Column of the Day The sin tax and the Laffer Curve
The sin tax and the Laffer Curve
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- Published on Monday, 12 November 2012 00:00
- Written by DUCKY PAREDES
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‘Recto exposed the DOF P60 billion tax goal as an impossibility. In various revenue runs done by the DOF itself, the best the DOF theorists could come up with was not P60 billion, but only around P40 billion, and in a worst-case scenario, only P23 billion.’
When Senator Ralph Recto argued that raising the tax too high on tobacco and alcohol may not result in significant money for health services, he was accused by a presidential appointee of being in the pocket of the Tobacco lobby that has successfully delayed the increase of the sin taxes for more than a decade.
Sen. Recto hurriedly resigned his post as chairman of the Committee of Ways & Means, which the vice-chair Senator Franklin Drilon was forced to accept.
Thus, Senator Drilon now has his hands full chairing two powerful committees—the Committee on Finance and on Ways and Means.
As head of the finance committee, he has the urgent task of swiftly steering to passage the 2013 General Appropriations bill with a little over a month to go before the Senate shifts to campaign mode for next year’s midterm elections. For his new role as acting chairman of the committee on ways and means, he has the responsibility of coming up with a fair measure that would impose excise tax rate increases on tobacco and alcohol products.
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I have no idea whether or not Senator Recto was in league with any lobbyists. But I do agree with him that prior to any increase in taxes, one has to understand the Laffer Curve which is defined as follows:
“The theory behind the Laffer curve states that there is a certain point, known as T*, at which a government collects the greatest possible amount in taxes. If taxes are lower than T*, the government collects less because taxpayers are not required to pay. If it is higher than T*, people have an incentive to work less because more of their money goes to the government and, as a result, the government collects less.”
The curve is derived from the writings of American economist Arthur Laffer who admits that he used the ideas of Ibn Khaldun, a 15th Century Muslim mathematician and economist John Maynard Keynes. Put more simply, it says that government collects nothing both at a 0% tax rate and at a 100% tax rate. The optimum earning of government is somewhere in between. The trick is to find it.
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Back to Sen. Drilon. Compared to Recto, Drilon has been having a hard time keeping up with his colleagues. Obviously, he has not had the time to study the voluminous documents on the issue.
During hearings on the tax bill, Recto exposed the DOF P60 billion tax goal as an impossibility. In various revenue runs done by the DOF itself, the best the DOF theorists could come up with was not P60 billion, but only around P40 billion, and in a worst-case scenario, only P23 billion. Apparently, this was why DOF officials eventually relented and said that they were willing to compromise and a P40 billion revenue goal was acceptable to them.
In contrast, last Monday’s start of the plenary debates put Drilon on the hotspot fielding queries from fellow senators. At almost every turn, he would consult with Bureau of Internal Revenue (BIR) Commissioner Kim Henares and Finance Undersecretary Jeremias Paul about the most basic questions regarding his substitute bill. When stumped, he repeatedly responded with general statements about the proposal being a health measure, bereft of details.
It did not help Drilon that both Henares and Paul appeared to be also grasping at straws in justifying the proposal. In one exchange, Senator Joker Arroyo wondered whether anyone understood what was going on!
Drilon was also vague and inconsistent in responding to Lacson’s interpellation. Lacson repeatedly pointed out that it was “a no-brainer” that cigarette consumption would go down as a result of high taxes, which in turn would lead to a decline in the sales volumes of manufacturers, and thus, less revenues.
But Drilon kept insisting that the experience in other jurisdictions “would not lead to that conclusion. ” Drilon never said which “jurisdiction” or country he was referring to, nor did he cite any case study or example.
The incoherence of his tax proposal became evident when he proclaimed that “even assuming (that revenues will decline), the position of the sponsor is that we should be willing to take that risk if it will result in less people smoking.”
Does Drilon not get it? What’s the point of setting a revenue goal if the sponsor is willing to sacrifice that revenue goal for less Filipinos buying cigarettes? If he’s willing to take the risk of declining revenues just so less people would stop smoking, then why was Recto’s proposal of collecting an additional P15 billion revenues from sin taxes unacceptable? If the ultimate goal is to stop Filipinos from smoking, then why not just ban cigarettes altogether?
Apparently, then, Drilon wants to tax cigarettes so high as to discourage Filipinos from smoking, yet he also wants more cigarettes to be sold in order to raise more revenues for the government’s health care program.
What can be expected of a tax bill that Drilon has already said should be approved by Nov. 19? That gives the Senate one week to approve a measure for which no support has been given by way of detailed computations.
Then, the next thing on Drilon’s agenda will be that of passing the 2013 budget.
Will both of these important measures passed by the Senate be passed “without thinking”? Being revenue measures, these will then have to be passed by the House. Our Constitution states: “All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills, shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.”
In this case, the amendments which the Senate may propose will have been passed and the House will be looking to their bi-cam session with the Senate as the time to come up with the House’s version of the 2013 budget, which will be finally approved by the bi-cam!
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