Believe it or not but nature continues to conspire with well-meaning people in unearthing ongoing corruptions and long buried anomalies perpetrated by devious politicians, corrupt government officials/employees and their cohorts in the business sector. Yes, as yesterday morning, another tremor shook Northern Mindanao.
Though it is not fair to speculate at this moment, the possibility that there will be damages to infrastructure like roads and bridges aren’t remote. Factor in the already validated damages in previous tremors and typhoons, the cost of rehabilitation will certainly run into hundreds of billions of pesos. Therefore, the government needs every peso of generated taxes to fund these needs. So that, the question now is, is the clamor for VAT reduction from 12% to 10% need to be heeded.
Lest we get it wrong, the proponents for this proposal know too well why they are demanding for it. The logic is too simple. First and foremost, that the budget for infrastructure, in at least two decades, is bloated is a fact. Secondly, that the underlying contracts are covered by performance bonds are true and can be called by the government. The proceeds of which can be used to complete the projects. Thirdly, that, onwards, the government in dealing with the same conniving contractors, won’t make things right. And, among a lot more, one that proponents are so concern about is the possibility that devious politicians (and their families), devilish as they are, will continue to plunder our treasury to perpetuate their dynasties.
Indeed, the list is long, near infinite, in fact. However, before we get carried away, there is a need to understand the relationship between tax and the economy. Let us first set aside the fact that politicians plundered our treasury and look at VAT, the main concern of the proponents for reduction. With our VAT rate higher than most countries in the ASEAN, the disadvantages are obvious. First, there is a disincentive in terms of investments. And when investments come in trickle, job creation snags. Then, when less jobs are created, demand for goods and services will decrease. Thus, consumer spending will substantially reduce. Consequently, the economy slows down.
Admittedly, the relationship between tax and the economy is intricate. To some extent, as explained above, it may seem like a disincentive to economic activity. However, it is also a fact that it provides revenue to the government to fund public services like infrastructure and education. Supposedly, with the right infrastructure in place, the long-term economic prospects are bright as these (from infra construction and their use once completed) shall help boost economic activity.
There are certain requisites though for taxes to have positive impact. First of all, we must always remember that businessmen hate ambiguity or uncertainty. Therefore, our tax system must be stable and transparent. With that, the business environment becomes more predictable. Consequently, investment will pour in freely, thus, boosting the economy.
Moreover, apart from infrastructure, taxes should also be spent on other public services like education, healthcare, and social welfare programs. Obviously, a healthy population and skilled workforce will always be vital for long-term economic prospects. Moreover, for a more inclusive growth, there is also a need to fund social welfare programs. Of course, amid higher tax rates, there is always a way to encourage investments when needed by certain sectors in the economy. Our existing laws provide tax incentives to investment priority industries.
Palpably, the influence of taxes to our economy cannot be trivialized. In the government’s effort to hit the right balance, the decision to heed the call or not to reduce VAT to 10% is crucial. Considering, however, that the government has even resorted to borrowing to fund some of our needs, deciding for it may not be sound. Keeping the rate intact for the time being could be the most logical thing to do. Why? As it would tantamount to funding tax cuts through borrowing. And that’s not the best way to move forward.
Yes, indeed, the relationship between taxes and the economy is quite complicated, yet, needs to be understood. Finding the right balance is necessary. That balance means, on one side, we should know the nature and rates of the tax and its implementation and, on the flipside, how government uses the revenue.
On the flipside, we, the taxpayers, is where we must actively get involved. There must be no more excuses. In fact, there is a need for the ‘Sumbong sa Pangulo’ initiative to be institutionalized and to include malfeasances from the Barangay level to the top.