Implications of VAT Removal: An Analysis
Although the removal of Value Added Taxes (VAT) on oil and petroleum products seems very desirable to most of us consumers, careful study of it and its implications to the overall Philippine Economy reveals much surprising fact than what is presented to us in the media. The following fallacies are presented in the hope of shedding light on the true consequence of the removal of VAT.
Fallacy: Value Added tax is a form of sales tax and sales taxes are regressive. Regressive Taxes, by definition in Economics, is always more burdensome for the poor than in the rich people. Thus, removal of fuel taxes would benefit the poor more and serves as an equalizer in the economy.
Fact: Although sales taxes are generally regressive, one must look at whether the tax is heavier for the poor than it is for the rich in order for it to be truly regressive. Taxes being regressive and progressive are therefore decided on the burden it imposes, whether heavier for the rich or the poor, not simply because textbooks say so. Fuel taxes are progressive. Removing the fuel tax, on the other hand, is regressive. This is because more rich people are able to consume oil and petroleum products than the poor people. Poor people also, have little need for fuel unlike rich people. Thus, the VAT on fuel products tend to be heavier for the rich than it is for the poor. Removing it would therefore benefit the rich more than the poor.
Also, removing fuel taxes translates into lower revenue for the government. And this lower revenue for the government makes it hard for them to push through with pro-poor programs that aid the most vulnerable citizens of the country. This is another reason why the removal of tax is burdensome for the poor.
Fallacy: Philippines is a Consumption driven economy with Food Expenditures accounting for 53.3% of the total Personal Consumption Expenditure of the GDP.( NSCB 2008) Thus, removing VAT on fuel would increase the real income of each people and stimulate consumption, which is taxed by the government anyway. So government revenues would likewise increase with the removal of taxes.
Fact: Removing fuel taxes won’t necessarily stimulate consumption, it is not that easy. On the first count, Filipinos don’t go shopping for fuel and petroleum products. It does not therefore comprise of the habitual commodities that they purchase and the effect of it on the purchasing power is thus negligible. On the other hand, fuel taxes comprises a large part of the Government Revenues and is considered to be a good source of revenue because it is income and price inelastic. Removal of it would therefore weaken the fiscal position of Philippines because it would have less resource to fund its deficit. And the consequence of this weak Fiscal position is that international creditors such as World Bank and International Monetary Fund would increase lending rate to the Philippines.
The removal of VAT from oil and petroleum products would cut P4 pesos from the diesel and P60 in an 11-kilos LPG. This increase in income will not almost be felt because Filipinos do not shop for diesel and their LPG use is disseminated in a long period of time. This little benefit is wiped out by the certain weakening of the Philippines’ Fiscal Position.
Fallacy: So consumers don’t buy fuel products, but almost all of the commodities that a Filipino would purchase have oil as a factor of production. Therefore, removing the fuel tax would allow the increase in supply of those commodities and thus lower their prices.
Fact: Oil is seldom used as a direct factor of production for any commodity. The only way in which oil is brought into picture of supply production is when the produced goods are delivered or shipped; at least this is true for most commodities. Thus, the effect of this lower price of oil through VAT removal is only lower cost of transportation. Transportation should not really affect the price of the commodity much, not unless produced from a very distant land, because the cost of it is spread over all the units of the produced goods.
Politics and Economics
Coming from the previous analyses, the removal of the 12% Vat is more of a political move than it is economical. But do we have any empirical basis to claim that argument? It seems that the Philippines political system is strongly tied to its economic system. Studies from actual data of GDP reveal a 6-year business cycle pattern. It means that as a new government is elected in the Philippines, the GDP drops. Every now and then, when we experience major political disturbances, like military coup, the prices of the goods and services increase the next day. All this reveal that the Philippine Economic System is strongly tied to its political system. And it is perfectly rational to assume since good political system increases the business confidence and allows more Investment and Consumption which follows from the security that the political system provides. On the other hand, a good economic system allows the government to remedy any political problems, have more resources to counter unforeseen shocks and this allows lesser unemployment and lower inflation increasing the trust of the people to the political system. Essentially, the government’s job is to ensure that the invisible hand – that is, the machinations of the free market – works as efficiently as it can to produce the most desirable result.
But will the removal produce the most desirable result? As has been noted, the removal of VAT from oil would have very little effect on the common Filipino’s consumption. Any benefit would be unnoticeable at the microeconomic level – that is, the household economic level. The reduction in VAT on oil would greatly hurt the government budget. There is little use in removing the VAT on oil.
Oil prices, however, have been a hot topic in the news as of late, as has VAT. To the common Filipino these are some of the big issues of the day. News of the removal of VAT from oil would certainly look good in the eyes of the masses; after all, most of them have felt that their finances have been hurting and the media has made oil prices and VAT some of the big reasons for this. The fact, however, is that while indeed rising oil prices and VAT has reduced their purchasing power, the VAT on oil has played only a very small role in it.
In line with economic thought, Senator Mar Roxas’ proposal to cut VAT by 12% would only harm the government’s fiscal policy in the long run. Whether the Senator believes in this mistaken idea, or is politically motivated to do so, we cannot tell. We can only make certain, as presented in this paper, the effects of his proposition on the general public and the economic landscape as a whole.
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