BIR

The BIR and Doctors

The Bureau of Internal Revenue embarked on a shame campaign to force doctors to pay their taxes. The ad campaign compares doctors to teachers. Not only does the ad campaign shame doctors, they try to compare two professions that have distinct training and suggests that the medical profession rides on the backs of other professions or people. The ad suggests one is better than the other. Which is a false assumption, and even false comparison.

The practice of medicine is an exacting one. It has to be because you have to take human life seriously. It is training that not only goes beyond the four years of collage, four years of proper, a year of internship, another four years of residency, four years of specialty training and pretty soon you find yourself an old person, with nary money in your wallet to show for it. That’s also not counting the thousands of hours in loss sleep, loss of friendship, partnership, because the medical profession is an exacting one that demands you think on your feet when you’re sleep deprived. That’s the whole point of going on duty. You can see why many from the medical profession find the whole ad— insulting.

To compare this to the teaching profession for example, is not only comparing apples to oranges but inflicts an insult to both profession. There is without doubt that teachers are important. They shape young minds. People who grow up to be doctors, to be exact. Yes, they spend the traditional four years of collage, and non of the bootcamp like conditions required of the practice of medicine, but again— to compare the level of training between two professions is a false comparison. Teachers too have to prepare lesson plans, find ways to captivate young minds, go through days filled with kids of all sort of personality that is certain to test the greatest of resolve, and deepest of patience. And with nary money to show for it.

It is like comparing two different lives, and the troubles they encounter. It is like saying the person to your right had it better, and his life is greener than yours when you haven’t walked on the other’s shoes.

The practice of medicine in the Philippines— to set up your own clinic— has more in common with the calling of small businesses, or a small law firm or design studio. Even when the clinic is attached to a hospital, this is how doctors make their bread and cheese. Profit rises and falls depending on how many people get sick, or how hard the doctor works. A surgeon gets pay with how many people he cuts open. An anesthesiologist gets paid depending how many operations happen. A psychiatrist gets paid with how many crazy people there are. So it is a mom and pop operation. And yes, like in every profession there are those who do skip in paying their taxes or those who don’t declare their income.

For the teacher, as an example— they have no choice. The same goes with the office grunt, the secretary, the mailman, the police and so many other people whose lives depend on an assured salary, no matter how much the school, the business, the government makes money. They get paid no matter what. (Well, most of the time, anyway). So the revenue collector has already cut of the monies from the teacher long before the teacher gets it. There is a clear cut revenue stream.

A doctor can teach, and many do since that profession requires some doctors to be teachers and lecturers too, but a teacher can’t be a doctor without first going through the extensive training processes. So there is already a specialization.

So again, to compare one over the other is a false comparison. It is apples or oranges and the required training, and subsequent pay bracket are different.

Hence, why it is both insulting to medical profession, and sets a different, and rather false tone. Why incite jealousy and differentiation between different people? Obviously they choose different path.

Yes, there is a connotation that doctors are rich. They drive expensive cars, take fancy trips. There is without doubt that there are rich doctors. And there is without doubt doctors who slave away like grunts especially in far flung areas. Obviously the training and required degree of labor while different in each, is no less hard on both. Don’t teachers slave away? Don’t surgeons spend hours and hours on the operating table?

There is no doubt that the government needs its fair share of the revenue. How else to pay for all the social service and infrastructure needs of the people. That’s why income is taxed. That’s why we have VAT and so many other taxes.

If we stared to blame doctors for not paying their taxes pretty soon people are going to ask, oh, hey, why single us out when the Philippine underground economy averaged 34.8% of GDP? How nearly 4 billion dollars were lost due to smuggling in 2011 alone. Pretty soon the blame game will descend to the lost of income due to the alleged wastes of the Pork Barrel scam. How many billions of pesos were lost in ghost projects.

The doctors and lawyers and other professions will ask: why us when you got all this waste that you can’t patch up? Do that first, then we’ll pay taxes. Don’t you think it is a chicken and egg problem? One does not preclude the other, after all doesn’t it?

Just because others aren’t good, why should you be good?

Why us, Jinggoy Estrada, Bong Revilla, and Juan Ponce Enrile asked too in the Senate for all the persecution they get from the pork barrel scam. Guess, the doctors have been singled out simply because the BIR can’t get Manny Pacquiao to pay. Or Janet Napoles. Or politicians involved in scam after scam. Why us, the doctors and lawyers and other professions ask? Well, because it doesn’t take much to screw you over, just like the teachers, policemen, soldiers, office grunts, you’re easy prey to be screwed over. Because the real thieves and abusers are unpunished by society that feeds on the small. Because when the taxman comes, if you don’t pay, you go to jail. Do you want to go to jail? Well, except if you are richer than doctors, and powerful swimming in wealth. Except when you’re old, handsome, or sexy. Tough luck. That’s the real shame campaign. Whoever said that life was fair?

That Vision Thing Redux: Wang-Wang Culture

In tackling wang-wang culture, has the president left something big out?

The president in his new found role as Sociologist in Chief spoke at his second State of the Nation Address about his vision for a nation free of what he described as a culture of wang-wang (blaring sirens symbolic of entitlement and abuse of privilege). His use of vernacular terms since his inaugural address in getting his message across has won him praise from even handed critics all around.

Those familiar with the business of vision building tell us that leaders should be adept at crafting a story or narrative that creates a sense of shared meaning and purpose for their followers. In this case, PNoy was delivering the “red meat” to his core constituents, those that saw in him the moral authority to bring about change to the culture of impunity that prevailed under the former dispensation.

Having recommitted his government to that cause, PNoy entreated his listeners to give him and the government he leads a pat on the proverbial back, to acknowledge its endeavors at fulfilling this corporate dream. That already seems to be the case. In fact as Mahar Mangahas points out, PNoy’s administration is the most popular one since public polling began (the distinction to be made is that this applies to his government as opposed to his person which is receiving the same treatment from the public as presidents past).

While the president’s speech was rightly praised by some for its lofty rhetoric, it has by the same token been criticized for being short on actual policy substance or consistency. When I say “some”, I mean respected commentators like economist Solita Monsod, sociologist Randy David and businessman Roberto De Ocampo to name a few.

Monsod criticized PNoy for failing to at least mention in passing his roadmap for delivering his vision, the Philippine Development Plan and for perhaps unwittingly committing intellectual dishonesty with leaps of logic and faulty use of statistics in attributing many positive developments to his good government agenda.

David goes even further and questions the roadmap itself for following the same orthodoxies and applying new buzzwords such as “inclusive growth” as a mantra without even a slight attempt to tweak these orthodoxies given their dismal record. The absence of the PDP in the president’s speech according to Monsod belies a view either on the part of the president or his men that it will have any impact on our development.

Indeed while the PDP projects a growth rate of 7-8% for the country in the next five years, the actual budget planning follows a lower set of growth assumptions of 5-6% in forecasting its revenue and spending plans. This exposes the roadmap as an aspirational one, where the budget figures show the real picture.

The need for tweaking

A strange quarter to find a critique against the business community came from one of its own in the person of De Ocampo who picked up the cudgels for competition policy given the doubling of locals in the Forbes billionaire club and the risk that such powerful business interests could swamp any attempt by this government to create a level playing field, citing the PPP program as one potential fatality.

If you look at why the government is unable to shore up its finances, it is largely because self-employed entrepreneurs and professionals and large dominant family-based corporations have successfully avoided paying their fair share of taxes. In a previous post, I cited the figures of the BIR and a study performed by finance economist Renato Reside that showed that the combined losses from non-tax compliance and abuse of fiscal incentives as well as watered down sin taxes could easily close the budget deficit of 286 billion this year.

Having trained his guns on the wang-wang mentality in government, particularly at his predecessor who according to Mangahas led the most unpopular government since public polling records were kept, the president went a little too easy on the well-heeled classes when he identified a glaring inaccuracy in their collective tax payments.

In fact this follows his performance at the Makati Business Club while he was still running for the highest office when he vowed to avoid raising taxes. The president appealed to them at his SONA however to take his honest attempts at creating public faith in government as an assurance that their tax payments would be used properly which he hoped would lead them to be more forthcoming in declaring their taxable incomes.

The problem may not lie just in appealing to a sense of common values. It might actually require in De Ocampo’s words “structural adjustments” a fancy word for fundamental changes in policy and approach. For example, the businesses that now avail of incentives from the BOI and PEZA while failing to follow-through on their investment commitments need to have their tax privileges stripped from them.

Tighter policies and enforcement means renovating our economic bureaucracy. A lack of teeth in enforcing the terms of fiscal incentives led to the failure of the import-substitution industrial policies of the 1950s and 60s. Just as an aside, my father who was in the banking industry in those days would later recount to me how he would often see the head of one bank bringing in sacks full of money after auctioning the import licenses issued by the Central Bank to supposed importers of capital goods meant for industrial production. It went instead to importers of finished goods who made a killing by avoiding tariffs on those items.

Today, the same sort of things is undermining our export promotion strategy where supposed exporters in our business parks and economic zones are able to avoid paying taxes, customs and duties while at the same time selling up to 50% of their output to the domestic market. This is outrageous because it creates an unfair advantage for them against smaller and medium sized competitors.

The real righteous road

Instead of taking a half measure by targeting abuse of authority in government alone, the president needs to focus as well on rent-seeking by private interests. Indeed if you stacked up all the alleged stolen wealth uncovered in the last twenty years, this would not hold a flame next to the amount of rents the business elite have been able to extract from the state during that time. Both are two sides of the coin, except that the latter form of wang-wang is legal, while the former is illegal.

At the risk of being lumped together with the “move on” crowd, I have to say that if the president wants to eliminate wang-wang culture in its entirety, he needs to broaden his vision and take the full-measure of targeting this culture wherever it may reside, be it in the corridors of power or the board rooms of our country’s business elite.

This is not about being forgetful of the sins of his predecessors; it is about being mindful that there are even larger sins being committed by powerful interests that are going on unnoticed. These same interests are able to switch allegiances with the changing tide of public opinion in the political arena.

It is easy to flog a dead horse. It is harder to go after the more prevalent and persistent forces that are alive and kicking. The president needs to take his carefully crafted vision of a country rid of wang-wang culture and turn it into a more comprehensive strategy. He will obviously need to take a balanced and considered approach as he doesn’t want to spook the horses so to speak.

The very essence of the social contract or grand bargain is to maintain the sources of growth, but to allow the more productive sectors to contribute an increasing portion of the proceeds of that growth to help the underclasses who lose out of the growth for whatever reason.

Walking the walk

Talking the talk is one thing, but if he wants to walk the walk, he might have to start with his own family interests. The Hacienda Luisita case could turn into a powerful device for demonstrating his commitment to the righteous path if the government is successful in fulfilling the true letter and spirit of the CARPeR law which would mean distributing land titles to the tillers of the Cojuangco estate. This would set PNoy apart as a leader who remained true to his word.

What would bolster his case even more is if he gets rid of his style of dealing with his KKK (classmates, friends and cronies) and instituted a true meritocracy in his team. Finally, he needs to strengthen the economic bureaucracy by instituting reforms in the way it is staffed and resourced.

A developmental state requires lead agencies that are engaged with but at the same time insulated from the influence of powerful business interests to prevent them from abusing the system. It is one thing to name and shame a group of delinquent taxpayers or to announce a policy of monitoring investment commitments, but the agencies concerned need to have sufficient resources to go out and conduct thorough audits on their clients.

A change in the wang-wang culture in all its shapes and forms requires not only a revamping of our moral and spiritual furniture as a nation, it will require a fundamental renovation of our economic strategy and bureaucracy. The president can leverage the cult of his personality to push for solid long-lasting reforms in this regard. That is if he would only recognize where the true wang-wang culture resides.

Revisit the original series: That Vision Thing starting here.

Budget 2012: How it all stacks up

Among the nations in the developed world that follow in the Westminster parliamentary tradition, the most eagerly anticipated policy speech by the government is not the state of the nation address but the budget speech.

The budget tackles not only the spending side, you see, but the tax side as well. On budget night, citizens find out if they are to get some form of tax relief. They also look for any additional spending on things they directly benefit from, like schools, hospitals or infrastructure.

The rich nations that make up the OECD (Organization of Economic Cooperation and Development) have varying levels of taxation. The Scandinavians typically tax more and provide a high degree of social insurance and welfare. The Anglo-American nations of the UK, US and Ireland tend to have lower taxes but provide a smaller safety net for their people.

Australia, the nation I am most familiar with seems to have the best of both worlds, with a tax take much lower compared to the Nordic countries but providing a level of social insurance and welfare comparable to them. That is because its tax and spend policies are some of the most progressive in the world.

Australia spends about 16 per cent of GDP on cash benefits (pensions, unemployment insurance, healthcare and community services) compared to an OECD average of just over 19 per cent. It is able to keep this expenditure down by means-testing benefits enabling it to target spending on those that most need it. Its tax take is about 27 per cent of GDP compared to an OECD average of close to 35 per cent. It is the sixth lowest-taxing country in that group.

Rich country, poor country

It is perhaps in this light that we need to focus on the Philippine tax and spend situation. Most poor countries are able to generate only as much as 20% of GDP from their tax systems. Yet the demand for public service is much higher than in advanced economies. The Philippines is no exception.

In 2012, the government projects it will generate about 1.5 trillion pesos worth of revenue out of a domestic economy that is expected to reach 11 trillion or about 13.6% of GDP. In the current year 2011, the government projects to earn 1.4 trillion out of an economy of 9.9 trillion or 14.2% of GDP. In 2010, the ratio was 13.3% (based on DBM papers).

In 2012, due to its low tax take and with a budget of 1.8 trillion, the government will incur a deficit of 286 Billion (up from the original 260 B) or 2.6% of GDP. That is compared to its projected deficit in 2011 of 300 Billion worth 3% of GDP and 314.5 Billion for 2010 or 3.5% of GDP.

Social services which include education, health, housing and land distribution are programmed to consume 556.2 billion pesos or 30% in 2012. That compares with 529 Billion in the current year equal to 31% of the budget in 2011 and 399.3 billion in 2010 worth 26.2% of that year’s total spend.

Among the social services, education takes the largest share. Next year it will amount to 309 billion or about 2.8% of GDP. This is up slightly from 2011 which was 272 Billion or 2.7% of GDP and from 2010 which was 225 billion or 2.5% of GDP. By contrast, Singapore and Thailand spend anywhere from 3.5-4% of GDP on education. Malaysia spends from 5-6%. If we were to match Thailand’s education to GDP ratio, we would need to spend an additional 70 billion on education.

As for health, next year’s budget includes 59 billion or 0.5% of GDP, up from 48 billion in the current year (0.48%) and 36 billion last year (0.39%). In contrast, Singapore spends about 0.9-1.5% of GDP, while Malaysia spends 1.8%, and Thailand 1.2-3%. If we were to match Singapore’s ratio, we would need to spend about 40 billion more on health.

Finally in housing, the 2012 budget contains 14.5 billion worth of spending or 0.13% of GDP compared to the current year’s 21 billion (0.2%) and 12 billion (0.13%) from 2010. Singapore by contrast spends about 1.8-2.5% on housing. Malaysia spends 0.3-0.6%, and Thailand spends 0.5-1%. If we were to simply match Malaysia, we would need to double our current spend by another 14 billion.

Living within our means

Judging from the magnitudes and ratios alone, we can plainly see that the country will continue to lag behind its neighbors in the region when it comes to providing basic social services for its citizens. As a result, it has much higher levels of poverty and inequality and lower levels of human development among the ASEAN-5.

If you take out the possibility of tax reform, “living within our means” confines the budget department to look for savings and improve the structure or mix of spending to improve the quality of the spend rather than the quantity. Past studies have shown that our education spending is already quite progressive, while that of our health sector tends to be regressive with its focus on the tertiary hospitals in urban centers rather than on primary healthcare in the community.

Certainly, there are opportunities to improve the progressivity of our spending program in health. One problem is that our health system follows the model in the US, Europe and Japan which relies of specific contributions. Those who earn more tend to receive higher reimbursements. While in Australia, health expenditures are financed from income taxes, but then are spent in a more egalitarian way by means-testing recipients so that those who earn more tend to pay more out of pockets than those who earn less.

Can afford more

The orthodoxy of constraining the budget because we have to live within our means can of course be challenged by simply asking the question, can society afford to pay more?

From his State of the Nation Address, the president hinted that we probably could afford to pay more when he cited to his own disbelief the close to two million self-employed entrepreneurs and professionals who declare incomes beneath the minimum wage. The BIR has said subsequently that it believes that the current 10 billion raised from these individuals should actually be about 100 billion.

Aside from professionals and self-employed individuals, the corporate sector might also afford to pay more. That is according to a five year old study by Dr. Renato Reside. His work showed that a very low correlation between investments approved by the BOI and PEZA with actual capital formation in all regions except Regions 4 and 7. He concluded that since investments did not materialize companies were simply using their fiscal incentive privileges to engage in tax avoidance. The recipients of such incentives read like a who’s who of Philippine business elite according to Dr Ben Diokno.

Because companies under this scheme are also allowed to sell as much as 50% of the goods they produce to the domestic market, Dr Reside also believes that much revenue is lost. According to him, back in 2004, we were losing as much as 59 billion pesos from revenues on imported capital goods, 135 billion on imported raw materials, 10.5 billion on the use of domestic capital goods, and 44 billion on income tax holidays provided to these so called exporters. If even half of these were recoverd, it would be an additional 125 billion in revenues.

Another form of tax incentive is provided to sin products because of the non-indexation of taxes imposed on them. It is an incentive because every year the prices of these products go up, but the taxes imposed on them don’t. Government revenues are eroded over time. By gradually increasing the taxes along with the rise of prices in general, the additional revenues from sin products estimated to be as much as 70 billion annually could help beef up our infrastructure which in 2012 will be 270 billion a mere 2.5% of expected GDP.

Indeed, from the combined tax breaks given to entrepreneurs, professionals and corporations, our society could afford to bridge the gap in social as well as economic infrastructure. We could become a more inclusive society. With a combination of better policies and stricter enforcement in revenue and incentive granting agencies, by renovating our economic bureaucracy, we could produce a more progressive tax and spend system.

BIR files Tax evasion charges against Garcia, Ligot and Yambao

The Bureau of Internal Revenue has filed tax evasion charges against the spouses of General Carlos Garcia and Clarita Garcia, as well as Jacinto Ligot and wife Erlinda Yambao-Ligot, and Edgardo Yambao tweeted/a> Palace Deputy spokesperson Abi Valte.

Bureau of Internal Revenue Commissioner Kim Henares revealed the move comes in light of the Senate Blue Ribbon Committee probe on alleged corruption in the Armed Forces of the Philippines. Hundreds of millions in tax deficiencies are being sought from the accused.

Why BIR asking for SLAN is just wrong

Finance Secretary Cesar V. Purisima signed an order granting the Bureau of Internal Revenue the ability to collect your Statement of Assets and Liabilities. This is for people who make 500,000 pesos per month. The move comes so the government can figure out if you’re fudging your returns.

For most people, employees and all that corporations handle filing taxes. At the end of your paycheck, taxes has already been deducted.  Now the half a million threshold, that’s not affluent.  In fact, it isn’t a whole lot of money to begin with.  Half a million a year, is perhaps the baseline for what you would call, middle-class.

What this does is similar to the brevity of planned laws from Sim Card registration to even registering your laptop.  Government wants us to do their work for them.  They want it wrapped in a nice gift wrapped box, and boom, here is your job.  That’s not suppose to happen.  Most of the people in the threshold can hardly keep up.

One can understand the motivations of the government.  It wants to understand the underground economy.  It wants to understand where all the money that is suppose to go into government coffers, but don’t.  Government needs income to keep the basic services that people demand it give them.

It is far, far easier to accept having to file a statement of assets and liabilities when it becomes pretty clear that those driving SUVs in Congress are properly taxed.  Is Chavit Singson for example paying taxes?  Manny Pacquiao?  How about the taxes filed by Representative Gloria Arroyo?  How about Joseph Estrada?  The generals of the armed forces of the Philippines for example, why isn’t the government looking out for how much taxes they paid for in the first place?

How about the gambling lords in Pampanga? Have you looked at their finances?

Government coffers are rather plain and dank and each person should give its fair share.  A teenage boy with no income pays taxes every time he goes to McDonald’s.  Call center agents who make a lot of money, spend money and keep the economy going.  In many ways, the government common acts like the mafia. It needs to take a slice of everyone’s pie.

Asking the middle class to file statements of assets and liabilities is oppressive.  We want them to pay more, not less.  It seem rather distracting that it is the middle class that the government want to pursue first.  The government should focus its attention on really big earners, and those in positions of power.  It will make it easier to ask for people’s SLAN when there is a proven track record to begin with, and not shift the burden to a middle class that can’t afford to.  SLAN for people who earn half a million a year, seems like putting the burden on people to do the job that BIR is supposed to be doing. Shouldn’t things like SLAN be a private matter, and records like that, should require a subpoena, why else do we have a bank secrecy law, if the information is already out in the street?

Even if we can argue that BIR agents are above board, there is still something iffy about letting that information be so easily available.  Government officials are asked to reveal such information because they hold a position of public trust.  Normal people do not have that burden.  What troubles me the most is how government puts the burden on people to let them do their job.  Filing SLAN seems like we are assuming everyone is guilty until proven otherwise.  “Show me proof!” Government rages.  And when we look at how EDSA has rough patches, while some Congressman waltz past us in gas sucking SUVs, “That’s proof of our taxes right there.”

I urge the Finance Secretary to find some other way to strike balance protecting decent people, and going after the real culprits.  A witch hunt serves no one, and leaves a foul taste in the mouth.  If this is what a liberal president can do with his government, imagine what someone less benign would.  It makes one shake his head.  It seems this way is to circumvent our rights.  Set it up so the innocent are protected, not abused.  If you think half a million is a lot of money, think again.  This whole issue leaves a foul taste.  Whatever happened to privacy laws and bank secrecy?

UPDATE: @ageofbrillig notes that “@randomsalt I read RR2-2011. What’s required is not SALN, but an Annual Information Return. Sample AIR (PDF): http://bit.ly/eYZy4V

Revenue Regulation 2-2011, “Filing Income Tax Return and/or Annual Information Return Report for Individuals, Estates and Trusts.”

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ADB warns gov’t against move to hike VAT to 15%

ADB warns gov’t against move to hike VAT to 15%
By Ronnel Domingo
Philippine Daily Inquirer

MANILA, Philippines—The government should not raise the value-added tax to 15 percent as this, along with the corporate income tax being lowered further, would make the Philippine tax system more regressive, according to the Asian Development Bank.

In a policy note on the Philippines, the multilateral lender said the Philippines should rather raise excise taxes on tobacco, alcohol and gasoline to improve its tax effort or collections expressed as a percentage of total output (gross domestic product).

The ADB noted a standing proposal for another increase in the VAT from the current 12 percent and a further lowering of the corporate income tax to 25 percent from 30 percent would not improve the tax effort, which was pegged at 12.8 percent in 2009.

“The overall impact [of this scenario] on the tax effort is neutral,” the ADB said. “But if the [corporate income tax] is cut further to 20 percent, the tax effort decreases by -0.6 percentage point.”