119

LIST OF TABLES

1 RaUo of Na_onal Government Tax Revenues to GNP 1975 1992 8

2 Tax and Revenue Effort m Selected Asmn Countries 9

3 RaUo to Tax Revenues 10

4 Buoyancy Coefficlent of Major Tax Groups 1975 1991 11

5 Indlvldual Tax Rate and Corporate Income Tax Rate

m Selected Aman Countries 1990 13

6 Value of Imports and Dutaes CoUected

and Average Effective Rates 1980 1990 16

7 Average EPR and Standard DewaUon by Major Groups

Exportables and Importables 17

8 Compara_ve Yield of Sales Tax and VAT 1987 1992 22

9 Potential Revenue from the Indlvldual Tax

and the Level of Tax Evamon 23

10 Potential Revenue from the VAT and the Level of Tax Evamon 25

11 Potential and Actual Number

of Indlwdual Income Taxpayers 1985 1990 2612 Distribution of Taxable Returns Fried m 1990

and Assessment Personnel by Revenue Reglon 29

13 General Government Expenditures 35

14 General Government Revenues 36

15 Revenue Structure of Local Governments 1980 1991 38

16 Assessors Market Valuation and Advertised Market Prices

for Selected Prlces of Property 1992 42

17 Buoyancy of Revenues of Local Governments 1980 1990 43

18 CoUection Rate for Baslc Real Property Tax 44

19 Region 3 Cost Recovery Levels Income and Expenditures 1987 1989 51

20 Sapang Palay D1st_nct Hospltal Level of Cost Recovery

from the Revolving Drugs Fund 1989 1990 52

21 Profitabfllty Comparison Between City Government Operated Pubhc

Enterprises and Comparable Private Sector Run Facdlties 1988 54

22 National Government Expenditures by Economlc Classification

on an ObhgatJon Basls as a Percentage of GNP 1975 1992 60

23 NaUonal Government Deficlts 1975 1992 62

24 National Government Expenditures by Sectoral Clasmficatlon

on an Obhgataon Basis as a Percentage of GNP 1975 1992 73

25 Pubhc Sector Investment by Level of Government

as a Percentage of GNP 79

26 Pubhc Investment by Sector as a Percentage of GNP 80

27 Relatlonahlp Between Economic Growth G

and Government Expenchtures E 82

28 Reallocatlon of Expendlture from Current to Capital Outlays 84

29 Revenue Foregone by Type of Incentives 90

30 Factor Bias of BOI IncentJves Capital Labor RaUo

of BOI Reglstered F_-rns 1986 1992 93

31 Scale Bias of BOI IncenUves Average Number of Workers

per Firm of BOI Registered Fn-ms 1986 1992 94

32 Economywlde Average Number of Workers per Ylrrn 1986 1989 95

33 Location Bias of BOI Industries Share of NCR and Reglons III and IV

m Total Number of Projects Employment and Project Cost 1986 1991 9634 Economyw_de D1st_nbution of Number of Estabhshments

Employment and Book Value of FLxed Assets of Large

Estabhshments Across Reglons 1986 1989 99

35 Market Bias of BOI Incentives Share of Export Actlwties

m Total Number of ProJects Project Cost

and Employment ofBOI Reglstered Firms 1986 1992 102

36 Internal Rate of Return of a Hypothetical Firm Under

Selected Incentlve Schemes m ASEAN Countries 1988 106

37 NFALosses 1986 to 1991 108

38 Cost of Dehvermg NFA Submdy 1991 109

LIST OF FIGURES

i National Government Tax and Non Tax revenues 1992 5

2 NaUonal Government Expenditures as a Percentage of GNP 1975 1992 57

3 Per Capita National Government Expenchtures

m Real Terms 1975 1992 58

4 Pubhc Sector Investment by Level of Government

as a Percentage of GNP 78

LIST OF BOXES

1 Increased Pubhc Investments Financed by Domestlc Borrowing 2

2 Use of HCV for Import Valuatlon 19

3 Pricing Access to Forest Lands 47

4 Mopping Up of Excess laqulchty 63

5 Dynamlcs of Domestlc Debt 67

Foreword

In November 1993 the Phfllppme Institute for DevelopmentStudms (PIDS) launched the PIDS Review_and Outlook of the

Philippine Economy (PROPE) as part of Its continuing analysm ofthe mtua_on and outlook of the Phlhppme economy For its maugural presentahon the PIDS focused on the country s fiscal cnsls asthe special theme of the report ldenUfymg It to be the period s most

crmeal concern and the one posing the biggest challenge to thecountry s economic performance and prospects

Thin present volume deals with the specml topic of the inauguralPROPE report on the Philippines fiscal poslhon SpecLfically itanalyzes the roots and effects of the current fiscal bmd providesestimates on the magmtude of leakages from the revenue systemand offers opportumtles and measures that can help release thefiscal brad that ties the hands of government fiscal planners anddecls_onmakers

By pnntmg this part or special theme of the PROPE report as astand alone pubhcatlon thereby expanding its circular_ton to m

clude sectors outside the formal pohcymakmg circle the PIDS hopesto impress to a larger audience the enormity and urgency of theproblem -- that if left unattended and understated it may stymieall other efforts to improve and sustmn the economy Hopefully byexplaining the msue m more detanl more people wall come tounderstand and advocate measures that will help resolve the sltuatlon

It m with this hope that the PIDS is pleased to present thisvolume

PONCIANO S INTAL JRPresldent

September 1994

1

Introductlon

The past two years showed that the present fiscal posltlon of the

pubhc sector hmlted the optlons open to the government to support

economlc recovery sustain growth and allevmte poverty The strln

gent monetary and fiscal celhngs under the st-_bdmatlon program of

the International Monetary Fund (IMF) restricted government s

ability to pump prlme the economy and stimulate economic revlval

More _mportanfly excessive monetary and fiscal restraints pre

vented the government from financing power and infrastructure

projects needed for long term growth Thus de D1os (1992) proposed

that monetary and fiscal targets be relaxed as a first step toward

rewwng the economy

While It m possible to ]umpstart the ec nomy m the Immediate

term by slackening fiscal and monetary restraints the economy

cannot afford to contmually run large fis al deficlts A counterfac

tual mmulatlon where public sector lnveo rnents were increased by

P5 bllhon and financed through domestlc _orrowlng revealed that

whale the effect on output remmns poslt_ e m the first two years it

turns negatlve from the thlrd to the fifth vear (Box 1)

Clearly the government has to respc nd to the fiscal challenge

of _reconcflmg lower fiscal deficits with growth in the medlum term

Fiscal mlsmanagement undemably cot tnbuted to the series of

balance of_payment/economlc crises that the country has had to

deal wlth m the past Thus the Importance of a prudent fiscal pohey

which glves rise to sustmnable deficits m the long run cannot be

overemphamzed

:2 ROSARIOG MANASAN

BOX 1

Increased Publ,c Investments Financed by Domestm Borrowing

The effects of _ncreastng capital outlays by P5 bilhon in current

prices which is financed by increased domestic borrowing was

stmulated ustng an extension and update of the PIDS NEDA Macroeconometnc Model The shock or change in the baseline scenario is

apphed =n1986 (period 1) and the effects are monitored up to the

year 1990 (penod 5) A five year s_mulatlon period _srequtred m order

to account for dynamic adjustments and medium term _mphcations

of the pohcy change Specifically domestic borrowing entails interest

and amorttzat_on payments which affect the economy after the loan

proceeds are spent

From the results (Table A) tt is evident that private expenditures

are crowded out by domestm debt financing primarily through ther=se in the interest rate Comsumpt_on spending manages to post a

gain _nthe first penod but dechnes thereafter Output expands _nthefirst year Because of the short term nature of domesttc debt thebonds are assumed to be redeemable atthe end of the penod Thus

upward pressure =smaintained on the interest rate up to the second

period and this results in further cuts m prtvate investment The need

to meet _nterest obhgatlons causes a reduction in producbve spend

Lng(as mdmated by a drop In government comsumphon expenditureCG) and the double cr-,wdwng out effect leads to a drop m output

beginning _nthe th rd pertod wNch lasts untd the end of the simulation

pertod

BREAKING AWAY FROM THE FISCAL BIiND 3

Table A Scenario 3 Deflctt Financing by Domest=cBorrowmg

Variable Period

1 2 3 4 5

Percentagedewatsonfromthebaseline

GDP 0437 0 085 0 063 0 111 0 126GNP 0 449 0 081 0 066 0 113 0 126CPI 0 616 0 319 0 102 0 016 0 020TBILL 7 675 2459 0 864 0 475 0 175

CP 0 012 0 045 0 091 0 105 0 098CG 0 596 0409 0 063 0 023 0 023CONSPR 0966 1 132 1064 0 855 0 789IDER 0 912 0 615 0492 0 394 0 361

GOCF 3498 0520 0219 0354 0368XD 0 144 0 046 0067 0 100 0 103MD 0 483 0 051 0 196 0 191 0 162

DEFNG 31834 17239 2 045 1235 0 688

DevfatlonfrombaselineOnmllhonUS$)

TRABAL 17839 5 543 10645 9 006 8 759BOP 19331 5 813 11581 9 946 9 690

Variable definitions

GDP Gross Domeshc ProductGNP Gross National ProductCPI Consumer Price Index

TBILL Treasury Bdl RateCP Personal Consumphon ExpenditureCG Government Consumption ExpendttureCONSPR Total Private ConstruchonIDER Investment _n Durable EquipmentGDCF Gross Domestic Capital FormatLonXD Dollar Exports (million)MD Dollar Imports (million)DEFNG Nahonal Government DeficitTRABAL Trade Balance (mtlhon $)BOP Balance of Payments (mJlhon $)

Source Josef T Yap and Ceha M Reyes 1993 F_scal Pohcy Alternahves _nthe

Phd_ppmes

4 ROSARIO G MANASAN

Good fiscal management is not easy since the fiscal sector m

buffeted by competing clalms On the one hand increasing govern

ment spending on maintenance and capltal investments is a press

mg need These items had to absorb the brunt of the severe cuts m

government expendlture as part of the stablhzatlon program m

recent years Today inadequate maintenance of government capital

stock and a shortage of bamc infrastructure severely constrain the

country s growth potentlal Yet the government has to expand social

serwces and provlde adequate safety nets to protect the most

vulnerable groups from the burden that comes with stablhzatmn

and structural adjustment processes that w111inevltably take place

If growth Is to be sustained At the same tlme the sustained pursult

of the structural adjustment program m expected to reduce govern

ment revenues All these imply that the government may be trapped

m the mclous cycle of low growth and hlgh fiscal deficlts unless

steps are taken to _mprove government revenue performance fur

ther reduce some items m the government budget and allocate

government spending more efficiently

More revenues and less spending w111both be needed However

the potentml gains from the former will far exceed the latter because

the fiscal adjustments mstltuted in recent years were dominated by

expenditure cuts Thus opportumtles for incremental budget cuts

are extremely limited Nonetheless there are ways to further im

prove budgetary allocation

2

ImprovingGovernment Revenue Performance

Government revenues may come from tax and non tax sources

Taxes remain the government s pnnclpal source ofmcome account

mg for 86 percent of the natmnal government revenues or 15 2

percent of the gross national product (GNP) m 1992 In contrast

non tax revenues which conmst of grants user charges income

from public sector enterprises and proceeds from the pnvat_atmn

program account for 14 percent of total government revenues (2 5

percent of GNP) m the same year (Fig 1)

NonTax Revenues14/

Tax Revenues86 /

Figure 1 Nat=onalGovernment Tax and Non Tax Revenues 1992

6 ROSARIO G MANASAN

Whde capltal rece:pts from the sales of government corporations

accounted for a slgnlficant portion of non tax revenues since 1987

the potentml income from thls source Is expected to dwindle as the

pnvatlzatlon program unwinds m the next few years In the short

run however add:tlonal revenues could be generated If the pnvatlzatlon program were accelerated Moreover the contrlbuhon of

foreign grants essenhally fall outslde the government s control and

will hkely follow a downtrend in the 1990s wlth the general dechne

m officlal development asslstance (ODA) worldwlde and the removal

of the US base facdltles from the country m 1992

In examining the scope for increasing and restructunng pubhc

revenues th_s chapter therefore focuses on taxes and user chargesalone The first two sectlons address Issues related to central and

local government taxes whde the thlrd section assesses the potential

of user charges as a source of government revenues

Reformsng The Tax System

In 1986 the government restructured the tax system extenslvely

Whde prewous efforts to change tax pohcy were p_ecemeal m nature

and generally concerned with revenue generation the 1986 tax

measures represented the first attempt at a comprehenslve reform

of the country s tax system In hne with art:culated pohcy the

measures that comprlse the Tax Reform Package were not solely

dlctated by the need for government revenues Equity and efficiency

objectlves also recelved conslderable weight

The following major components make up the Tax Reform

Package 1) a shlft from the schedular to a more global approach m

taxing redly:dual income from compensation business trade and

exercise of professlon 2) increase m personal exemptions 3) sepa

rate income taxation of spouses 4} an increase m the final with

holding tax rate on interest income (17 5 percent) and royalties (15

percent) to a umform rate of 20 percent 5) the phase ou_ of the final

withholding tax prevlously lewed on dlvldends 6) the unlficatlon of

the earlier dual tax rate (of 25 and 35 percent) on corporate income

to 35 percent 7) the mtroductlon of the value added tax (VAT} m

place of the sales/turnover tax and a host of other taxes 8) the

BREAKINGAWAYFROMTHE FISCALBIND 7

convermon ofumt rates formerly used for exclse taxes to ad valorem

rates 9) the abolition of export taxes except those on logs i0) the

general rewslon in the valuation of real property for tax purposes

and 11) further reduction in tariff rates 1

In the last six years government had to introduce more tax

changes primarily to respond to the need to raise more revenues in

vlew of a series of fiscal adjustment programs But not all were

conslstent with the spirit of the 1986 reform package Some like

the Import levy Imposed m 1991 were put in place because they

were admimstratxvely and pohtically convement But they were

generally seen as hlghly dlstortIonary and having a perverse effect

on long term growth

The foUowmg subsectlons show that while tax moblhzatlon

achleved sigmficant gains In the last six years still more remain to

be done They also hlghhght the fact that the biggest opportunity

for increasing tax revenues at present lies in tax administration

even as certain structural changes have been identified Many of the

proposed changes in tax structure were shown to bear negative

revenue Impact Thzs makes st doubly important to increase revenue

on the basts of adminlstratlve mnouat_ons

Trends and composstson

The 1986 Tax Reform Package together wlth the other tax measures

put in place in the ensuing years resulted m a slgnificant improvement in the tax effort 2 Thus the ratlo of total tax revenues to GNP

chmbed from an average of 11 3 percent in 1975 1985 to 15 2

percent in 1992 (Table 1) This development allowed the Phihppmes

to somewhat catch up with the tax effort of other Aslan countries

Despite thls improvement however the country contmues to lag

behind the performance of Indonesla Malaysia South Korea and

Thailand (Table 2) a

1 This last item xsnot usually wewed as part of the Tax Reform Package but as themare element m the Tariff Reform Program2 Tax effort xsdefined as the ratao of tax revenues to GNP

3 Singapore s tax to GNPratao is low because a conslderable portaon of thelr revenuescomes from government capltal investments i e non tax revenue

Table 1 =Ratio of Nabonal Government Tax Revenues to GNP 1975 1992

(In percent)

t97585 197582 198385 198692 1988 1987 1988 1989 1990 1991 1992

Taxrevenues 1126 1187 1059 1356 t098 1276 tl 36 1340 1410 1445 1523

1 Bureauof InternalRevenue 6 94 720 6 65 9 05 7 85 8 71 801 897 9 66 921 9 77

a Incomeandprofits 2 85 2 90 2 79 4 29 3 21 3 24 345 4 11 4 61 484 5 12

Corporatetncometax 1 10 0 76 1 48 1 85 144 182 163 167 177 198 2 24

Indlvtdualincometax 0 83 0 70 0 97 1 38 1 O0 108 1O0 120 151 164 167

Others 0 17 0 02 0 35 1 06 0 78 033 0 82 124 134 122 121

b Excisetax 2 02 194 2 12 247 2 75 336 2 46 2 72 268 201 2 02

c Sa_estaxandhcenses 148 161 1 34 183 155 180 155 172 194 192 203

d Otherdomesttctaxes 0 59 0 75 040 046 034 030 0 55 042 043 044 061

2 BureauofCustoms 3 82 4 07 353 434 293 386 3 15 4 20 427 5 10 532

a Importdutiesandtaxes 3 6I 3 86 332 4 33 2 83 386 3 15 420 4 27 5 10 532

b Exporttaxes 0 21 0 21 021 001 0 ll 0002 0 0004 _"

3 OtheroEces 0 51 0 60 0 41 0 '_7 0 20 0 20 020 023 0 16 0 13 0 14o

Sourceofbasicdata BureauofTreasuryandOepartrnentofFinance >_

BREAKINGAWAYFROMTHE FISCALBIND 9

Table 2Tax and Revenue Effort m Selected Asian Countries

(In percent of GNP)

Country Tax Effort RevenueEffort

Indonesia(1990) 1981 20 93

Malaysia(1989) 1745 2645

Phdlpplnes(1992) 1523 1772

Singapore(1989) 1379 23 18

Thailand(1990) 1900 2028

SouthKorea(1990) 1654 1827

Source AsianDevelopmentBank

Hand in hand with the improved revenue performance of the tax

system a notable change in the composition of national government

taxes took place in recent years The marked rise m the share of

direct taxes to total taxes constitutes a positive development The

proportion contributed by taxes on income and profits (which

comprise close to 95 percent of aggregate dlrect taxes) expanded

dramatically from an average of 24 4 percent in 1975 1982 to 33 6

percent in 1992 Conversely excise taxes accounted for a dechnmgfraction of total taxes between 1987 and 1992 Meanwhile sales tax

and licenses as well as import duties and taxes maintained their

share through the years (Table 3) Despite the increasing share of

direct taxes In 1986 1992 the bulk of natlonal government taxes

continues to come from indirect taxes

More significant than changes in the relative importance of the

different tax groups are changes in their levels when measured

relative to GNP Taxes on income and profits when measured as a

proportlon of GNP rose by almost two percentage points in 1986

1992 after hovering in the three percent level in 1976 1985 Importduties and Indlrect internal revenue taxes also recovered In 1986

1991 the losses they suffered in 1981 1985 The resurgence of

revenues from import duties became striking as it increased by two

percentage points to reach 5 3 percent of GNP m 1992 even

Table 3Rat,o to Tax Revenues

(In percent)

197_85 1975-82 t98385 198692 1986 1987 1988 1989 1990 199t 1992

Taxrevenues 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000

1 Bureauof IntematRevenue 6160 6064 6281 6674 7t 47 6820 7053 6696 6855 6378 64 16

a Incomeandprofits 2527 2440 2635 3t 62 2924 2537 30 34 3070 3270 3349 3360

Corporate_ncometax 977 641 1394 1363 t3 10 1427 1437 1243 1253 1368 14 69Indlvldualincometax 7 33 587 9 15 1014 907 8 49 8 80 8 98 1068 1138 1095

Others 155 0 16 3 26 7 84 7 07 2 61 7 17 928 949 843 797

b Excisetax I795 1632 1999 1824 2502 2635 21 69 2030 1903 1394 1324

c Salestax andlicenses 13 18 1361 1266 1348 '_412 1412 1368 1281 1373 1328 1332

d Otherdomestictaxes 5 20 6 32 3 81 3 41 3 10 2 36 4 82 3 16 308 3 07 4O0

2 Bureauof Customs 3389 3432 3337 3199 2672 3025 2769 3134 3029 3533 3492 I_

m_

a Importdut=esandtaxes 3202 3253 3138 3191 2574 3023 2768 3134 3029 35 33 3492

b Exporttaxes 1 87 1 79 198 0 07 0 97 0 02 0 0033

3 Otheroffices 450 505 3 83 127 182 t 55 1 79 170 1 18 0 89 093

SouroeofbasK:datB Bureau(YTreasuryandDepadmentofF_nance i

BREAKINGAWAYFROMTHEFISCALBIND 11

surpassing its peak of 4 5 percent m 1983 (Table 1) One observes

that the increased dependence on direct taxes m 1976 1992 did notresult from the replacement of redirect taxes by direct taxes Ratherit followed the marked rme m the overall direct tax effort without an

accompanying reductlon m the overall mdzrect tax effort In shortthe yield of redirect taxes measured agmnst GNP did not dnmmshwhile that of direct taxes increased slgmficantly

Concomitant with thin progress the buoyancy of the tax systemwith respect to GNP rose from 088 m 1976 1985 to 134 m

1986 1991 {Table 4) 4 The improved tax buoyancy has been suchthat _ts 1986 1991 level did not only rise above the 1981 1985 level

(0 92) but also surpassed the 1976 1980 level (1 09)

Table4BuoyancyCoefficientof MajorTaxGroups 19751991

19761985 19801985 19861991

Alltaxes 088 0 92 1 34

Income/profit 094 1 12 1 62IndlwdualIncometax 0 44 1 08

Corporateincometax 1 18 1 20Passive 5 05 3 20

Sales/l_censetax 095 0 69 1 26

SalesNAT+otherpercentagetax 0 83 149Exc_setax 102 138 0 58

Otherdomestictax 0 77 187 141

Importdutiesandtaxes 076 0 49 1 66

Source Author'sestJmates

4 Buoyancy refers to the ratao of the percentage change m tax revenue to the

percentage change m aggregate income GNP w_th the revenue changes mclus_ve ofthe increments m revenues brought about by thscre_onary tax measures It measures

the responsiveness of tax y_elds to changes m economm ac_wty

12 ROSARIOG MANASAN

Tax structure

Taxes on income andprofits The revenue performance of the aggre

gate tax on income and profits dramatically improved due to the

almost equal increases {0 6 percentage points on the average) m the

tax yield to GNP ratio of the mdwldual Income tax the corporate

income tax and the tax on passive income in the last SL_years (Table

1) Revenues from taxes on income and profits registered above

average growth rate dunng the period Compared with other direct

taxes revenues from taxes on passive Income exhibited the fastest

rate of growth (9.3 4 percent annually) in 1986 1992 Revenues from

the mdlwdual income tax (21 3 percent yearly) followed In contrast

revenues from the corporate income tax grew at a slower pace (19 3

percent yearly)

The tax rate hikes on interest income and royalties m 1986 as

well as the high Interest rate regime m the last six years completely

cancelled the negative revenue effect of ehminatmg the tax on

dlmdends The pomtive revenue impact of the switch from the

schedular to a global system and the reforms m tax administration

particularly the expanded coverage of the withholding system also

blunted the antmlpated revenue loss from the following 1) lowered

mdlmdual income tax rate on business and professional income

2) Increased personal exemptions and 3) the newly introduced

separate computation of spouses tax habihty However the mtro

ductlon of the tax holiday as an investment incentive in the Omm

bus Investment Code of 1987 and the existence of certmn loopholes

m the tax structure (such as those where firms enter into back to

back loan transactions to reduce their tax habflity) sermusly eroded

the corporate income tax take 5

On the whole the prowsmns of the 1986 Tax Reform Package

also promoted efficleney and equity Manasan (1990) showed that

the promslon allowing spouses to compute their tax liabilities

separately equalized effectively the marginal tax rates on the pn

5 Firms have an mcentave to engage m tax arbitrage by takang out loans and mvestangthe proceeds m high 3neldmgq_reasury bills In thas arrangement interest income istaxed at a rate of 20 percent while corporate income net of the interest expense istaxed at 35 percent

BREAKINGAWAY FROM THE FISCAL BIND 13

mary and the secondary earner She also demonstrated that ab

stracting from evasion the switch to the global system resulted m

a more neutral treatment of wage and non wage earners and m a

more progressive tax structure Moreover she argued that umfymg

the corporate income tax rate removes the blas against large and/or

profitable enterprises inherent in the dual rate structure that was

prevlously in place Finally Table S shows that the Phlhpplne

income tax structure is roughly comparable with those of other

countries In the region

Table 5

Indw,dual Income Tax Rate and Corporate Income Tax RateIn Selected Asian Countries 1990

(In percent)

MaximumMarginalRate CorporateIncomeCountnes Ind,wdualIncomeTax Tax Rate

Indonesia 35 35

Malaysia 40 40

Ph=hppmes 35 35

Singapore 33 33SouthKorea 50 30

Thailand 55 35

Source Manasan(1990)forcorporateincometaxrates

In 1992 Republic Act 7497 was passed permitting mamed

mdlvlduals to claim personal exemptions equal to P18 000 each

prowded both spouses were working While this amount is not large

If compared wlth the cost of hying mdlcators it is out of hne wlth

the P9 000 personal exemptlon allowed for single indwlduals Thus

this provlsmn led to a substantml loss m revenue (equal to about

P2 bilhon) wlthout any clear efficiency gains

The S1mphfied Net Income Taxation (SNITS) was also enacted m

1992 It reverted the ]ndlvidual income tax to the schedular system

14 ROSARIOG MANASAN

It reduced the tax rate on business trade and professlonal income

to 3 30 percent in contrast to the 0 35 percent rate for compensatlon income However SNITS restricted allowable deductions

against gross income to seven types of direct cost salaries of

employees raw materials and supphes business rental teleeom

mumcatlon and utilities expenditures depreclatlon interest pay

ments and contributions to government accredlted relief

orgamzatlons Expendltures on transportatmn representatmn and

advertmements are no longer tax deductlble as prevlously prac

tlced However _t replaced the provmion for a 10 percent optmnal

deductmn w_th one that allows 40 percent optlonal deductmn

SNITS clearly sought to plug the leakages m the system arising

from overstatmg tax deductmns particularly those related to trans

portatmn representatlon and advertmmg expenditures The tmpor

tance of Imposing celhngs on deductlons cannot be overemphamzed

But at this point the dlrectlon of net revenue gain from the SNITS

remains unclear Some anecdotal ewdences mdlcate that the SNITS

may result in a lower tax take than antlclpated Some also pointed out

that the 40 percent optmnal deductmn may be too liberal for certmn

groups of taxpayers Income sphttlng for mlxed income earners and

the reduced tax rate also work to lower the effective tax rate Moreover

the return to the schedular system once again Implies the recurrence

of efficlency problems assocmted with that system as noted earher

Import duties and taxes Of all indirect taxes duties and taxes

on _mports are the most Important in terms of revenue yield

Although their proportion to total taxes dechned from an average of

32 5 percent in 1975 1982 to 31 4 percent m 1983 1985 the share

of import revenues again chmbed upwards m the succeeding years

to about 35 percent m 1991/1992 (Table 3) In those years importdutles and taxes combined proved to be the blggest revenue earner

of all the major tax types

Measured relatlve to GNP national government revenues from

imports regained m 1986 1992 the two percentage points lost m

1980 1985 Thus Import duties and taxes stood at 5 3 percent of

GNP m 1992 from a low 2 8 percent m 1985/1986 (Table 1) Thin m

even greater than its peak level of 4 6 percent of GNP m 1980

BREAKINGAWAYFROMTHE FISCALBIND 15

Moreover tariffs and taxes on imports combined surpassed all

other types of taxes m terms of growth rate m 1985 1991 wlth an

average annual rate of increase of 26 4 percent during the period

Imtlally thls development was surprising given the overall reductionm tariff rates under the Tariff Reform Program started m 1981 A

number of factors moderated the expected negative impact of the

program on tariff revenues First an import surcharge/levy took

effect m 1983/1985 and then again m 1991/1992 m response to a

balance of payments {BOP) cnms in those years Second the wlth

drawal of the privilege of government corporations to capltal Impor

tatlon free of tax and duty in 1984/1985 blunted the likely drop m

revenues from thls source Table 6 shows a dechne in the proportion

of non dutlable imports to total imports m 1986 1988 In 1988

however the share of non dutlable imports began to inch up again

Third the mtroductlon of the Comprehensive Import Superwmon

Scheme (CISS) m 1987 somewhat improved customs collection

efficlency On the whole the changes m the tariff rates and m the

coverage of exemptions appear to have largely cancelled each other

out as suggested by the fairly even estimates of effectlve tariff rates

on total imports m 1980 1987 Although the effectlve tariff rate on

total imports tapered off in 1987 1990 a trend reversal occurred

when the import levy took effect in 1991 Finally the rapld growth

m tariff revenues m the last SLXyears resulted to a large extent

from the robust growth m Imports during the period

EO 470 which hopes to further cut down tariff rates and

restructure the tariff system over a five year pemod took effect in

1991 While the revenue effect of EO 470 is expected to be negatlve

its posltlve effects on overall competltlveness through further reductlon In the level and variation in effectlve protectlon rates are

well documented {Table 7)

An outstanding Issue on the tariff system still emsts Thls relates

to the use of the home consumption value (HCV) as the basls for

computang tariff To date the Phfllpplnes m the only country in the

world which does not use either the Brussels Definitlon of Value

(BDV] whlch is essentaally based on the export price plus insurance

and freight or the GATT system whlch m based on transactions

value Some sectors argued that since the HCV is generally higher

Table 6Value of Imports and Duties Collected and Average Effectwe Rates 1980 1990

(In b,ll,on pesos)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Total_mports 48.080 54030 64120 82.220 99710 92060 98697 124108 137206 225240 290082

Dutiableprnporls 37850 42780 54280 44270 61760 54370 70701 101153 103114 148013 187202

Non-dubabte_mports 10230 11250 9 840 379,50 37950 37690 27998 22955 34092 77227 102880

/otototal 2128 2082 1535 4616 3806 4094 2837 1850 2485 3420 3547

Totalimportdubesandtaxescollected 11453 10603 12141 15839 17329 16590 16965 25627 24866 38231 46514

TotaldutJescollected 7867 7 38t 8 551 12088 14199 13497 13013 1801t 17614 28197 33692EffecWetariffrates

Totaltrnportdubesandtaxescodlectec_

totaldurable_rnports 3026 2478 2237 3578 2806 3051 24CO 2533 2412 2583 2485Effectrvetariffrates

To_aldutP_,scollected/

totaldurable=reports 2078 1725 1575 2731 2299 2482 1841 1781 1708 1905 1800

EffecbvetanffratesTotaltmportdubesandtaxes _>

collected/total=mports 2382 1962 1893 1926 1738 1802 1719 2065 1812 1697 1603 ,._

Effectivetanffrates

TotaldutJescollected/_altmports 1636 1366 1334 1470 1424 1466 1318 1451 1284 1252 1161 I_

Sourceofba_cdata BureauofCustoms

==Table 7

Average EPR and Standard Deviation by Major Groups Exportables and Importables(Using pnce comparison)

1979 1985 SD 1986 SD 1988 SD 1990 SD 1995 SDSector

Group

0396 AIlsectors 06470 04904 11655 03937 07564 03649 07084 02539 0384 02002 02642 ,..:j

Exportables 00690 0069t 00594 00411 00325 00414 00327 >_

lmportables 11756 10226 14507 08072 09053 07514 08806 04810 04904 03806 02620 :ZE_

03 22 Agnculture fishery and

foresb'y 01229 00900 03737 00503 02616 00521 02632 00353 02365 00265 02094

Exportables NA 0 0849 00967 0 0570 00967 -00570 00967

Importables NA 07962 02088 04833 02702 04928 02627 03527 01152 03109 00414

28-96 Manufactunng 09330 07335 15895 06017 10604 05549 10080 03582 04925 02804 03446

Exportabtes 00445 00455 01113 00119 00989 00128 00994

Importables 02710 10727 18010 08693 11724 08024 11194 05055 04787 03927 03221

Source MedallaErl_ndaMAnAssessmentofTradeandlndustnalPolcy1986-1958PIDSWo_ngPaperNo90-07andMedallaErlindaM "TanffReformAssessmentpresentedatt_ePhitlpp_neEconomicSooetyAnnualMee_ngonDecember131991

18 ROSARIO G MANASAN

than the BDV or transactions value its continued use effectively

raises the tariff on Phihpplne tmports and reduces the international

competmveness of local products Medalla et al (1993) shows that

while the wedge between the HCV and the mvome value is not very

high on the average inter industry variation is quite substantial

As such the dlstortlonary impact of the use of the HCV may be more

slgmfieant than what the average HCV to lnvome value ratio lnd_

cates Moreover the revenue impact IS not as large as earher

estimates suggest (Box 2)

Excise taxes Of all the major mdlrect taxes lemed on domestic

goods and servmes excise taxes on alcohohc products tobacco

products petroleum products fireworks clnematographm films

automobiles and certain product goods classified as non essentml

goods provide the most slgmficant revenue yield Measured m terms

of their share in total tax revenues of the national government and

their raze relative to the GNP excise taxes are also larger than any

of the tax components on income and profits The traditional role of

excise taxes has been maintained m recent years despite its sluggish

growth (10 8 percent) m 1986 1991 compared with the growth of

other tax categories (average growth rate of all tax revenues m the

same period settled at 19 1 percent) and its own growth m earher

periods (18 0 percent m 1976 1982 and 32 9 percent m 1983 1985)The share of exc_se taxes in the total tax revenues of the national

government rose from an average of 16 3 percent m 1976 1982 to

20 percent in 1983 1985 After peaking at 26 4 percent m 1987 its

contribution continuously dropped to 13 2 percent m 1992 (Table

3) It exhibited a mmllar trend when measured relative to GNP

Excise taxes remained steady at about an average of two percent of

GNP between 1976 1985 Rising from 1985 onwards it peaked at

3 3 percent of GNP in 1987 From then on it took a downtrend and

stood at two percent of GNP in 1992 (Table 1)

The poor performance of excise taxes in recent years resulted

from a number of factors F_rst the excise tax on petroleum products

diminished when the excise tax on fuel oll was abohshed m August1987 and the effective tax rates on other items were reduced m 1990

Second some cigarette manufacturers avoided or evaded paying the

BREAKING AWAY FROM THE FISCAL BIND 19

BOX 2

Use of HCV for Import Valuat=on

Since the Jnactment of the Ph_hpp_neTanff Act of 1990 the dutiable

value of imported articles depends on the price at which the good ts freely

offered for sale in the usual wholesale quantities _nthe domestic market of

the exporting country at the time of exportation Th_s price is also referred to

as the Home Consumption Value (HCV) The actual determination of the

HCV was rather spotty over the years because of the hmlted resources that

the Bureau of Customs (BOC) was able to allocate to verify the HCV) Since

the Society Generale de Surveillance (SGS) was engaged to inspect and

value imports the use of the HCV for import valuation has been raised

Importers have complained that the use of HCV for tariff assessment tend

to overvalue imports and effectively _ncrease the cost of doing business _n

the country w_th d_re _mphcatlons on the international competitiveness of

Phdlppme exports and the country s ability to attract foreign investorsThe results of Medalla et al (1993) demonstrate that the HCV valuation

system indeed raises the dutiable of imports and thus further d_storts the

protection structure Table B shows that the weighted average ratio of HCV

to invoice value (IV) is equal to 1 11 after the globahzatlon of the CISS The

study also noted that inter industry vanatlon Jn the HCV IV ratJo Is qu_tesubstantial w_ththe ratio varying from 0 95 for mrscellaneous manufacturers

to 1 18 for machinery and transport equipment The antra industry dtspersion

in the HCV IV ratio as measured by the standard deviation Jsalso uneven

The study concludes that the wedge between the HCV and the IV translates

into an additional tanff on imports The unevenness _n the HCV IV ratio

across and within industries imphes that the use of the HCV produces a

highly arbitrary impact on the protection structure Consequently the use of

the HCV introduces additional distortions that are not fully predictable fromthe nominal tariff rates

Note that Medalla s numbers tend to underestimate the true Increment

_nthe cost of _mported goods because _tdoes not take transactions cost _nto

account SGS officials md=cated that the number of appeals submitted to the

BOC SGS Import Valuation and Class=ficatlon Committee increased _n

recent months The appeals process _s not costless to firms and consider

able amount of resources has been expended on th_s

The use of the HCV also deters the flow of foreign _nvestments It does

so not only because _traises the cost of doing bus_ness _nthe Ph_hppmes

but also because _tmakes doing business In the country more cumbersome

4

20 ROSAPIO G MANASAN

Note that the Phthppmes_sthe only country _nthe world that has not adoptedthe Brussels D_fit itlon of Value (BDV) or the General Agreement on Tariff

and Trade system which is based on transactions value Thus foreigninvestors who are more familiar w_ththese systems find that they need to

acquaint themselves to a new system when they enter the Phfl=ppmemarketAt the very least they vLewedthis as an _rksomeand burdensome process

From the policy perspective tt _sthus tmperabvefor the Philippinestoshift awayfrom the use of the HCV VVhdethe countrys economic managersagree on the disadvantages of the continued use of the HCV they are veryconcerned about the negative impact on government revenues that such amove wdlentail In this regard it is important to point out that the reductionintariff revenues estimated by Medalla ranges from 3 9 percent (P2 8 billionbased on 1992 revenues) to 6 5percent (P4 7 bdhon)depending onwhetherthe elastlctty of demand for imports _sNgh orzero These numbers are lowerthan official estimates

Table B

Average HCVIIV by Commod=tyGroupMarch 16 December 31 1992

Stmple WeightedAve Std Ave Std

SITC Description HCVIIV Dev HCVIIV* Dev

0 Food 1095 0328 0947 0042

1 Beveragesand tobacco 1208 0394 1 054 0 0442 Crudematprlals=ned=ble 1 292 0685 1 130 0 0133 Mineralfuels 1 186 0426 1 120 0 008

4 Anlmalandveg oils and fats 1341 0841 1118 00125 Chemicalsandproducts 1381 0 755 1063 00626 Mftdgoodsby matenal 1609 0 925 1044 0 1227 Machineryand transport 1 191 0 440 1 183 0 031

equtpment8 Misc manufactures 1 361 0 873 1076 0 004

9 CommodltlesNEC 1 355 0661 1126 0033M_xed 1348 0712 1166 0006

Allcommod=tlesexceptSITC9 1291 0713 1 110 0033

ValueofimportsisusedasweghtSource Medallaetal 1993Notes BOCBureauofCustoms

NECnotelsewhereclasaredSITCSlandardIntemaIionalTradeClassification

BREAKINGAWAYFROMTHE FISCALBIND 21

correct taxes through transfer pricing and mlsclasslficatlon of

brands Some analysts estimated the revenue loss at about P3

bllhon per year {Monsod 1993) Th:rd the tax base generally lagged

behind GNP m terms of growth Thxs last point rinses the msue of

whether the present excise tax rates are too high such that they

exert a negahve impact on demand and consequently on taxrevenues

In June 1993 Congress enacted a law revaslng the exeme tax on

clgarettes following acnmomous debate and intense lobbying from

various interest groups Unfortunately much of the debate centered

on the relative merits of specific and ad valorem taxation when the

real problem hes m the system s loopholes whlch permltted relative

ease m reducing tax hablhty through transfer pricing between the

cigarette manufacturer and wholesalers/traders and the mmclassl

ficat:on of brands While the mlsclasslficatlon issue appears to have

been adequately resolved the use of marketing frms to avold paying

the correct taxes is only i_artlally addressed by the mtroductlon ofthe floor tax 6 Moreover the new law continues to wolate GATT rules

by maintaining the higher rates on imported clgarettes relative to

their domest:cally produced counterpart

Sales tax and hcenses Sales tax and hcenses became the thlrd

fastest growing tax category m 1985 1991 wlth an average annual

growth rate of 20 3 percent compared wlth a 19 1 percent rate of

increase for aggregate tax revenues Thls marked a big shift from its

past performance Of the major tax groupings sales tax and hcenses

proved to be one of the most sluggnsh m 1982 1985 expanding by

only 15 8 percent on a yearly average

Consequently the share of sales tax and hcenses to total tax

revenues expanded from 12 5 percent m 1985 to 13 3 percent m

1992 (Table 3) Similarly revenues from sales tax and hcenses rose

from 1 4 percent ofGNP m 1985 to two percent m 1992 its highest

level m the last 18 years (Table 1)

6 Abstracting from the floortax and the classdicatton msue the provasxonthat apphesa 20 percent mark up to the reglstered manufacturer s price to arnve at the constructive pnce effectively raxses the revenue by 20 percent However _t tends to penahzefirms that used to pay the correct taxes relative to those that avoided doing so

22 ROSARIOG MANASAN

The VAT s mtroductlon m 1988 largely accounts for the credltable

performance of sales tax and hcenses The first two years of _ts

Implementatmn were problematm The ratm of revenues from sales

tax/VAT and other percentage taxes to GNP dropped from 1 4 percent

m 1987 to 1 2 percent m 1988 and 1 37 percent m 1989 But it has

recovered since then reaching 1 6 percent m 1992 It Is slowly

emerging to be a better revenue earner than the sales tax (Table 8)

Table 8

Comparatwe Yield of Sales Tax and VAT 1987 1992(In mdhon pesos)

1987 1988 1989 1990 1991 1992

VAT 59312 71467 101345 130793 150957 181129

OPT 34734 21449 24136 28143 35077 37171

Total 94046 9 2916 125481 158936 186034 218300

% toGNP 140 1 17 137 148 147 159

OtherpercentagetaxesareincludedinthisanalysisbecausetheVATreplacedsomeofthesetaxes

Manasan (1990) showed that the introduction of the VAT greatly

Improved efficmncy by reducing the average effectwe tax rates or

ETR (t e the sum of direct and indirect taxes on output resulting

from the successive layers of taxes on output taxes on inputs mto

outputs taxes on inputs into inputs etc ) from 14 4 percent to 6 5

percent as well as the variation m the ETRs from a range of 1 3 34 6

percent to a range of 0 4 13 3 percent The difference between the

ETRs and the nominal rates (whmh measures the extent inputs are

taxed mdmatmg the dmtorttons arising therefrom) was halved from

an average of 7 2 percent to an average of 3 3 percent Manasan also

estabhshed that the VAT m shghtly more progresswe than the

sales/turnover tax it replaced However she noted that taxes on

inputs under the present VAT stall accounts for more than 50

percent of the ETRs mdmatmg that some gains m efficmncy could

be achieved if the number of goods exempted from VAT is reduced

Thus thin supports current proposals to further refine the VAT

BREAKINGAWAYFROMTHE FISCALBIND 23

Meanwhile the gross recelpts tax on banks was found to con

tribute to the hlgher cost of financlal mtermedlatlon m the country

today (Lamberte 1990) Because of thls it is recommended that the

gross recelpts tax be abohshed

Tax evasion

The previous section indicates that changes in both the structure

of the tax system and its admlmstratmn m the last half of the 1980s

greatly improved revenue performance However estzmates of tax

evaslon zn recent years zndzcate that vast opportunzt_es exzst for

collecting more revenues w_thout the need to razse tax rates or to

tmpose new taxes It should also be emphasized that tax evaszon

weakens the progressltnty of even the best designed tax systems

Evaszon of the mdwldual zncome tax Table 9 presents revised

and updated estimates of the potentml revenue from the mdw1dual

income tax The numbers suggest that some improvement albelt

somewhat spotty occurred m its collectlon rate from 26 9 percent

m 1985 to 34 percent m 1991

Table 9Potent,al Revenue from the Indw,dual Tax and the Level of Tax Evasion

Collect,on Potent,al Actual Evas,on

Rate Revenue Revenue Difference Rate

(%) Year (PM) (PM) (PM) (%)

269 1985 2194960 5 9120 160376 73 1

383 1988 1550474 59400 95647 617

28 5 1988 2788730 79470 199403 715

35 1 1990 46 20030 162060 299943 649

340 1991 61 11210 207446 403675 660

Source Potent,alrevenueauthor'sest,matesActualrevenueBureauofInternalRevenue

24 ROSARIOG MANASAN

Despite the progress achieved to date m reducing the evamon

rate of the mdlmdual income tax Table 9 also shows the big potentlal

to increase the government tax take by improving further the

collection machinery Uncollected revenue from the mdlwdual m

come tax amounted to some P40 4 bflhon (or 22 2 percent ofnatlonal

government tax revenues) in 1991

Evaszon o/the VAT Potential revenue estlmates from the sales

tax/VAT mdlcate that while the collectmn rate deteriorated from

31 7 percent in 1985 to 27 8 percent in 1989 it has recovered since

1990 to reach 38 4 percent in 1992 (Table 10) Undeniably the early

years of VAT implementatlon were problematlc However emdence

seems to show that It has Improved considerably in the last three

years

Again the gains to be had from an admmlstratlve reform of the

VAT system continue to be large VAT s potential revenue m 1992

is P47 2 bflhon or 3 5 percent of GDP while actual collectlon reached

only P18 1 bflhon or 1 3 percent of GDP Thls Implies that the

amount of evasion and other leakages in that year amounted to

P29 1 billion (or 13 9 percent of national government tax revenues)m 1992

Admlttedly tax evamon estlmates are not preclse Because what

ts being measured Is something whmh is hldden and not directly

observable measurement errors cannot be assumed away Thus

the estimated evamon levels are at best approximate However the

magnitude of tax evasmn levels are so huge that even If one allows

a margin of error as large as 50 percent the estlmated leakage m

the tax system remains substantial

Sources of" evasmn 7 Manasan (1988) noted that tax evasion

usually takes the followmg forms non flhng of tax returns overstated

deductions and non reporting and/or understated income/sales

Comparing the actual and the potentlal number of Individual

income tax fliers reveals that outright non fihng of tax returns is amajor source of mdlmdual mcome tax evasion Table 1 1 shows that

7 This section draws heavily from Manasan (1988)

Table 10Potential Revenue from the VAT and the Level of Tax Evasion

Potenbal Potential Actual Evasion Collecbon _:Revenue Revenue Revenue Difference Rate Rate

Year {Inre,ilionP) %of GDP (InmilSonP) (InmillionP) (%) (%)F

1985 94280 165 29960 64320 68 2 318

1989 364140 394 101345 262795 722 278

1990 393950 368 13079 3 263157 66 8 332

1991 454430 365 15095 7 303473 66 8 332

1992 47 1910 352 181129 29078 1 81 6 384

Source Authorse_mates

26 ROSARIOG MANASAN

only 22 5 percent of potentlal taxpayers filed their income tax retums

m 1990 The Economlc Intelhgence and Invest_gatlon Bureau or EIIB

{1992) noted a slmdar problem emsted wlth regards to the corporate

income tax The problem also exasts m other types of taxes

Table 11

Potential and Actual Number of Individual Income Taxpayers 1985 1990

PotentialNumber ActualNumberof Actual/

of Indwldual Individual Potential

Year Taxpayers Taxpayers (%)

1985 10074039 2336337 23 19

1986 9247644 2093335 22 64

1988 10544 154 2434520 23 09

1990 11651988 2 619271 2248

Source Potentialnumberofindividualtaxpayersauthor'sestimateActualnumberofwndMdualtaxpayersBureauofInternalRevenue

Whale many tax hable mdwlduals and corporatlons opt to file

thetr tax returns (because such is needed to expedlte certain

transactions e g wlth banks or those related to travel abroad)

many of these tax fliers underdeclare thelr income or recelpts Many

taxpayers appear to adhere to the following precept What the tax

collectlon agency does not know wdl not hurt the taxpayer

Another n-nportant source of evaslon _s overstating expenses and

allowable deducttons in the case of self employed mdlwdual income

taxpayers and corporate taxpayers The Natlonal Tax Research Center

or NTRC (1986) reported a wlde dlsperslon m the ratio of deducttons

claimed to gross income Moreover Manasan (1988) estabhshed a

slgmflcant posltwe relatlonsh_p between the ratio of deducttons to

gross income and the gross mcome levels of mdlvldual income taxpay

ers At the same t_me she also found a posltwe correlation between

the ratlo of the deficiency tax (due to audit) to actual tax and the ratio

of deductions to gross income for corporatlons All these lndlcate the

prevalence of overstating deductions for tax purposes

BREAKINGAWAY FROM THE FISCAL BIND 27

Theoretlcal hterature suggest that a hlgh penalty rate and a high

probablhty of detectlon can effectlvely deter tax evasion The preva

fence and magnitude of tax evaslon m the country thus mdlcate

that exlstmg penaltles and/or the Iukehhood of being caught and

pumshed are not hlgh enough to actually discourage evamon The

creation of special tax courts and the passage of new law prowdmg

stiffer penaltles on tax evasion are steps m the right dlrectlon

However resoluteness on the part of the BIR and BOC to enforce

the legal sanctlons continues to be a crltlcal concern It _s notewor

thy that m recent months such commltment seems to be more

forthcoming than ever before

The study also identified other weak points m the tax admml

stratlon system that encourage evamon low computemzatlon level m

the major collecting agencies and mabfllty of the BIR/BOC to access

avadable data on the true income/receipts of hard to tax mdlwduals

These will be discussed m greater detail m the following section

Reforming tax administration

Various studies identified the following Issues concerning tax ad

mlnlstratlon

Too much centrahzatzon The NTRC (1986 1991) noted that the

BIR has a hlghly centrahzed orgamzatlonal structure Both the

central office and the regional offices heawly engage m the actual

collection audit and mvestlgatlon of taxpayers This arrangement

has led to a number of mefficlenc_es m assessment and collection

enforcement

The centralized procedure m issuing the Letter of Authority to

audit has led to substantml delay m the assessment process For

instance Manasan (1993a) found that It took from three to six

months on the average between the receipt of an apphcat_on for VAT

credit and the issuance of the Letter of Authority to audit Also under

present rules collecting accounts receivable exceeding 20 000 falls

under the jurlsdlctlon of the national office This sltuatlon has not

helped unclog the plpehne collection of uncollected dehnquentaccounts as the number of accounts receivable has remmned high

28 ROSARIOG MANASAN

over time Thus greater delegatton of authority should be pursued

within the BIR to enable the central office to concentrate on pohcy

formulation program planning and evaluatlon of the management

effectiveness of the lower level offices regmnal offices should focus

on momtonng and evaluating the revenue dmtncts operataons

Under such a set up personnel across revenue dlstncts should be

reallocated since the dmtnbutlon of revenue personnel m hlghlyuneven and does not match the actual work load m some revenue

dmtncts (Table 12) Recent pronouncements mdlcate that BIR offi

clals are fully aware of these posslblhtles and have attached highpmonty to decentrahzatlon

Weak systems and procedures The absence of an updated

master hst of taxpayers mgmficantly contributes to the poor morn

tormg of tax comphance Manasan (1991) uncovered for instance

that revenue dmtrtct offices found it dlfficult to Identtfy stop fliersand follow up dehnquent accounts because of the absence of a

master file of VAT taxpayers The introduction ofa umfied taxpayer

identlflcatlon system with the msuance of a unique Taxpayer Iden

tlflcatmn Number {TIN) to all taxpayers regardless of the type of tax

they pay will go a long way m improving the system Increased

computerization will also make it easier to maintain the TIN system

Meanwhile the NTRC (1986 199 I) identified the need for a clear

cut and defimtlve pohcy on selecting audlt cases Thin should reduce

the assessment workload at the BIR to manageable levels While It

Is tempting to concentrate on the audlt of large taxpayers for reasons

of revenue producUvlty such a pohcy may lead to the unwanted

result of increasing concentratmn of collectmns from few taxpayers

(de Jantscher et al 1991) Thus a schelI_ whereto a specificpercentage of returns per income bracket m selected for audit shouldalso be consldered

The NTRC (1986 1991) als0 recommended the need to adopt amore vlgorous program of collectmn enforcement The non enforce

ment of warrants of distraint and levy on property that have already

been msued remains a major problem The study attributes thin

partly to the lack of revenue selzure agents and partly to the more

baslc problem of phymcally locating defaulting taxpayers

Table 12

D,stnbut,on of Taxable Returns Filed ,n 1990 and Assessment Personnel by Revenue Regton

AverageNo

ofTaxableRevenueRegion Numberof ReturnPerAssessmentAssessment

.11

Total Individual Corporation Pertnersh_p Personnel PersonnelE

(1) (2) {3) (4) (5) (6)- (1}/(5)Total 1694067 1672,052 20605 1410 2,215 765

56451 55993 446 I2 126 448 _.1 BaguloCity2andCAR TuguegaraoCegayanandCorddleraAdmln_sb'abonRegion 76900 76520 370 10 69 t 114 m

,.3A SanFemandoParnpanga 77077 76400 611 66 1t8 6533B ValenzuelaBulacan 173752 172276 1369 107 165 10534A Manda 178043 173681 3874 488 315 565

481and4B2 QuezonCdyandMa_tl 505248 495931 8964 353 591 8554C SanPabbC_ty 91562 90941 594 27 90 10175 LegaspCdy 55866 55602 264 -- 62 901

6A IlodoQty 57295 56820 433 42 60 9556B Baco_ndC_ty 54731 53825 848 58 t08 5077 CebuC_ty 95855 94701 1046 108 140 685

8 TaclobanCdy 39485 39298 182 5 59 6699 ZamboangaQty 40940 40662 243 35 57 718

10A CagayandeOroCity 57601 57253 330 18 65 88610B BuPJanQty 31260 31133 116 11 45 69511A CotabatoCdy 33693 33425 249 19 59 571

11B DavaoQty 68308 6759"= 668 51 86 794

Source BIRAnnualReportasc_tedknNarwhalTaxResearchCenter(1991)

30 ROSARIOG MANASAN

Low level ofcomputenzatmn Although the BIR has a long hmtory

(starting m the mld 1960s) of computer use its present state of

computerlzatmn remains pnm_tlve Thin was attributed to the grow

mg obsolescence of the mainframe computer system their made

quate maintenance the acute backlog m data procesmng and the

lack of an integrated database m the BIR (Crown Agents 1993)

Instltutlonahzmg a major computenzatlon program wouldgreatly enhance the agency s collectlon enforcement and assess

ment functlons It should be emphamzed however that while

computemzatlon will greatly improve collectlon and collectlon en

forcement It will not cure all the 111s that currently plague the tax

admmmtratlon system Better systems and procedures w111lead to

better collectlon performance even wlthout the benefit of increased

automatlon (see preceding sub sectlon 1

Manasan (1988) noted that increased computemzatlon would

make It earner for the BIR to access mformatlon lodged m other

d_vlslons within the BIR and m other government agencles hke the

Bureau of Customs Socml Secunty System Department of Trade

and Industry and Secuntles and Exchange Commmmon In thls

way the BIR would be able to seek out more aggresmvely tax hable

mdw_duals and corporatlons who do not file thelr returns

The greater ability to access these external sources of mforma

tmn through greater computemzatmn could also help the BIR combat underdeclaratmn of income First It w111 be earner to

operatmnahze presumptlve income taxatmn (whereby tax m as

sessed not on the basra of declared income per se but on mdlcators

of income) Following the experience m other countries {World Bank

1982) specified amounts of income may be presumed to be assocl

ated wlth for instance ownership of remdent_al property automo

bales boats mrplanes and race horses forelgn travel and

employment of servants Related to thin the Bank Secrecy Act

prohlbltmg the dmclosure of mformatmn on bank deposlts greatlyimpedes the BIR s access to reliable mformatmn on the net worth

(and accretmn thereto) of mdlwduals An amendment of thin lawtherefore m m order

Second computer asmsted audit selectmn cnterla will greatly

increase the cost effectlveness of BIR audlts S1mllarly the enlarged

BREAKINGAWAY FROM THE FISCAL BIND 31

mformatlon system that would also result from a major upgrade of

the computemzatlon level should make It earner for the BIR toestabhsh "norms and standard ratlos that its examiners can use

m evaluating taxpayers deductlon clalms The D1scmmlnant Func

tlon System or DIF (whlch measures the probablhty of tax error m

taxpayers returns glven mdlcators hke economlc act_vlty sales

reported annual mark up and dlscrepancles resulting from cross

checking mformat_on from other agenclesl has been used m other

countries to maxlmlze the effectiveness of audlts (de Jantscher et

al 1991)

Thlrd computerization should mmlmme m the medmm term

contact between the revenue agents and the taxpayers whlch

presents opportumtles for corruptlon For instance computenmng

BOC operations should lead to mechamzed processing of tax docu

ments clasmficatlonoflmports assessment and paymentofdut_es

and taxes Under thls system only taxpayers tagged as hlgh risk

ones will be subject to audlt (Alano and Medalla 1993)

Thus the ongoing computenzatlon program at the BIR and

BOC whlch is expected to be completed m 1997 w111greatly improve

tax admmlstratlon m the medmm term

Low compensa_on of tax collectlon personnel Alano and MedaUa

(1993) pointed out that the low wages of revenue agents compared

w_th the large amounts that tax evaders can offer provldes the

blggest problem m curbing tax evaslon They suggest that a per

formance based compensatlon scheme be mstltuted to effectlvely

mmlmlze the dlspamty between legal and illegal raceme of revenue

agents They argue that such a system coupled w_th greater flexa

bdlty m hlnng and firing tax collection personnel will be a powerful

dlsmcent_ve to corrup_on at the BIR and BOC They noted that the

success of private agenmes hke the SGS can be traced to then" abfllty

to employ and mmntmn a hlghly quahfied effiment and honest

workforce by using the right combmatlon of reward (compensation)

and pumshment (hlmng and finng)

32 ROSARIOG MANASAN

Proposed tax enhancement measures

Since 1986 numerous tax measures have been proposed and

enacted year after year because of the need to bridge the gap between

projected revenue and programmed government expendltures Most

of these measures have the overriding objectlve of generating addl

tlonal revenues However the analysis above shows that thelr

impact on overall efficlency and equlty has not always been favorable At the same tlme the ceaseless stream of new tax measures

leglslated each year places undue burden on the tax admlmstratlon

system whlch further exacerbates the poor state of tax collectlon

and enforcement m the country

In pmnc_ple new tax measures should focus on plugging |oop

holes m the tax system should lead to efficiency gains and should

not make the tax system more regresmve than before Because not

all tax proposals meet all of these objectlves pohcymakers should

take into account the trade off between these sometimes confllctmg

goals as they often mdlcate the impact of vamous tax measures on

sustainable growth Also the cost effectiveness of each tax measure

0 e potentlal revenue relatwe to the cost of collecting the tax)should recelve due conslderatlon

Given the above perspective it _s appropnate to broaden the VAT

base and ratlonal_ze the motor vehlcle reglstrat_on fees As noted

elsewhere m thls paper including more goods and serwces m the VAT

system will lead to efficlency gains as _t reduces tax cascading Given

the earher expemence w_th the VAT It _s hkely that such a move will

not make the tax system more regresslve than before On the other

hand transport studies show that the current revenues from road user

charges do not suffice to cover the cost of road wear and traffic

congestion {Nathan Associates Inc 1990 World Bank 1988b) These

studles also show that registration fees follow an overly complex and

dlstortlonary structure They noted that damage done on roads de

pends primarily on the axle load rather than on total weight Conse

quently rigid trucks 0 e two and three axle trucks) appear to be

under taxed relative to articulated trucks under the exlstmg system

In contrast the proposed increase in the documentary stamptax and m the stock transactions tax the shlft from the ad valorem

BREAKINGAWAYFROMTHEFISCALBIND 3:]

to the specific system m taxang dlstflled splnts and fermented hquor

and the land convermon tax do not seem deslrable Ralsmg the

documentary s_amp tax (DST) would further increase the already

hlgh cost of doing business m the country In partlcular theproposed increase m DST on financml instruments would increase

the cost of capltal It would also exacerbate the uneven treatment

of foreagn exchange transactaons an the banking sector compared

wath those m the informal sector and does not take into account the

hagher counterpart risk m the latter Contrary to the contentlon of

certain sectors the prevmhng DST m most cases as effectavely an ad

valorem tax it as not a Fixed tax Thus except for the DST on bank

drafts and checks warehouse receipts promes and powers of

attorney DST rates need not be adjusted penodacally for mflataon

Also the proposed increase m the DST (on stocks and bonds) and

m the stock transactaon tax _s mconsastent wath the government

thrust to develop the capatal market since at tends to hamper the

much needed investment growth Converting the present ad valorem

tax on dlstdled sprats and fermented hquor to specafic tax wall make

the system less buoyant and will necessltate frequent adjustment

m the tax rate through legaslatave actlon samply to mamtmn the real

value of tax revenues The pubhc debate on the c_garette tax shows

that thas case reqmres a tamper proof defimtlon of the tax base (one

that would make the tax less vulnerable to tax avoldance) coupledwlth stricter enforcement of the law

Meanwhile the proposed land convermon tax would tend to

deter the socaally optlmal shift m land use If the present landclasslficat_ton under the CARP law as v_ewed to be reflectave of the

best land use then the conversaon from agricultural to resldentmlcommercaal or industrial use should not be allowed at all But if

thls as not the case then the land converslon tax would tend to have

deleterious allocatlve effects

Finally while the proposed expansaon m the excase tax coverage

on non essential commodltaes and the amposatlon of a national tax

on real property are demrable to enhance the redlstnbutlve charac

ter of the tax system they requxre further study m terms of thear

_mpact on other economic goals Wdl the exc_se tax on affluent

consumption generate enough revenues to warrant the cost of

84 ROSARIOG MANAS/

collecting it? Will a natlonal tax on real property adversely affect tax

revenues of local governments?

Reforming Local Government Taxation

Pubhc sector finance 112recent hlstory Is largely concentrated at the

center wlth local government units (LGUs) accounting for seven

percent of general government s expendltures or 1 6 percent of GNPm 1980 1990 (Table 13) The degree of fiscal decentrallzatlon ap

pears lower when measured in terms of revenues Local govern

ments account for approxlmately five percent of total general

government revenues during the perlod (Table 14) Thls has resulted

from the fact that about 50 percent of total LGU income comes from

external sources mainly transfers from the natlonal government

Thus the revenue effort of all LGUs m the aggregate has remained

low with locally generated revenues not exceeding an average of one

percent of GNP m the 1980s

The real property tax (RPT) is the single major source of locally

generated LGU income in 1980 1990 contributing 41 percent of

total LGU income from local sources But its importance weakened

in the 1980s its share in total local source LGU income dechned

from 46 percent in 1980 to 40 percent m 1990 Real property tax

effort hkew_se deterlorated from 0 5 percent of GNP m 1980 to 0 3

percent m 1990 (Table 15)Meanwhile revenues from other local taxes also dechned

throughout the period relatlve to total local LGU revenues andrelatlve to GNP Revenues from other local taxes shrank from 29

percent of total locally sourced LGU income m 1980 to 25 percent

m 1990 S1mdarly it contracted from 0 3 percent to 0 2 percent of

GNP dulnng the period (Table 15) In contrast LGU income from

economic enterprlses kept pace wlth GNP and remained stable at

0 3 throughout the 1980s

Given the massive transfer of functions authol_tles and respon

slb111ties from natlonal government agencles to LGUs under the

8 General government Is composed of the natJonal or central government and thelocal government unlts

BREAKING AWAY FROM THE FISCAL BIND 35

Table13GeneralGovernmentExpenditures

(In millionpesos)

Year Total NG Local

1986 119122 110874 8 2481987 162487 153444 9 0421988 173328 162570 107581989 206613 193316 132971990 265411 247502 179091991 306435 282824 23611

Average198085 67502 61532 5 970198691 205566 191755 13811

%DIstnbubon

1986 10000 9308 6 921987 10000 9444 5 561988 10000 9379 6 211989 10000 9356 6 441990 10000 9325 6 751991 10000 9229 7 71

Average198085 10000 9116 8 84198691 10000 9328 6 72

RatiotoGNP(%)1986 1998 1859 1381987 2414 2280 1341988 2180 2044 1351989 2261 2115 1461990 2466 2300 1661991 2429 2242 187

Average198085 1788 1630 158198691 2320 2164 156

Sources AnnualF;nanc4alReportsDepartmentof InteriorandLocalGovemmentsandCommLss;ononAudit

Table 14

General Govemment RevenuesNominalLevels(tnmdhonpesos)

I Average19801985 Average19861991 t988 f

Total NG LG Total NG LG Total NG LG

Total 50101 46721 3 380 148813 141570 7 243 118360 112861 5 499Taxrevenues 43 540 41 163 2 378 121218 116368 4 851 94203 90352 3 85tNon taxrevenues 6 560 5 558 t 002 27 595 25203 2 392 24158 22509 1649

Raboto GNP(in percent)

I Average19801985 Average19861991 1988 I

Total NG LG Total NG LG Total NG LGTotal 1327 1238 090 1680 1598 082 1489 t4 19 069

Tax revenues 1153 1090 063 1368 1313 055 1185 1136 048Nontaxrevenues 174 147 027 3 11 284 027 3 04 283 0 21

PercentageDistnbut_on

I Average19601985 Average19861991 1988 IoO

Total NG LG Total NG LG Total NG LG

Total 1000O 9325 6 75 10000 95 13 4 87 10000 9535 4 65Taxrevenues 10000 9454 546 10000 9600 4 00 10000 95 91 4 09Non taxrevenues 10000 8472 1528 10000 9133 867 10000 93 18 682

Table 14 (conbnued)

NominalLevels(Inmillionpesos)

I 1989 1990 1991 I

Total NG LG Total NG LG Total NG LG

Total 161066 152411 8 655 190170 180902 9 268 231321 220788 10533 '<Tax revenues 128020 122463 5557 157710 151700 6010 189256 182276 6980

Nontaxrevenues 33046 29 948 3 098 32460 29202 3 258 42065 38512 3 553RabotoGNP(Inpercent) r_

[ 1989 1990 1991 I i

Total NG LG Total NG LG Total NG LG _.Total 1763 1668 095 1767 1681 086 1833 1750 083Taxrevenues 1401 1340 061 1465 1410 056 1500 1445 055Nontaxrevenues 362 328 0 34 302 2 71 030 333 305 028

PercentageDistnbubon

[ 1989 1990 1991 ]

Total NG LG Total NG LG Total NG LGTotal 10000 9463 537 10000 95 13 4 87 10000 9545 455

Taxrevenues 10000 95 66 4 34 10000 96 19 381 10000 96 31 369Nontaxrevenues 10000 9063 937 10000 8996 1004 10000 91 55 845

Notes LG- LocalgovemmentNG- Nabonalgovemment

t4OlD

Table t5

RevenueStructure of LocalGovernments 19801991

NominalLevels(inmillionpesos)

19801985 19861991 1986 1987 1988 1989 1990 1991Average Average

A Localsources 3 380 7243 4616 4 887 5499 8 655 9 268 10533

1Taxrevenues 2 378 4 851 3288 3 418 3851 5 557 6 010 6 980

1 Realpropertytax 1 460 2872 2080 2 123 2276 2 733 3 728 4 2932 Others 918 1978 1208 1295 1575 2 824 2 282 2 687

I_Operahngandm=screvenues 993 2 202 1323 1461 1634 2 444 3 039 3 310

Ill Capital 9 191 5 9 14 653 219 243B Externalsources 2 980 7 621 4 045 4036 7860 6 626 9 794 13366

1 Sharesfromnationaltaxes 2 335 5 234 3249 3359 4 202 4 097 6 995 9 504

2 Grantsandaids 496 2 253 734 633 3 604 2 457 2 693 3 396 o

3 Interlocalgovt trans 16 19 12 30 20 24 10 17

4 Borrowings 133 115 50 13 33 48 97 448

Totalincomeandextraordinary r.,,9receiptsandborrowings(A+B) 6361 14864 8 661 8 923 13359 15281 19062 23899

BR

EA

KIN

GA

WA

YFR

OM

TH

EFISC

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Table15(continued) o_

PercentageDistr=bubon

19801985 1986-1991 1986 1987 1988 1989 1990 1991Average Average

A LocalSources 5314 4873 5329 5477 4117 5664 4862 4407

I Taxrevenues 3739 3263 3796 3830 2882 3637 3153 2921

1 Realpropertytax 2295 1932 2402 2379 1704 1789 1956 17962 Others 1443 1331 1395 1451 1179 t848 1197 1124

II Operabngandmlscrevenues 156t 1481 1527 1637 1223 1600 1594 1385

III Capital 0 15 128 0 06 0 10 0 11 4 28 115 t 02B Externalsources 4686 5127 4671 4523 5883 4336 5138 5593

1 Sharesfromnabonattaxes 3671 3521 3752 3765 3146 268t 3669 3977

2 Grantsandaids 780 1516 848 7 09 2698 _608 1412 1421 _o

3 InterIocaIgovt trans 025 0 13 0 14 0 34 0 15 0 16 0 05 007 _o4 Borrowings 2 10 0 77 0 57 0 15 0 25 031 0 51 188

Totalincomeandextraordinary >_receiptsandborrowings 10000 10000 10000 10000 10000 10000 10000 10000

BREAKINGAWAYFROM THE FISCALBIND 41

Local Government Code (LGC) of 1991 It Is imperatlve that LGUs

m'e able to generate an increasing portion of thelr income from local

sources Thls is partlcularly true for some 20 percent of total LGUs

whlch wdl suffer negatlve net transfer of resources and expendlture

respons:bdltles from national government to local government

(World Bank 1993) For the other LGUs improvements m local

revenue mob:11zatlon is equally important if local autonomy is to be

meaningful Financial independence of LGUs Is a key mgredlent tothe success of decentralization mlhatlves Thus a clear under

standing of the problems underlying the poor revenue performanceof LGUs is in order

A number of factors account for the poor revenue effort of LGUs

First the central government severely restricted the latitude of LGUs

m determining the rates at which they may levy local taxes Also

the prescrlptlon of umt rates rather than ad valorem rates for mostlocal taxes other than the RPT made these taxes hlghly melastJc

(Table 16) Similarly the centrally mandated postponement of the

general revlslon of the schedule of fair market value of real propertles

meant that untd 1987 the real property tax was lewed on grossly

outdated (1981/1982) property values 9 The results of Tan (1993)

confirm findings from key informant lnterv-lews (Manasan 1992a)that the ratlo of the _rue market value to the falr market value m

the assessor s schedule vanes from 3 to 5 (Table 17) 10

The Code also reduced the assessment levels on real property

for tax purposes and exempted remdentml buildings wlth fair marketvalue below P175 000 Thus the schedule of fair market values

must be adjusted upwards to levels that more closely apprommatethelr true market values to counteract the negative impact of these

changes on potentlal RPT revenues Where possible LGUs scheduleof fair market values should not fall lower than the zonal values

9 Pres_dentlal Decree 464 (Real Property Tax Code of 1974) mandated that theschedule of fau"market values should be rewsed every three years In 1980 such arew_aon was implemented However the revlslon scheduled for 1983 was contmuously delayed t.fll 1987 Under the Local Government Code of 1991 a new scheduleis supposed to be put m place not latcr than 199410 The Local Government Code of 1991 transferred the authority and respons_blhty

to update and unplement the schedule of fair market values to IX]Us

42 ROSARIOG MANASAN

Table 16

Assessors Market Valuation and Advertised Market Prices

for Selected Prices of Property 1992

Assessors_ Actual Assessors_Market Market Valuation

Value Value MarketPrice

(PIm2) (PIm2) (%)Diliman QuezonCityCommonwealthAvenue 1800/m2 8000/m2 225

(DonMananoMarcosAve)AyalaHeightsSubdivision 2 000/m2 6 000/m2 333LaVistaSubdivision 800/m2 2 900/m2 27 6XaviervllleSubdlwslon 800/m2 7 000/m2 114

Makati

ForbesPark(residentalproperties 3 500/m2 15000/m2 233

boundedby EDSA Aim

McKinley Pih Tamannd

Buend=aandGu_nguaPasayRoad(commercialproperties 8 500/m2 41000/m2 207

fromEDSAtoPasongTamo)PasongTamo(VJtoCruzto J P 2 800/m2 9 300/m2 30 1

RizalSt )MakabAvenue(commercial 4 000/m2 38000/m2 105

resident=alpropertiesfrom

Gen LunaSt to J P RizalSt)MakatiAvenue(commerc=al 10500/m2 64000/m2 164

propertiesfromPasayRoadto JupiterSt )

SanMiguelVtllage 3 000/m2 50000/m2 6 0

Assessors Actual Assessors

Market Market Valuation

Value Value MarketPrice

(PIm2) (PIm22) (%)AgriculturallandLaguna

Coconutland P18/m2 P50/m2 3 6Fishpond P120/m2 P421/m2 285

Source E A TanRealPropertyTaxationandItsPotentialAsaMajorSourceofLocalRevenue=nPovertyGrowthandtheF#scalCrtsssbyDeDiosetal 1993

BREAKING AWAY FROM THE FISCAL BIND

Table17Buoyancyof Revenuesof LocalGovernments19801990

(In percent)

RevenueSources Buoyancy*

TotalRevenues 0 87I Localsources 078

A Taxrevenues1 Realpropertytaxes 0672 Taxesongoodsandservices

Businesstaxes 072Occupationtax 0 24Franchisetax 1 15F=nesandpenalt=es 109MKscellaneous 0 83

3 OthertaxesResidencetax 0 51Amusements 070Sandandgravel 024Others 1 22

B Operatingandmiscellaneousrevenue1 Governmentservices 0992 Governmentbusinessoperattons

Rentals 107Pubhcutlhtles 062Market 0 71Slaughterhouse 100Tollsonroadsandbndges 0 59Cemetenes 091Otherbusinessoperations 127

3 Interest 2014 Others 044

Totaloperatingandserviceincome 0895 Incomefrompublicenterpriseorinvestments 0 916 Msscellaneous=ncome 107

ContnbutJons 0 10Others 140

C CapitalrevenueSalesofassets 241

II Externalsources 0951 Sharesfromnat=onaltaxes 0 912 Grantsandaids 1 333 Inteflocalgovernmenttransfers 0484 Borrowings 0 84

BuoyancyisdefinedastheratJoofthepercentagechangeintaxrevenueto thepercentagechange

fn aggregate=ncorneGNP

ROSARIO G MANASAN

estabhshed by the BIR for purposes of determining the capztal gainsand the estates taxes

Meanwhile the LGC perm:ts LGUs to :mpose taxes on some

actlvlt:es and sectors that were formerly outslde the amblt of local

taxatlon Moreover the Code razsed the mammum allowable rates

at whlch most local taxes can be zmposed Desp:te these modzflca

tlons the scope of LGUs authority to levy business and other typesof taxes remains severely clrcumscr:bed and hmlted

Second local officlals faded to maxlmlze the use of thelr hmlted

revenue ra:smg powers (NTRC 1981 1992) Many LGUs d:d not

_mpose the mammum allowable rates under the old Local and Real

Property Tax Codes and chose to maintain thelr taxes at the same

nominal umt rates over the years desplte the clear eromon of their

tax yields by mflat:on In th:s respect LGUs must acqulre the

techmcal and poht:cal expertlse m setting local tax rates at levels

that are hlgh enough to maxlm_ze local revenues and low enough so

as not to dlscourage businesses from locating m thelr junsdlctlon

Third the admmlstrat_on of local taxes has been mefficlent In

the aggregate LGUs collect less than 60 percent of potentml real

property tax revenues (Table 18) Whde no est:mates ernst of the

efficlency m collecting other types of local taxes they may be lower

than that of RPT whose collect_on Is better orgamzed

Poor LGU tax admmlstratlon can be traced to the inadequate

systems and procedures that currently govern assessment collec

Table 18

Collectmn Rate for BasmcReal Property Tax(In percent)

Year CollecbonRate

1983 58 61

1984 54 24

1985 46 85

1986 51 37

1987 5282

1988 5430

1989 6815

1990 5774

BREAKINGAWAYFROM THE FISCAL BIND 45

tlon and enforcement The Associates m Research Development

(ARD 1992) noted that the required improvements are rumple they

only need to be practiced conmstently These improvements include

I) estabhshmg a tax roll for each type that the LGU admmlsters

(conducting a tax census and developing an integrated revenue data

bank are key steps in thls regard) 2) using mdlcators of presumptave

income prudently to arrlveat the _true gross recelptsofbusiness

estabhshments (thisinvolvesthe use ofstandard ratiosthat relate

the amount ofincome with givenlevelsofeasilyvcrlfiableexpendi

ture varlableshke utlhttes{electnclty/water)consumption rental

number ofemployees and the hke) 3)sending tax billson a regular

basis 4) consclentlouslymonitoring tax payments and identifylng

and collectingtax dehnquencles and 51strictlyimplementlng sanc

tions and penaltles(hke auctlonlng dehnquent real propertles

closing business estabhshments imposing penaltles and sur

charges atratesthatare high enough to hurt}on erringtaxpayers

Computerization ofrevenue operationsand greateraccessto mfor

matlon maintained by other government agcncles (hke the BIR

Regmter ofDeeds) would alsohlghlyreinforcethe posmve effectsof

the abovementloncd improvements on LGU finances With regards

to the realproperty tax however the biggestopportunityfor Im

proving collectionhes m proper recordsmanagement

Exploring the Potentml of User Charges

User charges refer to fees that the government exacts from prlvate

sector beneficiaries of publicly provlded goods or servlces that are

associated with large private benefit Unhke taxes user charges

make households and firms pay for at least part of the cost of

producing those servlces they consume As such it has often been

argued by many economlsts that user charges increase efficlency

whde they raise revenues at the same tlme By collecting a charge

on the use of a pubhcly produced good or servlce the government

discourages wasteful consumption of such good/s_rvlce Moreover

funding the prowslon of these goods through user charges enables

the government to avoid the deadweight losses that are associated

wlth tax financing

415 ROSARIO G MANASAN

Some analysts have argued that since user charges are lewed

by the government on a quzd pro quo basis they effectively hmlt the

access of the poor to needed government sermces However others

have shown that thls crltlclsm is misplaced They point out that

2here are many subsldlzed (government} services in LDCs that

dlsproportlonately benefit the better off Tertlary education at the

University of the Phlhppmes prior to the implementation of the

socialized prlctng scheme is one such example They argue that

government can promote its equity and efflclency objectlves and find

some relief from Its fiscal constraints as well by charging all users

of the government service cost based fees and by surnultaneously

installing well targeted programs to deliver the needed subsldles to

the poor In the case of university education thls may take the form

of selective scholarshlps

The revenue potential of user charges has not been fully ex

plolted m the Phlhpplnes Thus the contribution of user charges to

total national government revenues c