Is tax collection getting better?

WHEN PRESIDENT Aquino assumed office nearly a year ago, most economic observers believed that government finances were the weakest link in the economy that needed urgent attention from his economic managers. He had inherited from his predecessor an almost P300-billion deficit for 2009, far above the targets set for that year. At almost 4 percent of gross domestic product (GDP), this deficit was well beyond the usual threshold level of 3 percent that is considered tolerable. Government’s tax collection efficiency had been deteriorating, and it showed in the falling tax effort (defined as the ratio of total tax collections to GDP), which had dropped from 14.2 percent in 2008 to 12.8 in 2009.

With weak finances, government’s hands were tied in providing vital public services, especially for education and health, whose shares in the national budget had successively declined through most of the period after 1997. Worse, P-Noy discovered to his dismay that the bulk of the 2010 budget had already been spent in the first half by his predecessor, leaving him little to work with for the remainder of the year in his first months in office. The effect of this came out starkly in the economic data for 2010. In the last two quarters of last year, corresponding to P-Noy’s first six months in office, government spending on operations and in infrastructure were forced into steep declines relative to the same period in 2009, by around 8 percent and 20 percent respectively.

The hope, then, is that the new government can do much better in collecting taxes than the previous government did, especially with its forceful stand against corruption. I applauded the new President’s campaign pledge not to introduce new taxes given the wide scope for improving tax administration. Moreover, I have constantly lamented that raising taxes when revenues run short only perpetuates an injustice to obedient taxpayers. With far greater trust from the people than the previous government had, it seemed reasonable to expect that tax compliance would improve (same as saying that tax evasion would fall). After all, the not-too-uncommon past reasoning that paying the correct amount of taxes only feeds corrupt pockets now seemed to have weaker ground to stand on. With tremendous trust capital, it seemed likely that the P-Noy government could attain vast improvements in tax collection efficiency.

Ten months into the Aquino administration, it’s an opportune time to find out if these expectations are being borne out by actual experience. I’ve compiled and examined the available data from 1990 up to the latest publicly available figures to get a longer perspective on the issue. The record, it turns out, is a mixed picture, and in fact leaves much to be desired.

First, the good news. Tax effort did rise from 2009 to 2010, from 12.78 to 12.85 percent. Also, tax revenue collections appeared to have sped up in the latter half of 2010, but like in tax effort, the improvement was not particularly spectacular. Tax revenues in the first half of last year, still under Gloria Arroyo’s watch, had grown 11.1 percent over the same period in 2009. In the second half, under the new leadership, tax revenues grew faster, by 11.7 percent, on the same year-on-year basis. These improved numbers, though modest, suggest that the tax authorities have been more productive under the new administration so far. But alas, it turns out that on closer examination of the data, any celebration is premature.

While tax revenue growth did speed up, growth of non-tax revenues from things such as administrative fees such as those paid for passports, licenses, etc., and from sale of government assets actually went down in 2010. Notably, it fell more steeply in the second half (by 23.8 percent, vs. a 13.1-percent drop in the first half, still under Arroyo). Thus, putting tax and non-tax revenues together, growth in total revenues slowed down from 8.5 percent in the first half (under Arroyo), to 6.6 percent in the second half (under Aquino). But there are a number of reasons why non-tax revenues, much of which are non-recurring, could move up or down from year to year without necessarily reflecting on government’s effectiveness in revenue collection. Our tax authorities, namely the Bureau of Internal Revenue (BIR) and the Bureau of Customs, could not be held to blame for that.

But wait, there’s more. Looking back to tax effort (tax-to-GDP ratio), it turns out that things actually got worse (lower) within the course of 2010. From 13.4 percent in the first half, it went down a full percentage point to 12.4 percent in the second half, even lower than the 12.8 percent posted in 2009. This means that even though tax collections sped up under the new administration, this mainly came from the economy’s expansion. Even then, the reduced tax effort tells us that tax collection growth did not quite catch up with growth in the economy. Hence, it appears premature to judge better tax performance even with faster tax collection growth under the Aquino administration. Latest tax revenue figures for the first two months of 2011 in fact show that tax revenue growth has slowed again to 10.1 percent from the same period last year, a likely reflection of slower GDP growth due to the Middle East disturbances and their effect on remittance flows.

It would seem, then, that P-Noy’s tax machine has more revving up to do. Failing that, he may yet be forced to reconsider on his campaign pledge against new taxes. I personally hope things do not get to that, and wish BIR Commissioner Kim Henares and her BIR professionals well on their assiduous efforts to rise up to the challenge.

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E-mail: cielito.habito@gmail.com