“At some point in increasing the tax rate, no more taxes can be collected and violation makes more economic sense.”
by Ducky Paredes
Department of Health (DOH) Secretary Enrique Ona is pushing for an excise tax on cigarettes of P4.50 per stick or P90 per pack of 20s. One can’t blame the secretary; he worries about our health and he wants anything that contributes negatively to our national health out. He is talking taxes as a doctor, not as a taxman and not as an economist, which he is not.
Will Secretary Ona’s P90 peso tax work? Will it cut down smoking or will it at least raise more money for government to spend on making the country healthier. My guess is that the Ona tax will do neither. In fact, not only will it have no effect on cutting down the number of Pinoy smokers by making the habit more expensive; Dr. Ona’s tax may even increase the number of smokers. As for earning more money that government can spend on making the country healthier, absolutely not!
What may even happen is that the tax collected on cigarettes may drop to zero – no collections at all! Here is why: When the tax on anything becomes onerous, one increases the rewards of tax avoidance. A tax that is affordable and reasonable gives the smuggler no incentive since it is affordable and getting caught in violation is just not worth the trouble. In fact, it is plain stupid to smuggle when the tax rate is fair and reasonable. But a tax of P90 per pack is another matter.
The very high tax makes smuggling or tax avoidance worthwhile. At some point in increasing the tax rate, no more taxes can be collected and violation makes more economic sense.
While those who fear that a P90 per pack tax may kill the local legitimate tobacco industry could be right, it won’t kill the cigarette smuggling industry that gives nothing back to the country. As of now cigarette makers pay excise taxes ranging from P2.47 per pack for low-priced cigarettes to P27.16 per pack for premium cigarettes.
According to a World Bank study, for every 10% increase in the price of cigarettes in developing countries (such as the Philippines), there is an 8% reduction in consumption. A side effect of this is that the price increase will force smokers to shift to lower-priced cigarettes on which a lower excise tax is levied. Not only does the government earn less, the effect on the national health of lower-quality lower-priced cigarettes may be a worse result.
If a smoker shifts from a high-priced brand on which he pays an excise tax of P27.16 to a low-priced brand on which P2.47 per pack excise tax is paid, the government loses P24.56 per pack. Will a smoker increase his consumption of cigarettes to accommodate the government? Are you crazy?
The experience in other countries is that drastically increased tax rates have found that these create major disruptions in the market and legitimate businesses and even governments suffer. This is because there are unintended consequences such as a dramatic increase in the incidence of counterfeiting and smuggling, which means revenue losses for the government.
In Canada, the government had to lower excise taxes on cigarettes after increasing them, when it encountered the problem of increased cases of smuggling. Thus, despite significantly increased excise taxes results in loss of revenue.
The present law (Republic Act 9334) provides for reasonable and predictable increases in excise taxes every two years, with the last increase happening last Jan. 2009. An excise tax increase is scheduled for 2011.
Only two products are regularly subject to tax increases every two years since 2005 — alcohol and tobacco products. Excise taxes on both products are a stable source of revenue for the government.
In fact, collections from alcohol and cigarettes have been steadily increasing. Tax collection from cigarettes January to June in 2009 and in 2010 shows an increase of 39.7 percent! The current system of smaller incremental increases works!
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According to the Jubilee South Asia Pacific Movement on Debt and Development (JSAPMDD) and the Action for Economic Reforms (AER), increasing taxes on tobacco products “upholds tax justice.” The increase will “correct a public bad caused by cigarette smoking and generates revenue that will finance poverty reduction, including essential health services for the people.”
The Framework Convention on Tobacco Control Alliance Philippines also backs Health Secretary Enrique Ona’s tax idea.
Lidy Nacpil, JSAPMDD Coordinator, says the Ona tax idea “is an effective instrument to raise revenues for the government that is saddled with a budget deficit problem and will have difficulty pursuing its social goals of providing for the social protection programs on health and livelihood.”
According to Filomeno Sta. Ana, AER coordinator, revenues collected from increased tobacco taxes — including those imposed “on goods and services that are of no social value such as cigarettes” — will be enough “to replace revenues from the Value Added Tax imposed on essential goods and inputs for staple goods.” Not only that but higher tobacco taxes will also provide “a big revenue boost, which will avert a fiscal crisis and thus provide macro-economic stability. It will also be critical to the success of the new administration’s poverty reduction program, including President Aquino’s commitment to put in place universal health coverage.”
Recently, JSAPMDD and AER organized the Asian Seminar on Tax Justice in the Philippines to pursue national, regional and global campaigns on tax justice issues, including particularly tobacco taxes to improve public health.
Participants from the Philippines, Bangladesh, India, Indonesia, Pakistan, Sri Lanka, Thailand and Vietnam also discussed the justice issues involved in progressive taxation, tax evasion and regressive taxation.
Nacpil says: “Raising tobacco taxes should not be unthinkable for the President because other countries are already doing so. Tax justice involves the review of our existing taxation policies that should encourage industries and practices that are beneficial to the people and discourage industries that produce goods and services that cause harm to people’s health and the environment.”
Fine words but Canada, for one, has already discovered that you can only increase taxes by so much; there comes a point when the money stops coming in and the habit – condemnable as it is – continues to grow!
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hvp (08.24.10)
One Comment
One problem with taxing something like cigarettes is that the government becomes “addicted” to the money that cigarettes brings in and lowers their motivation to actually stop people from smoking, which is what the tax was supposed to do in the first place! If the government REALLY wanted people to stop or reduce the number of smokers, they would make cigarettes illegal, period.
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