THE CLAMOR CONTINUES FOR RELIEF from the rapid price inflation arising from the unrelenting oil price increases and elevated food prices. Perhaps the most prominent among the solutions now being suggested is tax relief, particularly the removal of taxes on petroleum products and electricity. The apparent premise is that eliminating such taxes will help the great majority of Filipinos, especially the poor, to cushion the impacts of the rapid rise in the cost of living. But will it really? Will cutting taxes on energy products help the poor more than the rich?

Progressive vs regressive

The question really boils down to who bears the burden of our taxes. We can look at the distribution of the burden of a tax in two ways. We can determine how much of the government?s collections from the tax come out of the pockets of the different income classes. This would give us the distribution of the collective burden borne by the rich vs. the poor.

We can also determine the proportion (percentage) of the incomes of the different income groups that are taken by the tax, thereby giving us the relative burden borne by the rich vs. the poor. A tax (or tax system) is described as ?progressive? when it takes a bigger percentage out of the income (thereby being a heavier burden) of a rich taxpayer or household than it does from a poorer one. It is called ?regressive? when it does the opposite; that is, if the tax hurts a poor family more than it does a rich one.

Direct vs indirect

Taxes are also classified based on whether their burden can be passed on or not. A direct tax is one whose burden is borne directly by the one who pays it; that is, it cannot be passed on. Examples are income taxes and wealth taxes. The person or company earning the income, or owning, say, the land or house being taxed, cannot pass on the tax to someone else. The buck, as they say, stops with the one paying the tax. On the other hand, taxes on transactions?like the value-added tax (VAT), customs duties, excise taxes, etc.?are called indirect taxes. They are collected by the government from the sellers/producers, but they can be and are indeed routinely passed on to buyers/consumers by adding the tax to the selling price.

Direct taxes tend to be progressive, usually by design. The higher one?s income bracket, for example, the larger the percentage of income tax applied. Indirect taxes, which are ultimately taxes on spending, will generally be regressive in effect for a basic reason: the rich do not spend all of their incomes, while the poor do (often not even earning enough for their required spending). Thus, as a percentage of income, indirect taxes as a whole will be automatically higher for a poor family than for a rich one.

Indirect and progressive

But taken alone, certain indirect taxes, like the VAT or excise taxes on certain products, can be progressive or regressive in effect, depending on how the taxed product figures in the typical budgets of the rich vs. the poor. A tax on the sale of jewelry and yachts, for example, would clearly be progressive, while a tax on rice, canned goods and instant noodles would be regressive. For this reason, primary agricultural products, including rice, have been exempted from the VAT from the very beginning.

This brings us back to the original question: Will cutting taxes now help the poor? In particular, will removing the VAT and other taxes on oil products and electricity help the poor?or would we be wittingly or unwittingly be helping the rich more by doing so? One need not examine the data from the Family Income and Expenditures Survey to see that higher income households spend proportionately more for gasoline and electric power than poorer households do. Whether as a share of tax collections or as a share of household income, taxes on petroleum and electricity hit the poor a lot less than their higher-income counterparts. Thus, cutting these taxes would only help the latter more. Cutting the VAT as a whole would have largely the same effect, inasmuch as the products most dominant in the budgets of the poor are already VAT-free to begin with.

Reverse Robin Hood?

So when suggestions are made for government to cut the VAT, whether in general or specifically on energy products, I worry that the well-meaning advocates of such a move are unwittingly pushing for taking from the poor to give to the rich. Government?s track record already shows that the first things to get cut when revenues run short are social services that benefit the poor. Moreover, the destabilizing effects of a larger government deficit?including heavier debt service, higher interest rates, and yes, higher inflation itself?ultimately hit the poor much more than the rich.

Cut taxes to help the poor fight inflation? I?d look for better ways.

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Comments welcome at chabito@ateneo.edu