How to increase tax collection, according to Tet

Collection of the value-added tax (VAT) on road tolls, in particular NLEX and SLEX, will definitely start this October 1, according to the Bureau of Internal Revenue (BIR). The bureau  needs the VAT on toll payments because its present total collection is way below its goal. The jeepney group Piston is holding its “tigil-pasada” today to protest not so much against the VAT on toll but more against the continued increases in fuel prices.

But wait a minute, before you collect the VAT on toll, in fact on all products being traded, listen first to Bataan Governor Enrique “Tet” Garcia. Tet is saying that the more VAT the BIR collects, the lesser government collects.

How come? That goes against logic. Isn’t that contradictory?

Tet explains it this way: The present Expanded VAT (E-VAT) is laden with loopholes. Do you know that of the 12 percent E-VAT on goods and services, including road toll, less than 3 percent goes to the government? More than 9 percent goes to the traders and tollway operators. Why?  Because of the VAT’s input/output tax credit mechanism. To illustrate: Let’s take the road toll as an example. On every 12 percent addition to the toll, the toll operator can deduct its expenses on cement, sand and gravel and steel used in constructing the road, as well as the costs of maintaining and operating it. Thus from the additional pesos that motorists will be made to pay at the toll gates, more than 9 percent will go to the tollway operators. Less than 3 percent will be left for the government.

The same goes for all the goods and services levied with VAT. The traders get the lion’s share of the E-VAT. They, therefore, benefit more than the government.

Maybe this is one reason the BIR collection is down. The projections failed to reckon with the deductions.

When VAT was imposed, all the other taxes based on gross were removed. The “bright boys” failed to put in their estimates of the deductions.

It is bad enough when the deductions are honest. But dishonest traders who pad the deductions make it worse.

When the bill was being discussed in Congress, the lawmakers were warned about the possible padding of deductions. The retort was that there would be a paper trail that the BIR could check. But the BIR does not have the manpower to check the tons and tons of paper trails.

Do you know that although VAT was recommended by the International Monetary Fund (IMF), the United States doesn’t have it? There is no VAT in America. The US Internal Revenue Service (IRS) found out that it would need 25,000 additional personnel and hundreds of millions of dollars more just to follow the paper trails.

“What about the countries, like Germany, with VAT? Why are they successful?” Tet was asked.

His reply: Because there is better tax compliance there. Translation: Because the taxpayers there are honest. We can’t say that of the taxpayers in the Philippines.

But why are Filipino taxpayers dishonest? Because they see their hard-earned tax money being wasted and pocketed by corrupt government officials. Pork barrel, intelligence funds, allowances, overpricing, kickbacks, commissions, etc.—they all drain tax money from government coffers. Even councilors have ghost employees paid out of tax money. They also have their own pork barrel. All those names and pictures of politicians painted on waiting sheds or on posters dangerously hanging from electric wires, or etched on the tiles of flower boxes in the middle of streets or engraved on concrete markers at entrance and exit roads of every  barangay—those are all paid with tax money.

Tax money is supposed to be used for services benefiting taxpayers—schools, roads, health care, police protection, smooth flow of traffic, housing for the poor, and a thousand and one other necessities. But where is most of the tax money going? To projects that publicize the names of politicians—that is, if it doesn’t directly go into their private pockets.

That is why Filipinos feel justified to cheat on their tax payments, which is still wrong and illegal, and should be stopped.

So what should we do with VAT?

Tet believes it should be repealed, while all the other taxes based on gross should be restored. When a tax is based on gross, there is minimal cheating.

By way of example, Tet pointed to the capital gains tax. Capital gains is the profit you make when you sell your property. You subtract from the selling price the amount you paid for the property when you bought it. The remainder is your profit, or capital gains, which is taxed.

However, the law did not give any allowance for the effects of inflation. So it could happen that when you bought your property, the peso could buy so much more; but when you sold it, each peso could buy so much less. So while you profited a lot in terms of pesos, you may have actually lost in terms of purchasing power. In other words, your selling price is worth much less than your buying price. Other countries like the United States give allowances for inflation; not the Philippines.

So Filipinos feel justified to cheat when they declare their capital gains. They would declare the buying price so much less than what they would actually pay.

So what did the government do? It based the capital gains tax on zonal valuation. Each zone has a fixed value per square meter. No matter how much you sold your property, the tax is based on the zonal valuation. That is a tax on gross, and the government collection from capital gains taxes soared.

Tet believes that the same thing should be done with VAT with its input/output tax credit system. Remove VAT and restore the taxes on gross that were removed to give way to VAT.