Economics and Society 101: A but for VAT


VAT or value-added taxation comes to the limelight because recently various sectors are suggesting that VAT on oil and power be removed. This writer had opposed the VAT system when it was first proposed several years ago on the ground that it was not (and never has been) the solution to the country’s tax woes. Further, this writer has continued to expose the VAT as anti-poor or regressive taxation. Regressive taxation takes place when the tax rate diminishes as one goes up in the income ladder.

On its own, VAT is essentially regressive because consumption as a percentage of income decreases as income increases (savings rate increase) and, therefore, the tax rate decreases as one goes up in the income ladder under the VAT. That the VAT taxation is regressive is affirmed by at least one study conducted by the Philippine Institute of Development Studies.

Further, contrary to government propaganda, value-added taxation is never a fundamental solution to Philippine tax and revenue woes. VAT was proclaimed during its advocacy years as the solution to our national tax mis-performance. It was consciously mis-presented by writers in the payroll of government and interest groups as the solution to our problems of underdevelopment and mis-development. The tax system would supposedly eliminate tax evaders, especially big tax evasion of the big ones. Our country’s experience, however, has shown the contrary: tax evasion, especially by the big ones, continued even with a VAT system.

Propaganda misrepresenting the VAT as a fundamental solution to our country’s underdevelopment is either lie or a naïve assessment of the root-causes of our underdevelopment. We have tax woes not because of our tax system but primarily because of our political economy: those who have the economic power holds political power and influence and the many are powerless because they are unorganized and unassertive in advancing their rights and interests. Various countries have performed better than the Philippines and have better tax collection rates and this is not because of VAT. The world’s most economically powerful nation, the United States, is not even in the list of nations with a VAT system although there is a document that place its VAT rate at 5%.

The Philippine VAT standard rate is 12%. In contrast, a number of progressive countries have a much lower VAT rate. The VAT rate is only five percent in Taiwan, Singapore, Japan and Malaysia. VAT is 5-7% in Canada, and 7.6% in Switzerland. Does a low VAT rate become an obstacle to their development? Of course, no. Does a low VAT rate present an obstacle to their tax collection system? Again, of course, no.

Really, a number of development and economic “experts” have been misleading our country. Actually, we can attribute much of our underdevelopment to these economic and development “experts”.

Actually, the ulterior motive for advocating VAT came from a desire to move from a “dependency” on taxation on imports or tariffs. Free-marketeers argue that this is necessary so we can benefit from trade liberalization. In short, we have actually strangulated our local manufacturers so we can benefit from trade liberalization!

With the VAT, we have even made the prices of imported goods lower and the prices of domestic goods higher. Double baloney!

While countries such as Japan, Taiwan, Malaysia, and the United States (through VER or “voluntary” export restraint which in practice is a coercion against exporters to “voluntarily” reduce their exports to the United States) practiced de facto restrictions on imports, trade liberalization was coerced upon us and to ensure that we implement trade liberalization, we were moved into the VAT system. We were asked or coerced to reduce or eliminate our tariffs on imports and move into the VAT system that raised taxes on domestic production. #

(The writer maintains a blog at Comments can be coursed through,, and +63927-536-8431)

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