Rising prices and VAT

‘And Gloria has the gall to tell us to further tighten our belts?’

What does the call for sacrifice in practice mean? Workers should not press for higher wages to regain the purchasing power their lost through inflation. Business should be satisfied with a lower rate of profit. Households should scrimp. The national interest demands no less.

Let’s focus on wages. Rising prices are a given. Indisputably, take-home pay buys less every passing pay day. To raise wages to the same extent as the rise in prices – the indexation dreaded by economists – would only further stoke inflation pressures. The result would be an endless spiral with higher prices and higher wages feeding on each other.

This is the theory underpinning the opposition to indexing wages to prices. Following the same argument, anything that further feeds inflation, therefore, should be reined in.

The wage cost component of goods ranges widely by industry. So does the cost of depreciation of equipment and of raw materials. All these costs could be held down or, at least, their rise could be moderated. The market, in fact, has its own way of automatically aligning these costs to prevailing business conditions.

But what’s the cost component of a traded commodity that remains invariant to business conditions? That is, the cost that stays the same through fat and thin, through bust or boom? Or worse, the cost that increases proportionally to the rise in prices?

It’s taxes, folks, and the value added tax – which is a form of sales tax – is the worst of the lot. The more prices rise, the more the government collects. The VAT rate is 12 percent. So every time the final prices of goods rise, government collection gets bigger. The obscenity is that considering that VAT already accounts for 12 percent of the old price, the government is, in effect, further taxing what it has already collected as tax.

As we have repeatedly said, government is the only winner through VAT in a regime of high inflation. Every 1 percentage point uptick in the inflation rate means P10.5 billion in additional revenues. At the 9 percent expected inflation, that’s P94.5 billion, folks.