Sin tax alignments

Department of Finance (DOF) logo

From government’s point of view, the ideal excise tax on sin products is an ad valorem or a percentage tax of the manufacturing price of a pack of cigarettes or a bottle of beer or whiskey.  Failing that, it can accept a specific tax on these products indexed to the inflation rate.  Of course, it goes without saying that government will prefer the highest tax rate, be it specific or ad valorem.

Through  these specifications, government can collect the maximum possible sin tax revenues.

Additionally, the national government believes that high sin tax rates will dampen consumption and consequently have positive effects not only on people’s health.  It could also improve peace and order and reduce crime rates.

Department of Health (DOH) seal

What about the tax preferences of the manufacturers of sin products?  Of course,  they will prefer low rates; specific rather than ad valorem; and unindexed (to inflation) tax rates.  Low tax rates will ultimately lead to lower prices of sin products which will ultimately mean greater demand for the same.  Nonetheless, the demand for sin products is generally inelastic–meaning demand for the same is not very sensitive to changes in product prices except in the long run.  Some tax experts report that beer is the most inelastic among alcoholic beverages while others opine that the nicotine content of cigarettes make demand for tobacco products also inelastic.

Local sin product manufacturers have predictably opposed the government-proposed 1000% increase in specific taxes on beer and alcoholic beverages and tobacco products.  The huge increase is proposed given the relative freezing of specific tax rates since 1996.  The tax law approved at the time did not approve indexation to inflation of the tax rates and provided only for minimal tax increases.

 

San Miguel beer

How will consumers of sin tax react to government’s tax proposals?

Filipino beer drinkers

It does not take one to be a rocket scientist to figure out that consumers will oppose government’s plans.  In his column at the Philippine Daily Inquirer yesterday, Prof. Cielito Habito pointed out that the poor consume sin products in a greater proportion compared to middle income and rich people.  Thus, they will oppose increases in tax rates that translate into higher retail prices.  

Colt 45, one of the beer brands of Asia Brewery Inc.

And higher retail prices for these ‘indispensable’ products means lower real incomes for the poor.

This might not register well with a public already reeling with high prices of oil products and an increase in transport fares.  

What we have here is a case where the interests of sin tax manufacturers and consumers largely coming from the ranks of the poor are aligned and ranged against that of government.

Obama and Noynoy smoking

It is incumbent upon government to gather political support for its tax plans within and without Congress.

 

Will it be a good idea to appeal for support from the wives and children of smokers and drinkers who may be concerned about the health of their relatives?  To those who are worried that  the money  spent for sin products is money that should spent for the dining table and other household necessities?  Or will that be seen as an invasion of privacy and curtailment of individual freedoms? Or will it encourage strife within households?

Will examples from role models help?

Solid again?

Last week, I wrote about a possible chink in the armor of the Northern Luzon Alliance NLA), a group of congressmen from the tobacco-growing parts of Northern Luzon, including the Ilocos.  This was when Ilocos Sur Governor Luis ‘Chavit’  Singson joined a press conference sponsored by the Department of Health regarding the hazards of smoking.

Governor Chavit Singson

Apart from being a poster boy for healthy living, Singson surprisingly expressed support for an administration- sponsored tax bill after decades of dodging tax hikes on tobacco products.  Displaying economic acumen, Singson explained that the merger of Philip Morris and the Lucio Tan-owned Fortune Tobacco Corp. created a monopoly big enough to depress tobacco farmers’ selling prices.  In effect, he said, only the manufacturers were benefiting from the transactions.

Fortune cigarettes

During that same press conference, Singson said he will talk to his NLA colleagues to get them to his point of view.

However, it seems that it was Singson who was convinced to come back to the fold.

A report of Tempo last 19 March 2012 read:

La Union Rep. Victor Ortega, president of the Northern Luzon Alliance (NLA), said he expects members of the organization, dubbed the “Solid North,” to maintain this stance after learning of Ilocos Sur Gov. Luis “Chavit” C. Singson’s clarification of media reports claiming that he has thrown his support to House Bill (HB) No. 5727 that contains the DoF version of the sin tax measure.

In a meeting with Ortega last week, Singson, an influential political leader in the Ilocos region, has made clear that he would support the bill that will protect the interests his constituents, the tobacco farmers, and other stakeholders in the affected industries.

“Definitely, it will not be the unitary tax system, we will vote against it,” Ortega said a day after he and several Northern Luzon lawmakers held a dialogue with Singson last week. He added, “Buo ang Northern alliance, we intend to vote as one bloc if that is what it takes to protect our industries.”

Rep. Victor Ortega

Ortega said HB 5727 is considered by many congressmen as “prejudicial to the interest of our constituents and the tobacco industry.”

What we have here is somebody, Ortega, claiming that Chavit will ‘vote’ against HB 5727.  Technically, Chavit cannot vote against the bill since he is not a member of the House of Representatives. 

However, if he indeed changed his mind and will cast his lot against the bill’s opponents, Chavit’s opinion will carry a lot of weight.

Taxing professionals

The Bureau of Internal Revenue (BIR), the country’s premier revenue collection agency, announced today that tax evasion charges were filed against a well-known election lawyer and three other professionals.

The lawyer purportedly earned only P1.38 million in 2010 but was able to purchase a condo unit in Makati City valued at P53.3 million, according to BIR commissioner Kim Henares.

BIR Commissioner Kim Henares

Levying the proper taxes on the income of professionals (lawyers, doctors, accountants, engineers, architects, and entertainers, among others) has been a problem for quite a while.  These professionals do not, as a matter of default, issue receipts to their clients.  If there was proper documentation, then the BIR can properly audit their income and collect correct taxes.

Why don’t professionals issue receipts?  Because their clients do not, as a matter of default, ask for these same receipts.

There’s an alignment of interests on both sides.  When the professional does not issue a receipt, he can understate his income and reduce his tax obligation.  If the client does not ask for a receipt, she will pay a lower professional fee.

Tax authorities estimate that there are 1.7 million professionals in the country who paid only P9.8 billion in taxes in 2010 or an average of only P5,764.00.  Commissioner Henares estimated that based on their income levels, each professional should be paying P100,000 in taxes on the average.  The bulk of income taxes and profits were collected from fixed wage and salary earners.

The new cases filed today against the professionals resulted after BIR investigators posed as patients or clients and observed that no receipts were issued.  This approach is too micro.  A better macro approach is to convince and mobilize citizens to demand receipts from professionals.  Left to their own devices, the latter will not voluntarily issue receipts.

How do we break the alignment of interests between clients and professional regarding receipts?  First, we can encourage clients to ‘shop’ and compare professional fees so the threat of fee increases in case receipts are asked could be moderated.  Second, clients can be educated that the non-issuance of receipts by professionals is actually detrimental to their welfare.  Understatement of professionals’ income ultimately leads to lower tax revenues that in turn mean a smaller volume of public goods and social services.

Of course, the better clincher for ordinary citizens to demand receipts is the timely and palpable conversion of tax monies into public goods.  Absent that, they will continue to behave as before.