Stowaways on TRAIN

One of the first lessons a student in economics learns is that expectations can be, and tend to be, self-fulfilling. When people expect the price of a commodity to go up, they tend to buy more of it now in an attempt to beat the expected price increase. In so doing, they raise the current demand for the good, and in a competitive market, the increased demand raises the price. It’s the law of supply and demand at work.

What disturbs me about some news stories I’m seeing on the new TRAIN (Tax Reform for Acceleration and Inclusion) law is that they are fueling undue expectations that could be self-fulfilling. Those opposed to the TRAIN have been painting dire pictures of significant price increases that would supposedly arise from increased excise taxes on petroleum products, coal and motor vehicles. The law’s key essence of reducing burdensome income taxes on the lower- and middle-income groups seems to have been lost on many critics, who only focused on the increased excise taxes. Worse, the price increases they predict appear overblown, and in so doing, they are (perhaps unwittingly) helping fuel the very price increases they are afraid of.

I know that the Department of Finance had done its homework rather thoroughly in the crafting of the TRAIN’s first package that Congress has just passed, and of the packages yet to come. I was among many economists that the DOF had consulted since the earliest days in the conception of the comprehensive tax reform, well before this current administration. Even then, Dr. Karl Kendrick Chua—the amiable finance undersecretary who has become the poster boy of the TRAIN—had already been crunching numbers to analyze alternative directions for tax reform. He was still a well-paid senior economist at the World Bank office in Manila then. Many thus welcomed it when Finance Secretary Sonny Dominguez got him to make a personal sacrifice and put his competence to the direct service of the Filipino people.

One of the analytical tools Undersecretary Chua and his government colleagues had used to assess the proposed tax changes is the input-output table of the Philippine economy, which shows how various industries relate to one another via their input-output relationships. The table accounts for how much of the outputs of every productive sector (spanning agriculture, industry and services) are used as inputs by all the other sectors. Thus, it also tells us how much every sector contributes to the total cost of production in any sector. Preparing the table takes elaborate work involving careful processing of detailed data obtained by the Philippine Statistics Authority from economic establishments all over the country. For this reason, the table is produced only at 6-year intervals. The PSA released just last month the latest I-O table based on 2012 data; the one before it was for 2006.

So what does the latest input-output table tell us about the actual cost implications of tax increases on petroleum products and motor vehicles? Let’s do the math. The table gives an average contribution of petroleum products to total costs of production of 2.64 percent, ranging from 0.11 percent (in banana production), to 20 percent (in transport). The average contribution of motor vehicles is 0.25 percent, ranging from negligible (in primary agricultural products) to 2.7 percent (in the manufacture of transport equipment itself). Assuming an 8 percentage point rise in petroleum excise taxes (actually an overestimate), the overall price impact would average 0.21 percent, ranging from 0.01 to 1.6 percent. The impact of higher motor vehicle excise taxes would be even smaller. My quick calculations based on these and using a generous 20 percentage point estimate of the tax increase yield an average cost increase of 0.05 percent, ranging from 0 to 0.54 percent. I’ve done the math on the coal tax in this space before. The Bangko Sentral’s projected inflation effect of 1 percent is in fact already a liberal estimate.

So don’t let anyone claim that the TRAIN is causing them to raise prices by much more than that (or even less, as the calculations show). If they do, they are simply riding on the TRAIN—and as stowaways at that.

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