On TRAIN(s), taxes and governance

The controversial TRAIN (Tax Reform for Acceleration and Inclusion) proposal became law this year. TRAIN 1, that is. From what I have heard and read so far, there are four more TRAIN bills in the legislative mill.

The supposed focus of TRAIN 2 is a further reduction in corporate income taxes. But not one senator was willing to sponsor the measure, until known Duterte ally and newly minted Senate President Vicente “TitoSen” Sotto III agreed to be the proposal’s champion.

Why the new reluctance compared to the earlier alacrity among legislators to be associated with TRAIN 1? I believe the principal reason is, rightly or wrongly, TRAIN 1 is blamed for the unprecedented inflation that has gripped the economy since the beginning of 2018.

Politicians, being politicians, know how to behave, especially if elections are near. Sotto is quite bold only because he is not up for reelection in May 2019. Reelectionist senator Sonny Angara, who sponsored TRAIN 1, was candid enough to admit that he will not touch TRAIN 2 with the proverbial 10-foot pole given the 2019 elections.

Nobody loves taxes and tax collectors. The latter were often killed and robbed in ancient days.  Woe to the politician who campaigns for or is associated with a tax increase. Exhibit A: Senator Ralph Recto, who lost a reelection at some point after he was strongly associated with the expanded value-added tax (VAT).

In the final analysis, a tax is a form of extortion, since nobody will pay taxes voluntarily. People have to be coerced to pay taxes and reduce their disposable income. For that reason, Charles Tilly and other scholars of European state-building cynically observed that there is not much difference between a neighborhood toughie who threatens to break a window if the shop owner does not hand over some cash for “protection,” and the state who imposes and collects taxes.

Both the toughie and the state are “selling” the same (public) good—security of life and property—in exchange for money. Both “sales” are involuntary, and force (or the threat of force) underpins them.

Taxation is seen more these days an exchange transaction. In exchange for the payment of taxes, citizens get to enjoy public goods. But the capability to free-ride is one reason some individuals will not pay taxes if payments were decreed to be paid on a voluntary basis. Since public goods are public, somebody who does not pay taxes cannot be easily prevented from enjoying the benefits of such a good.

Still, while it is indeed an exchange transaction, the matter of taxes is not a straightforward (“kaliwaan”) one, unlike sales involving private goods. To enjoy a burger, a consumer must first pay before he can have the first bite of that juicy sandwich. That is not the case with taxes. There’s an obvious time lag between the payment of taxes and the “consumption” of a public good. This time lag is another reason people want to avoid paying taxes.

In addition, taxation may not be a pari passu (equal footing) arrangement. The taxpaying public may not enjoy or obtain the full value of the money they hand over, since government officials retain the ability to determine the quantity and quality of public goods they will supply. For example, a concrete road may be built, but it may be lacking in the promised length, or done with substandard materials, or constructed over an extremely long period.

Another reason for citizens’ reluctance to pay tax is the impact of taxes on the prices of consumer goods. Paying taxes already reduces their disposable income. If taxes were increased on key inputs such as fuel, electricity, water, sugar, food packaging, interest income and the like, these increases will raise the prices of goods and further reduce disposable income.

For all these reasons, taxation should be understood as primarily a political act. The collection of taxes is socially necessary, because the money collected is used to fund socially necessary public goods. Without public goods, a human community cannot exist. Thus, the payment of taxes finances human community-building.

Government officials, policy makers and tax collectors must be fully aware of the collective action problems associated with taxes, especially in societies with pronounced poverty and wide income/asset disparities like the Philippines. The time gap between the collection of taxes and the provision of public goods must be as short as possible. The quality of public goods must be high, and their quantity must be adequate for a growing population. And the collection of taxes must be equitable, because nothing raises the ire of citizens more than the knowledge that some are able to evade or not pay the right amount of taxes.

Last but not least, we must all help develop a healthy tax culture in our country. That means citizens must pay taxes promptly and properly, that government must provide adequate and high-quality public goods, and that both the tax burden and the supply of public goods must be equitable and judicious.

Everyone must also be chastened by the truth that the ability to provide public goods is not the monopoly of governments. Non-state actors can and do provide “public” goods in exchange for “payments” that are akin to taxes.  The “revolutionary taxes” collected by the New People’s Army comes to mind in this regard. The “kotong” collected by erring police officers is of the same category. The Catholic Church and other charities are enabled by donations to provide public goods. Governments must, therefore, make sure that the tax and public good exchange arrangement they have with their citizens is as equal and equitable as possible.

Amado M. Mendoza Jr., PhD, is a professor of Political Science and International Studies at the University of the Philippines.