Patterns of Philippine Revenue 1960-1990 Reported by John C.T. Ko August 8, 2005

Outline of the Presentation Introduction Income Sources of the Philippines Trends in the General Government Revenue System Revenue Performance by level of Government International Comparisons Relevant Issues

I. Introduction Government revenue system = Taxation + Borrowing Public revenues keep government moving + enable Gov. to carry out its fiscal functions of allocation etc. The revenue system is important because the government has steadily increased its role in the provision of social goods which the private sector could not (or does not want to) produce for reasons of unprofitability. The government revenue system, including the agencies involved in taxation and borrowing, has been always the focus of public finance. Public revenues are funds used not only to keep the government machinery going, but also to enable the government to carry out its various fiscal functions of allocation, distribution, and stabilization. The revenue system is important because the government has steadily increased its role in the provision of social goods which the private sector could not (or does not want to) produce for reasons of unprofitability.

Objectives of Gov. Revenue System To protect the territory and its inhabitants To create a stable macroeconomic foundation To improve the quality of life of the people The traditional objective of government finance is the maintenance of the state that protects the territory and its inhabitants. A stable macroeconomic foundation is one of the most important public goods that government can provide. Excessive borrowing led to domestic and external debt problems and to the crowding out of private investment. Fiscal and financial instability have sometimes been partly inflicted on governments by external events – or by internal shocks such as civil wars or national disasters. The most important is the promotion of economic development by the government through direct financing, like the construction of infrastructures to fill the gap the private sector has left, and through public entrepreneurship by the use of GOCCs. To sum up, government finance is geared towards the attainment of development objectives, e.g., the improvement of the quality of life of the people.

II. Income sources Tax Revenues Capital Revenues Extra-Ordinary Income Public Borrowings Grants Definition: The term “public revenues” means “all incomes or receipts of the government treasury used to support government expenditures”. The Philippine revenues are derived from five main sources: Tax revenues, Capital revenues, Extra-Ordinary income, Public borrowings and Grants.

Tax Revenues Definition Categories: Direct and Indirect Major tax revenues: Property tax, Income tax, Amnesty tax, Estate & gift taxes, Community tax, Immigration tax, Excise tax, License & business taxes, Import duties, Documentary stamps tax, Charges on forest products, Wharfage fees, Franchise tax, Import tax, Miscellaneous taxes. Tax revenues cover compulsory contributions to finance government activities. Taxes are computed at the rate established by law to a defined base such as income, estate, imports, etc., without any direct relation to the benefits enjoyed by the individual assessed. It is the primary and traditional source of income. Tax revenue fall into 2 categories: direct and indirect. Direct taxes are those whose payment is absorbed by the person on whom the taxes are imposed. Examples are income, transfer, real property and community taxes. Indirect taxes, on the other hand, are those charges paid by a person other than one on whom they are legally imposed. These include license, stamp taxes and others. Direct taxes, unlike the indirect, can not be shifted to other tax subjects. Thus, direct taxation is more effective in achieving equity in distribution of income. The major tax revenues of the Philippines are classified as follows: Property tax, Income tax, Amnesty tax, Estate & gift taxes, Community tax, Immigration tax, Excise tax, License & business taxes, Import duties, Documentary stamps tax, Charges on forest products, Wharfage fees, Franchise tax, Import tax, Miscellaneous taxes.

Major Tax Revenues in the Philippines (1) Property taxes: levied on the use or ownership of wealth or immovable property. Income taxes: imposed on incomes of individuals, corporations and partnerships; and all fines and penalties charged. Amnesty taxes: imposed by special laws as in the series of Presidential Decrees on delinquent taxpayers. Estate & gift taxes: “an estate tax is a tax on the privilege of the decedent to transmit property at death. Gift tax may be in the form of donor’s or donee’s taxes. The Philippine jurisdiction imposes only the donor’s tax. Community tax: a poll tax charged from individuals, partnerships and corporations. Immigration tax: includes all taxes and charges imposed upon immigrants.

Major Tax Revenues in the Philippines (2) Excise taxes: all the taxes and fees covering imports and exports. License and business taxes: include privilege taxes, fixed percentage and similar taxes on practice of profession. Import duties: cover all taxes on foreign goods levied in accordance with the tariff laws and regulations except wharfage. Documentary stamps taxes: levied upon documents, instruments, papers, acceptance etc. Charges on forest products: imposed on timber and firewood cut in public forest or from private lands, & on other forest products. Wharfage fees: charges for wharfage relative to trade. Franchise taxes: imposed for any special right or privilege granted by a government. Import tax: levied on imported materials to control their entry into the local market. Miscellaneous taxes: cover all other taxes not above-mentioned.

Capital Revenue Capital revenues cover proceeds from sales of fixed capital assets or scrap thereof and public domain and gains on such sales like sale of public lands, buildings and other structures, equipment, and other properties recorded as fixed assets. Capital revenues cover proceeds from sales of fixed capital assets or scrap thereof and public domain and gains on such sales like sale of public lands, buildings and other structures, equipment, and other properties recorded as fixed assets.

Extra-Ordinary Incomes Extra-Ordinary incomes include repayments of loans and advances made by government corporations and local governments and the receipts and shares in income of the Central Bank of the Philippines, and other receipts. Extra-Ordinary incomes include repayments of loans and advances made by government corporations and local governments and the receipts and shares in income of the Central Bank of the Philippines, and other receipts.

Public Borrowings Public borrowings cover the proceeds of repayable obligations generally with interest from domestic and foreign creditors of the government in general including the national government and its political subdivisions. Public borrowings cover the proceeds of repayable obligations generally with interest from domestic and foreign creditors of the government in general including the national government and its political subdivisions. The national debts refer to those debts accruing to the central government. The role of public borrowings is gaining emphasis in the Philippine fiscal system. It is resorted to for financing deficits to balance the budget and for compensating for fluctuations in the economy. This is due to the deficiencies of expenditure performance or rate of revenues collections.

Grants Grants cover voluntary contributions and aids given to the government for its operation on specific purposes. It does not require any monetary commitment on the part of the recipient. It can be in the form of money or materials. Grants cover voluntary contributions and aids given to the government for its operation on specific purposes. It does not require any monetary commitment on the part of the recipient. It can be in the form of money or materials.

III. Trends in the gov. revenue system The Pre-Marcos Era (1960-64) Pre-Martial Law Marcos Years (1965-71) The New Society (Martial Law Years: 1972-85) The Aquino Administration (1986-90) From 1960 to 1964, the aggregate general government revenue increased from P1.5billion to P2.4billion. This reflects an average growth rate of 12.17%. Tax revenues constitute over 7.% of total revenues while borrowings only 8.4%. This shows the heavy reliance of the government on taxation rather than on any non-tax sources including borrowing. During 1965-71, relatively significant changes were observed in the composition. Take a look on Page 189 (figure 5), it is clear that although, tax revenues remain the number one source of income, it is noticeable that its ratio to total has started to decline in the late 60’s and early 70’s. It was during this period that the government granted tax amnesties which partly increased collections. Another reason was the slight rise in the share of borrowing to total revenues. It may be recalled that during this time obtaining credits from foreign sources was a lot easier since the creditors themselves were also eager to dispose of their excess dollars. The Marcos government then embarked on a massive development spending which led to the rise of the country’s debt to high level. The New Society era ushered in record high deficits which were covered up by excessive borrowings. The revenue structure is shifted from one which was made up of more tax revenues to one which has become more borrowing-dependent. Borrowings during this period averaged to 31% of total revenues as against the 21% in 1965-71, and 19% in 1960-64. Massive investment expenditures on infrastructures by the government in the 70’s which were achieved through excessive foreign borrowings. In the 80’s, the Aquino government was faced with a huge debt to service which it inherited from the past administration. The onset of the debt crisis in the 80s made the foreign funds scarce, the government was then forced to go into more domestic borrowings. This increased the revenues for the period.

III. Trends in the gov. revenue system Per Capita Growth Per capita revenues is reflective of what each Filipino supposedly contributes to the government coffers. Lower actual per capita growth of the 70s relative to the 60s. Why? (1) Inflation; (2) Currency depreciation Per capita revenues is reflective of what each Filipino supposedly contributes to the government coffers. Hence, the increasing per capita revenues over the years only indicate that absolute revenues increases faster than total population. However, as an indicator of the real tax base it may be a bias measure. Because the tax burden is no evenly distributed, i.e. it is highly skewed. In addition, the higher income groups have various ways of evading taxes through the existing tax exemptions which set no limit at all. The poor majority are often more burdened by the indirect taxed which are very dominant in the Philippine tax system. In fact, in real terms, the per capita growth is lower in the 70s than the 60s. One reason was the moderate increases in the wholesale price index in the 60s, while the 70s had a high rate of inflation. Another explanation was the increase in the peso’s purchasing power in the 60s (as evidenced by the decrease in the consumer price index) and its tremendous depreciation in the 70s.

III. Trends in the gov. revenue system Revenue Structure Three Categories: Tax revenue, non-tax revenue and public borrowings Tax revenue and non-tax revenue declined; however borrowings increased Public borrowings > non-tax receipts (See Figure 5, Page 189 & 193)) Revenue structure of the period: Tax revenue > Public borrowings > Non-tax revenue > extraordinary income > capital revenue Government revenues are divided into three broad categories: tax revenue, non-tax revenue and public borrowings. The pattern (See Figure 5, Page 189 & 193) showed that the importance of tax revenue and non-tax revenue have declined gradually, but public borrowings took an important share in government revenues. Significantly, public borrowings constituted a more important source of revenue that non-tax receipts. Among the three major sources, borrowings exhibited the fastest rate of growth. During the Martial Law period, as noted, approximately one-third of total revenues consisted of public borrowings. The pattern of revenue during the 70s and the 80s, clearly reflect increasing reliance on borrowing as a major revenue source. Revenue structure of the period consisted in the following order of share: Tax revenue, public borrowings, earnings and other credits (or non-tax revenues), extraordinary income, and finally capital revenue.

III. Trends in the gov. revenue system Performances & observations: Alison & Lewis Model The overall performance is not comparable to that of industrialized countries. Income tax revenues were way below what the model projected. Real property, transfer, excise, and sales taxes decreased. There were a skewed distribution of direct and indirect taxes in total revenue collection. In 1956, Alison and Lewis proposed a revenue model for LDCs. It was based on the assumption that government revenues should come in almost equal amounts from both direct and indirect taxes, and on the assumption that grants and receipts from public borrowings of developing countries are insignificant. During that time, several observations hold: Although there has been a significant improvement in the revenue efforts in 1980 at 12.30% of GNP compared to the 1960 level of only 11.04%, the overall performance is not comparable to that of industrialized countries. The fact is, the model was the ideal in the 60s yet. Twenty years after, one would expect the figures to be higher for a country to cope with the rising needs of increased population and inflation. Income tax revenues were way below what the model projected. Real property, transfer, excise, and sales taxes decreased. There are findings showing that the poor performance of the real property tax is due to non-payment of taxes at the rate of over 60%. There were a skewed distribution of direct and indirect taxes in total revenue collection. The Alison and Lewis model may not be useful in analyzing revenue patterns during the decade of the 70s and 80s. This is due to the ascendancy of borrowing as a major source of revenue. The orgy of borrowing weakened the use of revenues to finance development. The two decades in the Philippines and to the present days were dominated by the debt crisis and the addiction to borrowing.

IV. Revenue Performance by Level of Government Share of Collected Revenue Growth Composition of Revenue Revenues, Price & National Income Of the average revenues collected in 1960 to 1964, 79% came from the national government. Local governments on the other hand, accounted for about one-fifth. In 1965-85, this became 91% against 9% for local and 93% against 7% in 1986 to 1990. Both national and local patterns of growth fluctuated although there had mostly been positive growth. There are only brief irregularities in the growth pattern of revenues. One was the dramatic increase in public revenue collections in 1973 and 1974. This was the time when the national government granted tax amnesties. Among tax revenue, non-tax revenue and public borrowings, tax revenue is still the major source of revenue of both national and local governments. Local governments’ resources are limited to tax and non-tax revenues; no public borrowings. During the period, the increases in the CPI were over and above that of the total revenues. This indicates that the increases in revenues in current prices were rendered illusory by the high inflation rates. Relative to the increases in national income, revenue growth rates are higher which reflects an increasing revenue effort.

V. International Comparisons Low tax performance in RP Per capita GNP of RP in 1976 was US$370, which is 10% less than that of Japan, and 17% less that that of Singapore. Direct taxes comparisons Indirect taxes comparisons The present state of development of the Philippine economy is often given as a justification for the low tax performance. There is a wide disparity of per capita income between the industrialized countries and developing countries, like the RP. The per capita GNP of RP in 1976 was US$370, which is 10% less than that of Japan, and 17% less that that of Singapore. Direct taxes comparisons: For the low income economies, represented by Bangladesh and Indonesia, the latter has levels which belong to that of higher-income economies by having direct taxes of about 50% of total taxes, a characteristic not that of low and middle income countries. Other the other hand, Singapore is behaving like the middle income economies with income and profits taxes of only above 20% in contrast to the over 50% for the high income countries. Indirect taxes comparisons: In 1972, Bangladesh, Indonesia, RP, Malaysia, Singapore and Japan were not far from each other in this category. However in 1989, while Bangladesh and RP increased by about 10%, Malaysia and Japan’s declined. It is noticeable that the high-income economies as Singapore, US, and Japan, compared with the low and medium-income economies, have relatively very low domestic taxes on goods and services. The same is true for the taxes on international trade and transactions which include import export duties, profits and exchanges.

VI. Issues Adequacy of Revenues & Tax Administration Implications on Progressivity & Equity Borrowings in National Revenues Inflation and Revenues One of the standard tests in evaluating revenues is adequacy. This is specially directed towards tax revenues. The patterns of revenue from 1960 to 1990, especially on tax revenue indicate that revenue has not been sufficient. The trend during the period under analysis probably emphasizes the need to evaluate revenue from taxation as a major source of funding. There are limits to the amount of tax revenues our administrators can collect. This is particularly true of measures aimed at minimizing tax evasion. In RP, indirect taxes account for a much larger share of tax revenue that direct taxes, because indirect taxes are much easier to administer than direct tax. And also, there is less resistance to an indirect tax that to a direct tax. In addition, economic rigidities and fiscal politics in developing countries make it difficult to legislate increases in direct taxes. After all, redistribution of income and wealth is an essential component of “true” development which all developing countries aspire for. In RP fiscal administration, borrowings are considered revenues. The increasing share of borrowings in national revenues should be on serious concerns to students of public debt in developing countries. Now the government is spending a large portion of its budget on debt-servicing which means the allocations for essentials would be crowded out. While borrowing is a powerful tool for fiscal policy, it can be dangerous as well. Another issue on patterns of revenue is the pervasive role of inflation. While absolute growth of revenue registered at 519% at current rates, growth in real terms registered only at 79%. This means that inflation accounted for much of the dramatic increase in revenue. There is a need to reexamine further the success in tax collection during the period. The relationship between inflation and revenues need further looking into. Perhaps investigations could be directed towards identification of groups of taxes which were least ravaged by inflation. This could help continuing efforts to increase not only absolute revenue in current terms but also in real terms.

Sun-Moon Lake Taichung, Taiwan Thank you!