TAX NEWS - June 2010
Philippines Tax: Ultimate fiscal challenge
With the 2010 budget deficit likely to hit 4.4% of GDP, a successful budget pruning could yield cuts in the vicinity of one percent of GDP. Improved tax administration could yield another one percent. The two-percent-to-GDP cut in budget deficit is somewhat satisfactory.
But that's business as usual for government spending for education, health, and public infrastructure. It does not include the expansion of basic education by another two years, universal access to basic health care, expansion of the cash transfer program, and modest investment in public infrastructure.
A forthcoming public expenditure report by the World Bank estimate that public spending has to expand by 5.7% of GDP, compared to baseline, in order to address new initiatives for education, health and social welfare and address the infrastructure needs of an expanding economy.
A simple calculation suggests a large deficit-to-GDP ratio (8.1= 4.4 -- 2.0 + 5.7) would emerge unless new taxes or higher tax rates are legislated.
New tax arrangements
Fiscal sustainability is anchored on reforming the tax system. And this is best done in an environment of cooperation, mutual trust, and strong technical support. There is a strong argument for the revival of the pre-martial institution called the Joint Legislative-Executive Tax Commission (JLETC)
The power to formulate tax policy and pass tax laws legitimately belongs to Congress. It is an inherent part of its power of the purse. As duly elected representatives of the people, the congressional power to tax goes hand in hand with the power to authorize spending public funds.
But ideally this power to formulate tax policy and pass tax laws should be nonpartisan, seamless, and rationale. Administration solons and their opposition counterparts should work hand in hand in designing a tax system that is sufficient, efficient, equitable, and administratively simple. After all, those who are in power right now may be out of power, while those who are out of power now may be in power, after the elections.
Ideally all tax proposals should be discussed by the top representatives from both houses of Congress and the Executive Branch, based on rigorous studies done by a strong, well-equipped pool of experts that belong to a secretariat to the joint tax body.
The old JLETC was a joint Senate-House-Executive body, with a senator and a congressmen alternately chairing the commission. The respective chairs of the House and the Senate Ways and Means Committees head the House and Senate contingent, respectively. Opposition members are represented in both the House and Senate panels. The president appoints the representatives of the Executive Department.
The JLETC was one of the major casualties of the martial law years. Presidential Decree 74, dated Dec. 6. 1972, constituted the technical staff of the joint Legislative-Executive Tax Commission as a new agency under the administrative supervision of the National Economic and Development Authority. The decree reconstituted the staff of JLETC into the National Tax Research Center.
When democracy was restored in 1986, NTRC's clout had been all but practically lost. While it continues to conduct research on taxation, its close link to Congress was largely diminished. The House Committee on Ways and Means and its Senate counterpart have now started to consult their own tax policy staff.
The important synergy in tax policy formulation and research that existed before martial law needs to be restored. A new and revitalized JLETC has to be restored so that politicians, regardless of political color, will have a forum for discussing tax policy design and specific tax proposals.
Necessary conditions
What are the necessary conditions for the new JLETC to work? First, it needs a strong legal basis -- either by law or through joint resolution signed by the president. It then becomes the focal point for all debates and discussions for any specific tax proposal. Tax legislation in aid of reelection would then be minimized.
Second, it needs a competent and professional staff that is able to do real research in taxation -- incidence, efficiency, optimal tax policy, green taxation, and tax administration. Politicians should refrain from using the joint tax body as another opportunity for employing their political supporters or even relatives.
Over time, the JLETC Secretariat should be able to develop a strong reputation for competence, objectivity, and reliability in conducting tax studies and analysis.
Third, it should have access to the right data coming from government sources -- the National Statistic Office for income and expenditures data, fiscal data from the Bureau of Customs, Bureau of Internal Revenue, and other official data from housing agencies, the Department of Public Works and Highways, and so forth.
Annual and quarterly data should be gathered systematically, and stored in a way that there is easy, interactive access by researcher from government, private sector, and the academe
Fourth, the private sector should be represented in the commission. The president should appoint the head of the yet to be constituted Tax Policy Center as private sector representative to the commission.
Fifth, in the spirit of transparency and accountability, the JLETC should maintain a Web site that is accessible to everyone -- policymakers, researchers, taxpayers, and so on. It should contain up-to-date information on taxes collected, tax data comparison with other countries, own research, commissioned research, and all decisions made by the commission.
Overall, I expect that this rearrangement in the process of tax policy formulation and legislation will be nonpartisan, transparent, and continuing from one administration to another.
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