Agrarroyo and the Ampatuans

Arroyo

I take a break from the quest of sharing a book-in-the-making in bits and pieces to comment on more recent political developments.

So much has transpired since my last commentary on the ruling party Lakas‘s woes last week, including reports on the continuing lead enjoyed by Noynoy Aquino in surveys, the barb-trading between the yellow and orange camps, and self-serving pronouncements from both the Palace and the COMELEC that preparations for the first-ever nationwide automated polls were on track.  Meanwhile, several IT organizations and business/management groups have warned about possibly-fatal flaws in the system.

What captured my attention was acting Justice Secretary Alberto Agra’s dismissal of the multiple-murder charges  against suspended Autonomous Region in Muslim Mindanao (ARMM) governor Zaldy Ampatuan and former Maguindanao vice governor Akmad Ampatuan for last year’s mass murder of family members and supporters of their rivals from the Mangudadatu clan, and journalists accompanying the Mangundadatu convoy.

Of course, the decision generated a firestorm of protest especially from relatives and lawyers of the massacre victims and mass media organizations.  The US Embassy weighed in and called for the proper disposition of justice.  Seeing Agra’s decision as a clear dismissal of their work (since they recommended inclusion of the two Ampatuans in the rap sheets), state prosecutors at the Department of Justice walked out of their offices in protest of the cavalier treatment.

Those who want to earn brownie points will not be far behind.  Re-electionist Sen. Jinggoy Estrada announced that his legal team  is exploring the possibility of disbarring Agra even as he also disclosed that they were classmates in Ateneo. (An aside: so what if they were both from Ateneo?)

Agra himself insist that he did nothing wrong, that he will not resign, and that he will not sanction his protesting subordinates.

That he will be supported by his predecessor, Raul Gonzales, is a no-brainer.

Just this morning, we read Palace spokesman Rogelio Peyuan informing us that GMA will consult government lawyers to determine whether she should intervene in  resolving the controversy generated by the decision of Justice Secretary Alberto Agra.

Who are the government lawyers to be consulted on the matter?  Isn’t Agra the Secretary of Justice (albeit in acting capacity)?  Isn’t he also the solicitor general on a concurrent basis?  How’s he to resolve a controversy that he created in the first place?

Or was he the principal author of the deed?

Members of the cabinet are considered to be alter egos of the President.  They enjoy the trust of and closeness to the chief executive.  It is inconceivable that acts of cabinet members are not cleared before hand with the President.

Then our complaints regarding the dismissal of the charges against two of the Ampatuans must be directed at GMA.

I submit that the dismissal of multiple murder charges against the Ampatuan duo is the handiwork of Agrarroyo.

If this premise is accepted and recognized, then we should respond accordingly.

Legislators, legislative committees, and tax policy making

In candidate-centered democratic polities, individual legislators exert an inordinately-heavy influence on policy making.  This is so since politicians need to develop personal reputations to get themselves elected into office and to stimulate their political careers.  Their party affiliations will not matter much in these political settings and they try to develop their reputations as reliable representatives vis-a-vis constituents, supporters, and financiers.  For the benefit of their constituents, they ‘bring home the bacon’ by way of pork allocations to finance local public works and other note-worthy projects that can generate local employment or bring desired goods and services like medicines, sports equipment, and the like to the home district.  To non-resident supporters and financiers, legislators must be able to offer divisible policy favors such as government contracts, subsidized credit, fiscal incentives, and tax breaks.

However, legislators do not participate in policy making only through their individual selves.  They do so through legislative committees.

Committees are institutions established to enjoy the scale economies and efficiency offered by division of labor.  Committee systems allow lawmakers to divide the various policy issues facing the legislature into distinct and separate jurisdictions, each delegated to a different committee.  Members of a legislative committee specialize in the aspects of their particular issues and the legislature capture some gains in efficiency due to the specialized division of labor (McCubbins and Sullivan 1987b).

These insights were drawn from the new institutionalist theory pioneered by Coase (1937) who sought to explain why economic agents coordinated their decisions via central authority rather than through market forces.  The basic approach is to study how institutions (qua rule-bound organizations) enable members within them to pursue their goals more effectively.

Alchian and Demsetz (1972) also noted a particular type of transactions cost and argued that firms reduce these costs better than markets.  Economic actors produce more by cooperating than by producing separately.  They therefore prefer to coordinate their actions.

However, coordinated action introduces the problem of measuring accurately the contribution of an individual to the joint output.  Individual rewards are only weakly related to the individuals’ efforts; and although they individually bear the full costs of their own efforts they individually receive only a part of the output they jointly produce.

Meanwhile, when individuals shirk by reducing their effort, the savings in effort accrue only to them and the resulting losses in team production are largely borne by other team members.  The rational behavior of each individual is to shirk or free ride on team effort but this will lead to sub-optimal results.  If everybody tends to shirk, then total team output will be reduced and individual benefits will likewise decrease (McCubbins and Sullivan 1987a).

The only way to mitigate shirking is to monitor the efforts of team members.  Alchian and Demsetz (1972) also argued that teams could be made better off if they hire a monitor and give her the authority to set payments on the basis of information with respect to productivity and individual contributions.  Since the monitor herself has an incentive to shirk, the team will give her marketable title to the team’s output and install her as the central contracting agent.

The approach of comparing institutions with respect to how well they enable members to pursue their goals is useful in studying firms and congressional committees.  Problems of monitoring and shirking are evident in legislatures as well as firms.  Transactions costs are incurred in building legislative coalitions no matter how tactical these may be.

Labor in legislatures could also be divided through the party system.  While the committee system allowed legislators to specialize in issue areas of choice, parties also provide management and coordination.  In theory, parties reduce the transactions costs associated with building policy coalitions within legislatures.  Political parties should be looked at as ‘enduring coalitions’ and if parties were robust, the costs of negotiating bargains and securing legislative votes would be brought down since the process of cobbling coalitions on any issue does not have to take place anew each time a proposed measure was considered (McCubbins and Sullivan 1987b).

Notice the big ‘if’; parties rival legislative committees as mechanisms for coordination and management of collective effort only if parties themselves were robust.

In candidate-centered democratic polities where political parties are by definition weak and party discipline is practically non-existent, committees would emerge as the institutional agency of choice in legislatures.   Scholars and reformers for more than a century have acknowledged the central strategic position of committees in legislatures (Wilson 1885; Bryce 1893; McConachie 1898; Norris 1945; Bolling 1965; Eulau and McCluggage 1984; and Smith and Deering 1984).

While some difference of opinion persisted, there was a substantial consensus on a number of empirical regularities and stylized facts: (a) committees were ‘gatekeepers’ in their respective jurisdictions; (b) committees were repositories of policy expertise; (c) committees were policy incubators; (d) committees possessed disproportionate control over the agenda in their issue-area domains; and (e) committees were deferred to, and that deference was reciprocated (Shepsle and Weingast 1987a).

From the traditional literature on legislative committees, the foundation of committee power consists of gate keeping, information advantage and proposal power.  Committees, as an empirical matter, are veto groups that may choose to keep the gates closed on a particular bill.  Enjoying the advantage of smaller memberships (compared to the entire legislative chamber), a committee could study a question, obtain full information, and put the proposed legislation into shape for final decision.  The practice of referring bills to a standing legislative committee (and not debating them in full plenary until reported by that committee) gives legislative committees formidable proposal power.

However, Shepsle and Weingast (1987a, 86) argued that the ultimate source of committee power “resides in the rules governing the sequence of proposing, amending, and especially of vetoing in the legislative process.”  Both believed that the last stage of the legislative process—the bicameral conference where differences between the legislative chambers—was crucial since it confers relevant committees (or subsets of such committees) ex post adjustment power.  The deference given committees on the plenary floor was supposedly a natural consequence of this ex post power wielded by committees in bicameral conference.

Legislative committees have three specific mechanisms to employ in order to influence their institutional influence on the rest of the legislature.  These include punishment, ex ante defensive behavior, and ex post defensive behavior.

A committee may discourage opposition to its decisions (on nonactions) by developing a reputation for punishing those who oppose it.  This explanation is particularly potent in the realm of distributive politics in which the committee’s bills are of significance to a substantial number of legislators; disaggregatable by individual legislators; and introduced on a regular basis. Examples of these bills include those involving the national budget, public works and revenues.

A committee may also induce cooperative, deferential behavior by ex ante accommodation.  It tries, when preparing its committee report, to anticipate what will pass in full plenary.

However, Shepsle and Weingast (1987a) argued that the third mechanism, ex post defensive behavior, is the committee’s most potent enforcement mechanism since it allows the committee to exercise a veto after the full chamber had ‘worked its will’ on the measure.

Recalling the process of lawmaking in the Philippines, we note that after a legislative chamber has passed a bill in third reading, a Bicameral Conference Committee composed of panels from both chambers is formed to reconcile bicameral differences.  It could be demonstrated that relevant committees would dominate their respective chamber’s panels in the bicameral process enabling them to exercise ex post veto power.

In the bicameral conference process, only a small subset of a legislative chamber’s members participates in the process of drafting a bill that can only be voted up or down (or the so-called closed rule as a take-it-or-leave-it proposal) by both chambers in plenary to determine if the measure could be sent to the President for her appropriate action.  Legislative plenaries cannot amend bicameral output and this restrictive rule gives relevant committees (or smaller groups) inordinate power and influence over the entire process.  The bicameral conference process allows the relevant committee (or a subset of that committee) a ‘second crack’ at a bill.  A committee with only the power to move first—by opening the gates or keeping them closed—possessed only blocking power.  Once it opened the gates almost anything can happen and the committee is virtually powerless to alter the subsequent trajectory of a bill.

In contrast, a committee (or a smaller subset) with powers at subsequent stages, especially the penultimate stage, not only affects the subsequent outcome but also influences the antecedent actions of others by conditioning their beliefs and expectations.  A committee (or a subset) with an ex post veto has the power to protect itself against unwanted changes wrought by the entire plenary.

In that sense, deference to the relevant legislative committee is endogenous to the legislative institutional structure and procedures and should be construed as a property of sequential equilibrium.  The conference process institutionalizes the relevant committee’s ex post veto and the closed ‘take-it-or-leave-it’ rule after the bicameral conference stage enhances the veto (Kreps and Wilson 1982; Shepsle and Weingast 1987a).

In response, Krehbiel (1987) argued that congressional committees had never possessed an insurmountable ex post veto and were very much constrained by their parent chambers.  For one, Krehbiel noted that parent chambers possessed ‘discharge’ powers; legislative committees may be ‘discharged’ or compelled to report bills against their wishes.  He added that parent chambers could exercise these ‘discharge’ powers vis-à-vis the bicameral conference committee itself.

Shepsle and Weingast (1987b) conceded that chamber majorities could attenuate ex post committee powers through various institutional devices, including bypassing the bicameral conference process altogether.  They nonetheless asserted that the exercise of such powers by chamber majorities involved greater transactions costs given the greater number of legislators involved.  This point is best illustrated if we consider what majorities face when they deliberate the bicameral conference report under the closed ‘up-or-down’ rule.  If they vote against the report, the status quo is preserved.  But majorities have already expressed a preference to change the status quo when they approved the measure in third reading and agreed to send a panel to the bicameral conference.  Rejecting the committee report meant returning to ‘square one;’ and returning to ‘square one’ did not guarantee that subsequent results would not remain unsatisfactory. Therefore, the greater difficulties involved in attenuating ex post committee powers indicate that these powers bias final outcomes towards the preferences of relevant legislative committees.

For our purposes, the debate between Krehbiel, on one hand, and Shepsle and Weingast, on the other, remains an academic one.  Under existing rules of the Congress of the Philippines, chamber majorities do not have ‘discharge’ powers vis-à-vis standing legislative committees.  This means that legislative plenaries cannot compel committees to report out a disfavored legislative measure.

Furthermore, there is no way that the bicameral process can be bypassed.  Miral (2004) reported that even inconsequential bills have to go through the bicameral conference process.  The bicameral process for such bills would be ministerial; the bicameral process for substantial bills would be quite involved.  In all, the bicameral stage is an indispensable stage in Philippine legislation.  The ex post veto of legislative committees is more potent in the Philippines compared to their counterparts in the United States.

It is also true that while committees are crucial to the legislative process, participation in committee decision-making is not universal.  On any given bill, the membership of a committee abdicates its considerable legislative powers to some subset of self-selected members (Hall 1987).  In effect, while legislative committees matter, some committee members matter more than others.  Individual legislators wield such power by virtue of their seniority, acknowledged expertise, and legislative rank.  Officials of committees are obviously more powerful than ordinary members; issue experts rather than policy amateurs and neophytes, and grizzled veterans rather than greenhorns would enjoy a comparative advantage even within legislative committees.

FVR’s CTRP

President Fidel V. Ramos

In the previous blog entry, we noted how President Ramos was rebuffed by legislators from his own political party in his attempts to expand the coverage of the value-added tax (VAT) during the first half of his term.

Despite this setback, the imperatives of the tight fiscal situation forced Ramos to propose a more comprehensive tax reform program (CTRP) during the second half of his presidential term.  The Comprehensive Tax Reform Program (CTRP) of the Ramos presidency consisted of three laws—Republic Act No. 8184, which restructured the excise tax on petroleum products in support of the Republic Act No. 8180, otherwise known as the Oil Deregulation Law; Republic Act No. 8240, which shifted the taxation of so-called “sin products” from ad valorem to specific; and Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, which initiated changes in individual and corporate income and in tax administration.[1]

As provided for by the 1987 Philippine Constitution, revenue measures must ema­nate from the House of Representatives (HOR), the bigger chamber of the country’s legis­lature.  This practice is supposedly consonant with the principle “no taxation without repre­sentation”; the HOR members being seen as direct representatives of the citizenry since their mandates are supposedly closer to the grassroots than that of the senators who are elected with the entire nation constituted as an electoral district.  In both legislative chambers, the pro­posed tax measure was handled first by their respective Ways and Means (or Finance) Committees, which may then invite affected parties to offer their views on the proposed measure.

Only after a revenue measure was passed by the House will it be considered by the Senate.  There is some controversy over the powers of the Senate in this regard.  Some believe that the Senate can only amend the House measure.  Others believe that the Senate can overhaul or even throw out the House bill and substitute its own version.  These controversies would figure in the passage of the CTRP.  After both legislative chambers have passed their versions of a revenue measure, panels from both chambers will constitute a bicameral conference com­mittee (“bicam” for short) to reconcile their differences (if any).  The “bicam” will then pro­duce a conference committee report that must be presented and approved by both cham­bers.  Once a proposed revenue measure gets passed by both chambers, it is now considered by the President of the Philippines for approval.

The petroleum tax measure was approved by the House as House Bill 5550, a sub­stitute bill for House Bill 72, which was sponsored by Rep. Marcial C. Punzalan, Jr. (Quezon).  HB 5550 was approved by the House in early June 1996.  The Senate approved the same measure after a few days and the President signed it into law as RA 8184 on 11 June 1996.  The said tax law was a necessary complement to Republic Act No. 8180, otherwise known as the Oil Deregulation Law.  RA 8180 also provided for the lowering of tariff duties on crude oil and refined petroleum products from 10% and 20% to 3% and 7%, respec­tively.  In turn, RA 8184 decreed the conversion of the 7% tariff reduction on crude oil to­gether with special oil levies provided for by administrative fiat into a specific tax on refined petroleum products.

Of the three measures comprising the CTRP, this measure was relatively the least controversial.  It appears that the policy battles in this issue area were fought during the passage of RA 8180 itself.

The “sin tax” measure was approved by the House as House Bill 7198, in substitu­tion of several House measures including HB 6060 (introduced by House speaker Jose de Venecia himself), the latter being a version drafted by the Department of Finance, which included provisions for income taxation and reforms in tax administration.

Its passage was attended by controversy and considerable attention as the corporate giants affected by the proposed measure—San Miguel Corporation, Asia Brewery Inc. (ABI), Fortune Tobacco Corporation and La Suerte Cigarettes—undertook a massive lobbying and media blitz for and against the measure. San Miguel and La Suerte were in favor of the shift to specific taxa­tion while the companies associated with Lucio Tan (ABI and Fortune) were in favor of re­taining the ad valorem ( a percentage of the selling price) tax. However, all of the affected corporations were against indexing the excise tax on cigarettes and beer against inflation.

At one point, the House Committee on Ways and Means tried to satisfy all parties by approving a “whichever-is-higher” formula for beer taxes.  This meant that the government could use either the specific tax or the ad valorem tax depending on which tax rate will yield higher revenues.  This incurred the Palace’s displeasure since it preferred a specific tax on sin products.  HB 7198 was approved by the House (in a 116-11 vote) on 12 September 1996 after it was reconsidered “to allow for perfecting amendments”.  The measure was supposed to have been adopted the day earlier.  This version appeared to hew close to the Palace’s preferences.

However, many observers including Rep. John Osmeña (Cebu) believed that a rehashed version of the controversial “whichever-is-higher” formula was passed by the House (Jabal, Carlos and Batino 1996).  President Ramos then apparently put himself in a ‘Catch-22’ situation when he certified HB 7198 as an urgent measure on 11 September 1996 despite objections from the Department of Finance and some of his cabinet members (Samonte 1996).[2] It took almost two months before the Senate (through a 15-0 vote) could adopt the measure on 7 November 1996, opting for an outright shift to specific taxation (Carlos, Jabal, Santos and Serapio 1996).  A bicameral conference committee was formed and met twice (on 13 and 20 November 1996).  The sin tax measure was approved and en­acted as law by President Ramos on 22 November 1996, just in time for him to claim an im­portant victory before the Association for Asia Pacific Cooperation (APEC) summit meeting in Subic on 24 November of the same year.

In the final version, the specific taxation system was adopted as a rear-guard action by the House to impose a 20% surcharge on foreign ciga­rette brands was withdrawn during the last ‘bicam’ meeting on the measure (Nuqui, Santos, Carlos & Garcia 1996).  In this particular episode, it was quite apparent that the major actors involved com­promised to have a rather ‘bad’ sin tax law rather ending up with none at all.  It also appears that the country’s creditors and oversight multi-lateral financial institutions (such as the In­ternational Monetary Fund) also went along with this compromise.

The passage of the third CTRP component, Republic Act No. 8424, took a longer and more difficult time since a greater number of affected parties were involved.  Corporate actors and self-employed individuals lobbied for a lighter tax burden by way of reduced tax rates or exemption privileges while fixed income earners wanted higher levels of allowable deductions and exemptions.  While organized industrial and economic interests had minimal collective action concerns in the pursuit of their goals, the otherwise more-difficult-to-organize-and-mobilize fixed income earners found champions in such organizations as the Freedom from Debt Coalition (FDC) and in many members of the House who were quite mindful of their chances for re-election in the 1998 general polls.[3]

In addition, proposed reforms on tax administration such as granting the Bureau of Internal Revenue (BIR) Com­missioner the authority to examine the bank deposits of suspected tax cheats were opposed by several powerful sectors such as the commercial banks and many of the legislators them­selves such that they never got off the ground.  These opposition forces also rode on the support of a citizenry wary of the powers of government to pry into the private affairs of individuals—admittedly an attitude developed due to the abuses of the Marcos dictatorship.

The executive department initially opted for a strategy of having the comprehensive tax reform program (CTRP) adopted by the legislature as a single package.  It resisted the idea of breaking the package into smaller and more “digestible” bits, fearing that this will result in a watered-down package; that the legislators will adopt the more politically-palatable aspects of the package while passing up on the more controversial, albeit necessary compo­nents (Guevara 2003).  For this reason, the Department of Finance (DOF) drafted HB 6060 and got House Speaker Jose de Venecia to champion it.

In the end, however, the said pack­age was broken down into smaller measures.  HB 7198 dealt with the excise tax on ‘sin’ products while HB 9077 dealt with individual and corporate income taxation and tax admini­stration issues.  Nonetheless, HB 6060, sponsored by de Venecia in February 1996, should be regarded as the proper starting point for tracing the legislative history of RA 8424.  The emergence of HB 7198 and HB 9077 should be seen as the means through which the House, or more particularly its Committee on Ways and Means headed by Rep. Exequiel B. Javier (Antique) and Rep. Renato Diaz (Nueva Ecija), sought to leave its own mark on tax legisla­tion.

Through HB 9077, the House differed with the Department of Finance (and with the Senate, eventually) on several key issues including the nature of the income taxation sys­tem, the minimum corporate income tax (MCIT), the fringe benefit tax, the tax on the inter­est income of foreign currency deposit unit (FCDU) deposits as well several proposed re­forms in tax administration.

Under the global system of income taxation proposed by the House Ways and Means Committee through HB 9077, all types of income derived from whatever source, active or passive, will be taxed under one schedule of progressive tax rates.  In a schedular system of income taxation, different types of incomes are taxed at different final rates and are covered by separate tax returns or forms.  According to House Ways and Means Committee chairman Javier, the DOF-authored HB 6060 was not adopted by the committee “because it seeks to perpetuate” the schedular system (House TSP, 17 March 1997).  However, the House as a whole voted against the committee’s recommendation for a global system of income taxation and opted for a modified schedular system instead.

In HB 6060, the DOF proposed a minimum corporate income tax (MCIT) based on corporate assets.  In so doing, the DOF wanted to prevent corporate tax cheats hiding be­hind a continuous failure to post bottom-line profits to avoid paying income taxes.  It be­lieved that a corporation that loses year in and year out “has no business being in business”.  House legislators meanwhile had conceptual problems on an “income tax” which was based on corporate assets, a non-income item.  Technically speaking, the MCIT was not an income tax and could be a disincentive to domestic and foreign investors for several reasons. For one, the US Internal Revenue Service has ruled the MCIT to be ineligible as tax credit for American firms operating in the Philippines.[4] Furthermore, the MCIT was also seen by the House as a tax that penalizes capital-intensive firms and will discourage corporate expansion.  It was also seen as a needless burden for firms who do not make a profit due to normal business reasons or legitimate corporate difficulties.

In its place, the House proposed a five-year net-operating-loss-carry-over (NOLCO) provision for firms.[5] Under this proposal, a firm’s net operating loss from each of the 5 taxable years preceding the current taxable year can be carried over to reduce its income tax payable for the current taxable year.  This meant that a firm could declare losses for 5 straight years and avoid paying income taxes.  Senator Juan Ponce Enrile countered that tax cheats can still defeat this provision by breaking the 5-year stretch; if a firm declared a profit for a least a year within a 5-year span, it could avoid paying income taxes for four years.

In response to suggestions that the MCIT be based on some income measure such as gross income, DOF officials countered that it was foolhardy to base a minimum income tax on the income decla­rations of acknowledged tax cheats.  The MCIT was precisely based on corporate assets be­cause these items are among the more transparent items in a corporate financial statement (Guevara 2003).

The Senate and the DOF also wanted to tax the fringe benefits of corporate execu­tives and higher-level corporate employees in order to plug loopholes.  Under the prevailing setup, corporate executives may opt for lower basic salaries (and correspondingly lower tax liabilities) to receive tax-free or tax-exempt perks such as company-provided or –supported housing, international travel, house help, and educational, medical and dental benefits.  All of these perks constituted income-in-kind and should be taxed accordingly.  The House opposed the fringe benefits tax based on, among others, the vacuous reasoning that it will make the corporate tax burden heavier.  It considered the fringe benefit tax as a tax on corporate expense rather than on individual incomes (see the sponsorship speech of Rep. Javier, HOR-TSP, 17 March 1997).[6]

The House also wanted to maintain the prevailing policy of not taxing income from dividends and FCDU deposits.  In contrast, the Senate proposed a 10% final withholding tax on FCDU deposits’ interest income and a graduated tax schedule on dividends (4% in 1998, 8% in 1999, and 10% in 2000).  The House reasoned that maintaining the tax-free policy will help prevent the outflow of precious foreign exchange.  This argument will gain greater sa­lience in the context of the Asian financial crisis that will hit the country by July 1997.  On the other hand, the Senate pushed for these taxes on passive income for reasons of equity.  The senators could not see why holders of peso-denominated deposits should pay a 20% final income on interest income while FCDU depositors do not pay any tax.

In all of these issues, the House was supported by the big business sector, as repre­sented by their peak associations.  In addition, the House and big business, especially the commercial banks, defeated a provision to relax bank deposit secrecy laws to allow tax au­thorities to examine bank accounts of suspected tax cheats. House leaders believed that this power is “fraught with potential abuse and is therefore unacceptable” (Javier, HOR-TSP, 17 March 1997).  The commercial banks meanwhile alleged that relaxing the bank deposit se­crecy law would scare depositors away.  On this issue, the Bangko Sentral ng Pilipinas joined the House and the commercial bankers (Garcia, Jabal, Batino and Nuqui 1996) in insisting on bank deposit secrecy.

The House also differed from the Senate and DOF on other income tax issues.  It clung to the older practice of taxing foreign-sourced income of citizens and residents while the Senate was in favor of taxing only the income of citizens and residents earned within the national territory.  On this issue, House leaders curiously defended their position on grounds of equity: why should income from foreign-based deposits of citizens and residents be exempt from Philippine income taxation when their local peso deposits were not tax-free?

In response, the Senate believed that the new practice would help avoid double taxation of the same income by both countries.  The House was also prepared to exempt the foreign-sourced income of overseas Filipino contract workers and seafarers up to a given ceiling.

The House also consistently favored higher levels of allowable deductions from the gross income of individual income taxpayers.  While the Senate was amenable to only a   P20, 000.00 basic deductions per taxpayer regardless of marital status, the House approved a higher basic exemption of P60, 000.00 per individual.  In fact, this issue was one of the most contentious matters that delayed agreement by both chambers.  Both chambers however agreed on several key provisions.  For one, they agreed to simplify the income tax rate structure by reducing the number of tiers from 10 to six.  Both chambers found the DOF-proposed 3-tiered structure (10%-20%-30%) to be too coarse and radical.

HB 9077 was passed by the House with amendments on 8 May 1997 on an overwhelming 156-1 vote.  While the House Ways and Means Committee was amenable to fringe benefit taxation, the whole chamber was not.  The Senate’s approval came only after almost 5 months of de­liberations on 1 September 1997.  The Bicameral Conference Committee was convened al­most immediately and met for seven times during October 1997.  A meeting scheduled for 17 November 1997 was immediately adjourned as Senate panel chairman Juan Ponce Enrile was unable to attend due to his health problems.  Enrile’s absence gave opportunities for some House conferees to move for changes in the agreements reached between Enrile and his House counterpart, Rep. Exequiel B. Javier (Arpon, Santos and Duplito 1997).  Earlier, both panel chairmen were empowered by their colleagues to meet separately in order to fa­cilitate the resolution of points of disagreement between both legislative chambers. The ac­tion of some of the House conferees to change the bicameral committee draft report was opposed by the other members of the Senate panel who insisted that the changes must be approved by Enrile.

Among the changes proposed by the House conferees include raising the allowable tax exemptions for a family of six (consisting of two income earners and 4 dependent chil­dren) to P120, 000.00 from P92, 400.00; the retention of the 35% corporate income tax in­stead of a gradual reduction to 32% from 35% by year 2000; the restoration of tax exemp­tion of gross receipts of thrift banks (which were not subsidiaries of commercial banks) and the 10%-20% tax on capital gains from the sale of unlisted shares of stocks in any domestic corporation (Arpon, Santos and Duplito 1997).

The Bicameral Conference Committee managed to meet a number of times after the aborted November 17 meeting.  However, no minutes of these subsequent meetings could be found in the legislative archives.  In subsequent meetings, an increase in the level of tax exemptions from P92, 400.00 to P98, 400.00 for a family of six obtained the approval of all of the Senate conferees (Santos and Arpon 1997a).  However, some House conferees con­tinued to insist on a P120, 000.00 figure with six of them (Reps. Joker Arroyo, Edcel Lagman, Mar Roxas, Felicito Payumo, Raul del Mar and Ramon Bagatsing, Jr.) dissenting with the bicameral committee report on this account.  Three of them (Reps. Gary Teves, Eric Singson and Tajon) did not categorically reject the said report; they signed the report but signified a preference for a higher exemption ranging from P100, 000.00 to P120, 000.00 (Arpon and Santos 1997).  With the “yeas” of the Senate conferees, the approval of at least 10 of the 18 House conferees was necessary before the bicameral conference report could be taken up by both chambers.  If both panels failed to compromise on the tax exemption level, taxpayers will be back to the prevailing P56, 000.00 figure for a family of six.

It was probably the fear of voter backlash on a much lower tax exemption level that led some of initial dissenters to change their positions as November 1997 waned.  Furthermore, more and more of the House conferees that were initially absent when the signatures were being collected also approved the bicameral conference report so that the magic number of 10 signatures was reached.  By early December 1997, Reps. Mar Roxas, Tong Payumo and Raul del Mar changed their positions; they explained their change of heart by noting that  P98,400.00 was preferable to P56,000.00.

Rep. Mar Roxas even delivered a privilege speech to have his dissenting vote counted as favoring the bicameral report (Arpon 1997).  These vote changes were questioned by opposition legislators at the House floor but the bandwagon for the tax mea­sure in the chamber started rolling.  On December 8, the Senate approved the bicameral conference report with a 21-0 vote with no abstentions.  On the same day, the House ap­proved the same report amidst complaints from some opposition legislators based on some technicalities (Santos and Arpon 1997b).

The tax measure was signed into law by President Ramos on 11 December 1997 and was expected to raise P6 billion in new revenues.  Among the revenue earners included in the law were the 7.5% tax on the interest income of FCDU deposits, the gradual hike of dividend taxes to 10% from 6% by year 2000, a 2% minimum corporate income tax based on gross income, an increase in capital gains tax on real property to 6% from 5% for indi­viduals, and a withdrawal of the tax exemption of thrift banks.  It could be noted that the MCIT that was approved was now based on gross income and not on gross assets as originally pro­posed by the Finance department.

---

[1] Former finance undersecretary Dr. Milwida Guevara argues that in addition to these 3 measures, the Ramos administration’s CTRP also includes Republic Act No. 7716, otherwise known as the expanded value-added tax (EVAT) law (Guevara 2003).  Pursuing Guevara’s logic, the tax reform effort of President Ramos should also include the 1993 cigarette tax reform law.  However, this same law was the subject of her own doctoral dissertation (Guevara 1995).

[2] Executive Secretary Ruben Torres warned that when he certified a bill as an urgent measure, President Ramos can no longer veto the bill if its final version was not to his liking.  Based on Ramos’ marginal notes to HOR speaker Jose de Venecia, his certification was issued on condition the bill was still to be amended by the HOR in accordance with an earlier meeting of the Legislative-Executive Development Advisory Council (LEDAC) where House leaders committed to adopt the Palace’s version.  The Palace’s hopes for a more congenial tax measure therefore depended on the Senate (Samonte 1996; Villegas, Garcia, Jabal & Carlos 1996).

[3] Olson (1965) noted that if the benefits of a proposed policy change are dispersed amongst so many beneficiaries such that the per capita gain is quite minimal, it is relatively more difficult to mobilize political support from these numerous beneficiaries who are unorganized in the first place.  In contrast, if the adverse effects of a proposed reform are confined to a fewer number of economic actors, their political opposition to the policy reform is more forthcoming.  Furthermore, these economic actors may be organized already and will find it less difficult to mobilize opposition to the reform.  For example, while a lowering of the tariff duty on refined sugar will benefit millions of consumers by way of lower prices, it will be easier for the fewer domestic sugar producers to oppose the new tariff measure.

[4] Among the usual terms of a tax treaty between two countries is a provision that income taxes paid by corporations (incorporated in country A but operating in country B) to the tax authorities of country B could be claimed as tax credits by said corporations when they reckon their final income tax obligations to country A’s tax authorities.  This provision prevents taxation of the same income by both countries.

[5] The House Ways and Means Committee originally proposed a three-year NOLCO but the House approved a more liberal five-year NOLCO provision.

[6] It could be considered a tax on expense if the fringe benefit tax is levied on corporate employers.  As envisioned however by the Senate and the DOF, the fringe benefit tax will be levied on individuals.

Political institutions and tax policy-making in the Philippines

In this blog entry, we continue sharing parts of the draft book on political institutions and policy making in the country.  To sharpen the discussion, we focus our attention on tax policy-making with emphasis on tax measures adopted during the presidency of Fidel Ramos.

I believe this discussion is timely given recent warnings that the incoming president will be saddled with fiscal deficits and need to raise revenues by way of raising value-added-tax (VAT) rates and rationalization of current fiscal incentives.

The examination of tax policies is a good way of seeing the policy making process of a country in action.  Taxation touches almost every aspect of the economy and society and taxation is the area of public policy where the most interests are at stake.  For one, a number of public policy decisions (such as public spending and borrowing) and private economic behavior (such as spending and investments) are related to taxation.

Raising adequate tax revenues to finance government programs and support public policy thrusts is one of the key failures of the Philippine state since the colonial period.  During the American colonial period, the efforts of the American-dominated Philippine Commission (which operated as a quasi-executive branch) to raise greater revenues were consistently opposed by the legislative assembly (composed largely of a Filipino elite that acquired land via Spanish land grants and the sale of church lands during the American occupation) (Golay 1984).

In fact, the political dominance of landowners in the legislature helps explain why the real property tax system was not even codified until 1973 (Montes 1991).  In addition, legislators had continually sought tax concessions for constituents and supporters.  Golay (1961) concluded that reliance on tax incentives was the reason why tax revenues did not increase (as a percentage share of the GDP) between 1950 and 1959 despite increasing rates of import duties on American goods.  In his study of the pre-martial law legislature, Stauffer (1970) noted that Congress consistently held back efforts to tax the export industries.  While the martial law government of Ferdinand Marcos adopted tax reforms that increased the tax burden of the wealthier classes, it also granted vast tax exemption privileges to cronies and front-men (Eaton 2002).

Notwithstanding the chronic fiscal crises and crushing debt burden inherited from the Marcos period, legislators were still reluctant to enact tax reform measures after the return to democracy in 1986. However, they were  yet were not immune to tax particularism.  In fact, the most common type of tax bills passed between 1987 and 1994 was designed to grant tax exemptions (Eaton 2002).  President Corazon Aquino (1986-1992) was thus forced to respond to the fiscal bind by relying on domestic borrowing, which allowed her to avoid the politically difficult decisions involved in either repudiating the Marcosian foreign debt or in pursuing tax reform.

Prior to the re-establishment of Congress in 1987, she enacted a limited tax measure which imposed a 10% value-added tax (VAT) on manufactured goods but excluded a wide range of services, including those provided by professionals and financial institutions.

The Ramos presidency (1992-1998) faced a harsher fiscal situation compared to the preceding Aquino government.  On top of the foreign debt service burden, Ramos had to contend with the loss of millions of dollars in official aid from the United States following the abrogation of the Military Bases Agreement and the subsequent withdrawal of American military forces from the country in 1991.  With the passage of the Local Government Code in 1991, his government also had to deal with the increased and automatic claim of local government units (LGUs) on national revenues.  He also had to honor international treaty commitments to lower tariffs.

The need to raise revenues is also demanded by his “Philippines 2000” program, a plan to transform the sick Philippine economy into the latest Asian newly industrializing economy by his term’s end.  It was regarded by many observers as the first strategic top-down project for social and economic restructuring since the Marcosian “New Society” program associated with martial law.

On his election to the presidency in May 1992 on a narrow mandate, Ramos faced an economic crisis characterized by nearly zero economic growth, falling average incomes, and daily power outages of up to 8 hours (De Dios 1993).  At 15% of gross national product (GNP), tax revenues in the Philippines were the lowest in Southeast Asia.  In contrast, In­donesia, Thailand and Malaysia had better tax efforts at 19.8%, 19% and 17.5% of GNP, respectively.  Similarly, the level of tax evasion (more than 50% of potential tax revenues are uncollected) in the country clearly reflected the weakness of Philippine tax administration (Manasan 1994).

As a first step, Ramos proposed the broadening of the narrow VAT base and asked Congress to include telecommunications, cargo transport, hotels and restaurants, books, newspapers, broadcasting, and the lease/sale of real estate.  By buying off congressional opposition to the measure through accelerated releases of pork barrel allocations, an expanded VAT law (Republic Act 7716) was enacted in 1994.  However, the new law’s implementation in July 1994 was suspended when the Supreme Court ruled it violated the Constitution.

After the 1995 mid-term elections, legislators from the House of Representatives resumed their offensive against expanded VAT coverage.  The outcome of this new tax policy process was the improved VAT or IVAT law (Republic Act 8241), which took effect on 1 January 1997.  The new law was a setback for Ramos as legislators reneged on an executive-legislative deal to limit exemptions.

Instead of expanding VAT coverage, RA 8241 expanded the list of industries and economic activities exempted from VAT, leading to foregone revenues estimated at US$20 million (Eaton 2002).  In effect, Ramos used up government funds and substantial political capital to end up with a tax law not entirely up to his liking in terms of revenue productivity, economic neutrality, and equity.