Three-person games: an attempt at theorizing a game-theoretic model of social change from authoritarianism in the Soviet Union and the Philippines, Part VI

Part VI: Modeling the Philippine political game (1983-1986)

As in the Soviet Union, we identify the Philippine political game during the late martial law period from August 21, 193 to February 25, 1986 as a three-person game.

Let there be three players: Agent (1) is the moderate reformer [MR], who stakes out a ‘centrist’ (essentially unarmed contestation) programme for the Philippines because of the presence of agents (2) and (3). The second agent, Agent (2) is the conservative standpatter or regime stalwart [CO] and the third player, Agent (3) is the radical revolutionary [RR]. Each of these three agents in the Philippine political ‘game’ have distinct goal functions:

• MR : G (MR)
• CO: G (CO)
• RR: G (RR)

The goal functions of these three agents could be construed as maximization problems subject to constraints. For example, the reformist goal function, G (MR) could be written as the Ferrerite function:

• G (MR) = Max MR’ = Max (F, D, E)

= Min (UI, EW, SUS)

where MR’ is a row vector defined as:

• MR’ = [C₁, S₁, C₂^e, C₃^e, S₂^e, S₃^e, I, T, r]

where

C₁ = a measure of comprehensiveness of the reform program^[1] and 0 < C₁ < 1

C₂^e = MR’s expectation of the extent of Agent (2), or CO’s conservative program and 0 < C₂^e <1

C₃^e = MR’s expectation of the extent of Agent (3), or RR’s radical program and 0 < C₃^e < 1

S₂^e = MR’s expectation of Agent (2), or CO’s political strategy

S₃^e = MR’s expectation of Agent (3), or RR’s political strategy

S₁ = MR’s political strategy for reform

I = measure of supportiveness of international environment and 0 < I < 1

T = state of available theoretical guidance and ideological support

and r = residuals

In this case, maximizing MR’ means maximizing (C₁, S₁) subject to the {C₂^o, C₃^o, S₂^o, I, T, r} constraint where the C₂^o, C₃^o, S₂^o, and S₃^o are the actually observed values rather than MR’s expectations regarding the program and strategy of the two other players. This means that there are solution values C₁^* and S₁^* equivalent to:

• C₁^* = f(C₂^o, C₃^o, S₂^o, S₃^o, I, T, r)
• S₁^* = g(C₂^o, C₃^o, S₂^o, S₃^o, I, T, r)

The goal functions of the two other agents could be cast similarly as constrained maximization problems. The contents of their goal functions will contain similar C₂, C₃, S₂, and S₃ factors. The same {I, T, r} constraint applies to all three agents. Part of the constraint for Agents (2) and (3) will be their opponents’ political program and strategy.

Even with distinct goal functions, one can conceive of all three agents participating in a political game of gathering the broadest support and amassing the maximum amount of resources and personnel to prevail and implement their respective programs. It seems realistic to assume, given the Philippine political situation immediately after Ninoy’s assassination, that most likely not a single anti-regime agent can win. In this case, two-person coalitions must and will be formed for a winning program to be adopted. Such a winning program will obviously be a compromise.

Should Agents (1) and (2) coalesce against Agent (3) [which is unlikely but is possible since both are united in opposing communism and are either opposed to or are wary of Agent (3)] and win, the solution values to the game will be represented by C_1,2^* and S_1,2^* equivalent to:

• C_1,2^* = h(C₃^o, S₃^o, I, T, r)
• S_1,2^* = i(C₃^o, S₃^o, I, T, r)

C_1,2^* could be construed as the political compromise forged between Agents (1) and (2) while S_1,2^* is their joint strategy versus Agent (3). The compromise between these two agents could be anywhere between the first and second scenarios outlined below. Perhaps the moderate reformer (MR) will get some foothold in the government in an elite power-sharing arrangement while the conservative gets assured that the he remains the leader of the Philippines. The moderate reformer (MR) might likewise gain some concessions for the participation of non-Marcos crony business firms in the commanding heights of the Philippine economy. Both actors will most likely allow the United States government to continuously play a prominent role in Philippine politics and foreign policy.

We can likewise work out similarly-structured solution values for coalitions between Agent (1), the moderate reformer, and Agent (3), the radical revolutionary. In fact, such a coalition existed after the Ninoy assassination in August 1983 up to eve of the May 1984 parliamentary elections. This coalition between Cory’s moderate opposition and the left led by Sison was practically dissolved when the latter refused to support the former and boycotted the 1984 parliamentary elections. The split between the two was further confirmed when leftist legal political forces formed Bagong Alyansang Makabayan (or BAYAN) while non-communist anti-dictatorship mass organizations coalesced in a rival alliance called BANDILA.

A coalition between Agent (2), the conservative standpatter, personified by the dictator himself, and Agent (3), the radical revolutionary personified by CPP founder Sison, is theoretically impossible since both fought each other in the battlefields. However, one can argue that such a coalition (albeit tactical) was practically formed when the CPP boycotted the snap presidential contest that pitted Marcos against Tita Cory. The CPP then had to share the defeat inflicted on Marcos by Cory’s political alliance which eventually included the US government, military rebels, the Christian churches, and big business.

If, as had actually happened (after the February 7, 1986 snap elections), Agent (1) opposed a coalition of Agents (2) and (3) and won, the relevant solution values are represented as:

• C₁^* = j(C_2,3^o, S_2,3^o, I, T, r)
• S₁^* = k(C_2,3^o, S_2,3^o, I, T, r)

The games that these three agents played were asymmetric PDs. This point could be seen if we subdivide the over-all game into 2-person sub-games. In the contest between the moderate reformer and the conservative, the reformer can only choose amongst the following options: compete, neutralize, compromise, or surrender. In contrast, aside from the above options, the conservative may cooperate with the moderate reformer against the radical revolutionary. The asymmetry can be seen also in their pay-offs. For the reformer, his positive and negative pay-off is quite discernible. From the conservative’s point of view, it is only his negative pay-off (in the event of the reformer’s triumph) that is clear. He loses power, perks and privileges. He is not sure what positive pay-offs are in store for him under a reformist regime. The positive pay-offs may only exist in the form of side-payments the reformist makes in his behalf to buy the conservative’s cooperation, or at least, his neutrality.

The contest between the conservative and the radical revolutionary seems to be a zero-sum game. One side’s gain is the other side’s loss. However, as had actually happened, Sison de facto allied with Marcos against Tita Cory when the CPP decided to boycott the 1986 snap elections over the objection of many CPP cadres and activists. The 3-person contest morphed into a 2-person game and with Sison sidelined from center-stage, Tita Cory’s side gained the biggest price—the presidency—when her alliance forced Marcos to flee to Hawaii.

An initial analysis of the Philippine political game during the late martial law period (August 1983-February 1986) indicate the following possible scenarios. The first and last scenarios are most unlikely with the last one having less chance than the first to happen.

• First: No or very cosmetic change (classic authoritarianism): CO wins
• Second: :Elite power sharing without substantial democratization: MR and CO coalition wins
• Third: Democratization without significant socio-economic reform: MR and RR coalition wins or solo MR victory
• Fourth: Democratization with substantial socio-economic reform: MR and RR coalition wins
• Fifth: Installation of a communist-led government: RR wins

After the Ninoy assassination up to the eve of the 1984 parliamentary elections, one can argue that the Cory forces were courted by both sides for their own purposes. While the obvious alliance is against the dictatorial regime and between Cory’s and Sison’s forces, it could likewise be reasoned that Marcos placated the opposition by allowing the moderate opposition more seats in the parliament. In effect, a tactical Marcos-Cory alliance was formed to wean the moderate opposition from allying with the communists. Marcos apparently realized that the communists were a more implacable foe than Cory. If the communists won power in February 1986, among their most likely first acts would be a summary trial and the execution of Ferdinand and Imelda Marcos, plus General Ver.

EDSA I, 1986

From December 1985 to February 1986, the Philippine political game clearly got transformed into a two-person non-cooperative zero-sum game between the Marcos faction and the moderate reformers (with the radical revolutionaries eliminating themselves from the political stage). The conservative position became increasingly unviable and Marcos became more and more isolated during the fateful four days of the unprecedented February 1986 People Power Revolution. He was asked to give up and leave the Palace by his main prop, the US government as most of his military commanders and troops withdrew their support and pledged their loyalty to Cory. Marcos had to go and his dictatorship had to end.

TO BE CONCLUDED

Tax reform under GMA I (2001-2004)

Through a rigorous analysis of the tax reform efforts of President Fidel Ramos (1992-1998), the tax policy process is revealed as a bargaining game between various veto players.  An accommodation of some sort is pre-ordained since even as the players have veto powers, everyone has an interest in making sure that a new tax policy emerges from the policy mill.  This is true for President Ramos who initiated the reform.  The desire to get the reform process going is also shared by legislators who, even if satisfied with the status quo, welcomed another opportunity to rewrite tax laws in order to secure divisible policy favors for constituents and supporters.  As a product of bargaining, the resultant tax laws were adulterated versions of their original versions and a mix of public-regarding (e.g., the expanded value added tax law) and private-regarding (e.g., the excise tax on ‘sin’ products law) policies.  The study of the tax policy process affirmed the propensity of lower-level legislators House members) to cater to special and private interests while the Senate was the natural ally of reforming President Ramos.  It also revealed the inordinate influence of several powerful individual legislators in tax policymaking.  The institutional players also included the Supreme Court, which at one point declared a tax law as unconstitutional.  This raised the transactions costs of tax legislation as a new and acceptable law had to be crafted.

 

 

 

 

 

 

 

 

President Fidel Ramos

 

The robustness of the conclusions and findings we had arrived at so far can be further tested if we change the decision-makers with the institutional parameters in place.  For this purpose, we examine in this section the tax reform initiatives undertaken during the presidency of Gloria Macapagal-Arroyo.  As revealed in subsequent paragraphs, this exercise would reveal continuities in tax policy and bolster our previous conclusions regarding tax policymaking in a candidate-centered democratic polity like the Philippines.

 

Arroyo’s tax reform initiatives evolved from her first term to the early months of her second term.  While the state of the country’s public finances was not in a pretty shape upon her take-over in January 2001, a greater sense of urgency was espoused during the start of her second term.  This was largely due to the alarm bells raised by a group from the University of the Philippines School of Economics (UPSE) [that included several former cabinet members from previous administration] who warned of an impending fiscal meltdown.  In her 2004 State of the Nation Address (SONA), Arroyo asked Congress to pass eight tax measures designed to raise some P80 billion in revenues.  However, Arroyo did not communicate a sense of necessity in this front.  She in fact did not replace her economic management team; in contrast, she appointed new men for the national defense and security portfolios.  The UPSE economists did a signal service for warning the nation of the fiscal dangers awaiting a polity that would continue to not fix its public finances.

 

 

 

 

 

 

 

 

President Gloria Macapagal-Arrooyo

 

During her first term, Arroyo initiated moves to reform the Bureau of Internal Revenue (BIR), the country’s premiere revenue collection agency.  The thrust of the reform was to convert the BIR into a corporate-like public organization that would operate (as well as rewarded and punished) under performance-based parameters.  Officers and staff of the new revenue authority were supposed to be paid at salary scales competitive to the private sector and shielded from political influence.   In her first SONA, Arroyo cited unprecedentedly the sitting BIR commissioner, a mere bureau chief, who spearheaded the reform effort.

 

An interview with Romulo Miral, Jr., then deputy director of the Congressional Planning and Budget Office (CPBO) at the House of Representatives, indicated the radical extent of the proposed BIR reform.  Miral, who was consultant to Bañez at the time, revealed that the plan was to abolish the BIR and establish a new and independent revenue body called the Internal Revenue Management Authority (IRMA) in its place.  None of the former officials and employees of the BIR were to be automatically or preferentially absorbed into IRMA.  There were plans to sub-contract private head-hunters to hire the officials and staff of IRMA and former BIR personnel had to apply with a screening board if they wanted to be employed by IRMA.   Anybody with a derogatory record was deemed ineligible for employment until her name was cleared.  IRMA officials and staff were to enjoy competitive salaries so quality personnel from the corporate sector could be attracted.  In addition, the pay and tenure of senior IRMA officers were to be linked with revenue collections (Miral 2004).   

 

Of course, the BIR officials and employees were against the planned reform.  At first, opposition to Bañez’ initiatives (including the transfer of revenue officials who had overstayed at a particular revenue district office to another locale) was confined to the filing of court suits. However, they obtained support from Courage, the left-leaning union of government employees.  The alliance between Courage and anti-reform BIR elements initiated a massive walkout and picketing at the BIR headquarters against Bañez. Almost immediately after this demonstration of popular resentment, he resigned in August 2002.  Bañez, who wanted to be able to fire corrupt and incompetent tax collectors, accused opponents of reform of stirring up trouble among the agency’s employees and undermining tax collection to thwart changes at the agency (MB 2002). President Arroyo admitted in her State of the Nation Address two weeks earlier in July 2002 that tax collections were running far behind target, while government spending is increasing as planned, so that chances are diminishing of reaching the 3% deficit target she had imposed for this year (Mendoza 2002). 

 

Arroyo could have clearly demonstrated her support for the embattled BIR chief and the IRMA reform by refusing to accept his resignation and supporting the IRMA reform.  However, the planned reform of the tax agency apparently found little support even among her chief allies.  The corrupt mafias within the BIR apparently sabotaged the reform effort by slowing down tax collections.  The drop in revenues was cited by reform opponents to call for Bañez’ resignation and no less than Speaker Jose de Venecia made the first call. 

Houser speaker Jose de Venecia

The speaker was seconded by other House members including Aniceto Saludo, Jr. (Southern Leyte) and Prospero Nograles (Davao).  Saludo even threatened to file charges of economic sabotage against Bañez for the poor revenue collections (Diaz 2002).  Notwithstanding President Arroyo’s optimism during her 2001 SONA, Bañez’ reform efforts apparently did not earn him friends within Congress, especially in the House of Representatives.  While House Bill 5054 calling for the establishment of a National Authority for Revenue Administration (NARA, a new name used in lieu of the much-maligned IRMA) was introduced, the measure languished in the House Committee on Appropriations (HOR 2003).  During the third and last regular session of the 12^th congress, a similar measure (HB 6435) was also introduced.  While it fared better than HB 5054, it only managed to be reported by committee and did not pass the second reading stage.  In the Senate, a counterpart measure (Senate Bill 2463) was introduced by Senator Ramon Magsaysay, Jr.  However, the 12^th Congress closed with SB 2463 pending in the Senate Committees on Ways and Means (headed by Senator Ralph Recto), Civil Service and Government Reorganization (headed by Senator Aquilino Pimentel), and Finance (headed by Senator Manuel Villar) (HOR 2004).

 

Miral (2004) explained the proposed BIR reform did not gain ground during the 12^th Congress for several reasons.  First, the proposed reform was “mistakenly packaged” as either a ‘privatization’ or ‘corporatization’ of revenue collections.  Miral believed these were unfortunate labels that unduly raised alarums and red herrings among the affected parties.  Second, he noted that the authors of the IRMA measure (which included Speaker de Venecia, Rolando Andaya, Jr., Neptali Gonzales II, and Julio Ledesma IV) were actually not well versed in the technical aspects of the proposed agency reform.  Miral intimated that the less-senior champions of the reform, Reps. Florencio Abad and Joel Villanueva (a party-list representative) were the ones who seriously studied the IRMA proposal and even traveled to countries like Mexico and New Zealand that had reformed their revenue agencies

Rep. Joel Villanueva

(Miral 2004).  But they apparently could not offer much contest to the reform’s opponents.  After Bañez’ resignation, the reform was softened through a proposal to form a National Authority for Revenue Administration (NARA).  A key compromise was the inclusion of a ‘preferential absorption of BIR employees’ provision in the proposed NARA measure.  

 

 

During the same 12^th Congress, other tax reform measures similarly rotted within the legislative mill.  At the end the second regular session, the status of measures to index and update so-called ‘sin taxes’ (HB 4765 and HB 5057) was reported as for ‘further Committee deliberation’ (HOR 2003).  During the third regular session, similar measures (HB 1728 and HB 4765) remained pending at the House Committee of Ways and Means chaired by Rep. Julio Ledesma IV (HOR 2004).  In contrast, measures that provided tax relief for several sectors and groups were either enacted into law or were approved by the House in third reading.  These included RA 9238 (which exempted certain services from the VAT), RA 9243 (which eliminated the imposition of the documentary stamp tax on secondary trading of financial instruments), RA 9294 (which clarified the tax exemption of offshore banking and foreign currency deposit units, authored by Rep. Exequiel Javier), HB 5713 (which granted tax incentives on capital equipment imports of new and expanding firms registered with the Board of Investments), HB 6344 (which restored the fiscal incentives to enterprises engaged in agriculture and fisheries (HOR 2004). 

Individual legislators, legislative committees and tax policy making

Through this blog entry and subsequent ones, I will continue sharing parts of a book on Philippine institutions and policy making which I started writing the middle of last year.

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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 candidate-centered political settings and they try to develop their reputations as reliable representatives vis-à-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 offer divisible policy favors such as 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.  However, individual rewards are only weakly related to their 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.

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[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.