Economics and Society: VAT and the folly of subsidies through VAT


Last week I pointed out that the two most important responsibilities of the Filipino in today’s century is to fight for the fatherland and mother earth. This is a continuing theme of this column whether or not the two responsibilities are stated explicitly or implicitly or whether or not the two major responsibilities are stated at all.

Defending mother earth from the annihilation of global warming is indeed an important task, a key task of every life on the planet. At the same time, working for a truly sovereign Philippines free from imperialist and semi-feudal exploitation also remains a fundamental task for every Filipino. Further, it is always important for the exploited to liberate themselves from exploitation as their most important contribution to global or international emancipation.

For now, we address the issues of value added tax (VAT). What can be a good position on the issue? What can be our tasks?

In the June 1 issue of the Nordis, I pointed out that VAT is never the fundamental solution the solution to our tax woes because our more basic fiscal problem is the leakage of government revenues through graft and corruption. The VAT’s principal agenda is not really raising revenues but the restructuring of tax collections. It is meant to restructure tax collections so these would be compatible with trade liberalization. This is because without VAT, there will always be a temptation to tax imports.

The real and more important aim of tax restructuring through VAT is really to make the country fully liberalize on the trade front. Removing taxes on imports (tariffs) would supposedly move society to a higher level of welfare. However, moving towards trade liberalization requires that we replace the revenue losses from tariffs with tax gains from VAT that serves as a disincentive at the same time to both local production and the consumption of local goods.

In short, we tax our locals so we can accommodate more imports. Another way of describing the situation is that we provided disincentives to local production through VAT so we could import more. Can we export more with VAT? Not really because VAT also makes local production more expensive. With VAT we also provided a disincentive to the consumption of local goods. So who fundamentally benefit? Not us, not Juan de la Cruz!

Government policy makers justify VAT by saying that any bonanza from the VAT from the oil price hike will be used to fund subsidy programs for the poor. This is another folly and we can take Judy Anne Santos’ yelo or ice analogy on the Meralco systems loss.

In defending Meralco’s systems losses, Judy Anne Santos described system loss as similar to buying ice from a store. You purchase a block of ice but as you carry the ice home, the ice melts and the ice you bring home is no longer worth the ice you have originally bought.

In the case of VAT, it is taken as taxes on the consumers but along the way, what goes back to the consumer is much less than what was taken as VAT. A part of the loss can be traced to graft and corruption. Even multilateral agencies such the World Bank agrees that about 20% of government revenues goes to graft and corruption. Other than the “systems losses” through graft and corruption, the more harmful effect is on domestic production. VAT provides disincentives to local production and even the consumption of local goods. This type of “system loss” can mean less employment opportunities and less income for the Filipino.

Our options on the VAT can range from calling for its entire removal which will not be likely victorious as compared to calling for its significant reduction of the Philippine. But whether we oppose VAT entirely or call for its reduction, this column believes that what is more important in the VAT issue is to expose it as an instrument to facilitate trade liberalization and perpetuate the nation’s semi-feudal status.

Calling for a significant reduction of the VAT can be a good tactical call as we expose the grand scheme of imperialism behind the promotion of VAT taxation scheme in Philippines. As mentioned by Economics and Society 101 in the 1 June 2008 issue of the Nordis, versus the Philippines’ VAT rate of 12%, a number of countries impose a VAT rate of only 5%. These countries include Taiwan, Singapore (5-7%), and Malaysia. Canada imposes a 7% VAT. Switzerland, 7.6%. The world’s powerful nation, the United States, is not even in the list of nations with a VAT system. Thus, there is prospect for a probable win in the fight to reduce the VAT as a tactical call.#

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

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