Analysis

IMF’s 11 Disciples in U.P.
Pro-VAT paper is filled with inconsistencies

The International Monetary Fund (IMF) – irritated and impatient about the delay in the approval of a two-percentage point increase of the current 10 percent value-added tax (VAT) for all kinds of Philippine products and services – has let loose once again its ever-trusted 11 UP economics professors to push Congress to finally pass the VAT bill.

By EDBERTO M. VILLEGAS
Bulatlat

The 11 University of the Philippines economics professors – dubbed by media as the UP 11 – went to the extent of scaring the public if the increase of VAT rate is not approved in their paper, titled “The Economy on a Cusp: The Proposed VAT Amendments and their Larger Significance.” The UP paper was released on Good Friday, March 25.

Without such an amendment of the current VAT law, the UP 11 warned that there would be a continuous credit downgrading of the Philippines in the financial capitalist market and a “massive loss of confidence” in its sovereign debt with borrowings costs for the country rising. Thus, there would be “profound social, economic and financial costs to the nation if one considers –as one should – the macroeconomics instability and uncertainty that are bound to follow upon a debt-payment crisis.”

A case of play-acting

Conscious that their avid rooting for the payment for our foreign debts may seem overly callous at a time when government spending for social services is constantly declining through the years, the UP professors as an afterthought recommended that the government raise an additional P54 billion ($989.55 million, based on an exchange rate of P54.57 per U.S. dollar) from other measures to fund social services and infrastructure after first collecting P54 billion ($989.55 million) for 2005, the latter  to “placate financial markets and pave the way for the refinancing of maturing debts (thereby avoiding a future default).”

This stance of the UP 11 is play-acting to the crowd at the most and naïve-thinking at the least. When has the government ever concerned itself with giving priority to increasing the budget for social services? The authors themselves admitted that social service as a proportion of GDP has suffered a constant decline with spending for education dropping from 3.4 percent of GDP in 1999 to only 2.7 percent in 2004, and that for health fell from less than half a percent to less than a quarter of GDP.

As regards budget for infrastructure, this is now barely one percent of GDP. With their vehement call for the settlement first of our foreign obligations to avoid being blacklisted by the capitalist market, the UP 11’s regard for the welfare of the majority of Filipinos can therefore be seen as mere crocodile tears.

To hide their anti-people orientation, the authors claimed that the increase in VAT rate is not regressive (i.e., a tax which burdens the poor more than the rich) but  “mildly progressive” as a form of taxation since records show that the rich pay more VAT than the poor. And they used as basis the Family Income and Expenditures Survey (FIES) statistics for the year 2000. This particular study showed that the percentile share of the richest 10 percent of the population accounted for “35% of all spending in the country” for that year. They argued that less than half of consumption in the poorest half of the population is subject to VAT, but “that this figure rises to 64% for the next-richest nine percent and to more than 75 percent for the very richest (sic) one percent of the population.”

Besides using old FIES data of 2000, the above position of the UP 11 is contrary to the very nature of a consumption tax in that it erodes the incomes of the poor more than those of the rich. It does not matter whether the rich consume more VAT-covered products and services than the poor, since in the first place they have higher spending capacity. What matters is the proportion of an income that the VAT captures. The authors conceded this characteristic of a consumption tax, when they admitted, “it is not the main purpose of a consumption tax to be progressive, (italics supplied) especially a uniform tax which the VAT is.”

Double-speak

They even cited a National Tax Research Center (NTRC) estimate that effective VAT rate is 5.2 percent for people who earn P20,000 ($366.50) or less, while those earning P500,000 ($9,162.54) or more pay 3.66 percent of their incomes as VAT. But they quickly took back this admission by insisting that the proper basis for measuring progressiveness is tax on consumption rather than on income, “since not paying taxes on income saved at most postpones but does not avoid tax payment.”

Does this mean then that a 1 percent income tax on the poorest 20 percent of the population compared to a 60 percent tax on the income of the richest 10 percent is not progressive? Could it be then regressive? But this is absurd! With their convenient definition, the UP 11 then called the increase in VAT as “mildly progressive” and “mildly regressive”!  This kind of double-speak which the UP 11 engaged in, as used by Big Brother in George Orwell’s novel 1984 to obtain public support, characterized the general tenor of their paper.

Another major point of the UP 11 in batting for the rate increase of VAT from 10 to 12 percent is that this will simplify the implementation of the VAT which is expected to raise an additional income of P35.12 billion ($643.58 million) for the government. According to the authors, the reformed VAT should be passed first as originally crafted by the IMF and there must be no insertion of other provisions that promote social equity like exempting noodles and ordinary sardines from the increased VAT rate. These may, after all, mangle and deviate from its original intent which is to raise government revenues to please foreign creditors and investors and to avoid defaulting on foreign debts.

This bias for foreign interests of the UP 11 was further seen in its pushing for the temporary exemptions from the VAT of such big businesses in the Philippines (if not the biggest) like the petroleum industry, electric companies (particularly the independent power producers, the IPPs) and buyers of capital equipment (particularly heavy equipment), the latter dominated by foreign TNCs in the country. They argued that imposing VAT in the case of petroleum and electric generation, besides being unwise economically speaking, may promote political instability at this time when oil and electric prices are all going up. The oil and electric companies may just pass the VAT costs to their consumers. 

UP 11’s inconsistencies and class bias

It may be recalled that in an August 2004 paper titled “The Deepening Crisis: The Real Score on Deficits and the Public Debt,” the authors were against the decrease by the government of electric costs for the consumers, since they see such a measure as a “politicization of prices” and they would rather leave the movement of prices to the neo-liberal mythical free market. But when it came to imposing VAT on petroleum and electricity, among the reasons for their opposition was one based on political grounds. Thus their use of the argument of the “politicization of prices” is used according to their convenience whether it favors the wealthy or the poor. And their class preference for the rich, who succor them, is obviously showing.

While the UP 11 claimed that they are for lifting exemptions for those formerly excluded from VAT like doctors, lawyers, entertainers, and others, they argued for the exclusion from VAT coverage of the very rich as mentioned earlier. Again, while they wanted the lifting of VAT exemptions for the travel costs of Filipino nationals who travel internationally and locally, they were for exempting foreign nationals in this regard. They asserted that exempting from VAT foreign travelers who use Philippine international carriers and ships would promote the international competitiveness of the country. The foregoing are just some examples of the persistent double-speak of the UP 11 in their attempt to grandstand to the public and assume a pro-people posture.

UP 11 as IMF disciples

The UP 11 and the government are caught in their narrow and selfish vision of options to weather the fiscal and economic crisis of the country. Assuming a neo-liberal outlook, the IMF UP 11 disciples would rather let the market be, avoid renegotiating for the abrogation of odious loans incurred by the government, and not call for the repeal of all disadvantageous trade treaties entered into by the country.

For indeed, the IMF’s 11 disciples and the government are the main proponents of the capitalist globalization policy of liberalization, deregulation and privatization which has long placed the Filipino people in great misery. Their reforms to restore financial, economic and even political stability to the country would just exacerbate the present impoverishment of the majority of the people.

While the IMF’s 11 UP disciples console themselves that in the long run all the poor will experience prosperity if their reforms like the VAT would be adopted, they enjoy the comforts extended to them by their foreign mentors in terms of generous consultancy fees and new projects. But the road to perdition offered by the UP 11 will be rejected by the people who are beginning to see the path toward their true emancipation. And those who serve false masters shall not be there with the people in their hour of victory. Bulatlat

Edberto Malvar Villegas, PhD, currently chairs the Development Studies Program of the University of the Philippines in Manila and is Fellow of the Center for Anti-Imperialist Studies (CAIS)

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