THERE is word that the government is under pressure from the big bad guys across the ocean to raise taxes again, given the record deficit that the current administration is leaving behind to the incoming president. As of last March, we were doing far worse than last year on keeping the deficit in check. Last year the deficit for the first three months was P90.7 billion; this year it jumped 48 percent to P134.2 billion. The April numbers are just in, and there?s good news and bad news. The good news is that the government posted a small surplus of P2.6 billion. But there?s no surprise there, as April is income tax filing month so there?s always a one-time surge in revenue collections then. The bad news is that the surplus was less than one-third of the P7.9-billion surplus posted in the same month last year. Bottom line is, we?re still doing far worse than last year, April surplus notwithstanding.

No scrimping

There are no ifs, ands or buts about it: The incoming government?s highest immediate economic priority would be boosting its revenues. And how to do it promises to be the subject of lively debate, and lots of hard work, in the coming months.

There is of course the spending side that should be watched as well. Government?s official line to explain the modest April surplus was that spending slowed down as the government complied with the election ban on spending, even as tax collection increased. Both the Bureau of Internal Revenue (BIR) and Bureau of Customs (BoC) reportedly exceeded their revenue targets for the month. Thus, April revenues were 6.8 percent higher than last year. But wait, April spending this year was actually 12.1 percent higher (almost twice the revenue growth) than in the same month last year?and there was no election spending ban then! What this tells me is that government wasn?t exactly scrimping on expenses either. One can only hope that the extraordinary spending was for good cause. But given that it was election season, you would probably be as skeptical as I am that this was so.

Twin measure

How then do we ramp up revenues so that the new President can avoid the near-fiscal crisis we found ourselves in five years ago, before the hike in the value-added tax (VAT) saved the day?

Well, just reading the previous sentence would lead some?including some guys in Washington D.C.?to a seemingly logical conclusion: Raise the VAT again, of course! Now we?re hearing of hiking it further to 15 percent from the current 12, adding an even bigger percentage point increase than the last painful one we already had.

But wait, there?s more. To make it more acceptable (to whom?), the proposal for the VAT hike is being packaged with a simultaneous reduction of the corporate tax from 30 to 20 percent. Sounds to me like a sure-fire formula for dousing with a cold shower the seeming euphoria greeting the (apparent) election of a president widely expected to do things differently from the outgoing one. Such a twin revenue measure will almost immediately strike the common observer as a reverse Robin Hood maneuver that takes from the poor to give to the rich. And we are likely to get into a rather acrimonious debate worse than what met the last VAT increase in 2005.

Ill-advised

There is enough evidence to suggest that this contemplated twin measure would be ill-advised, to put it mildly, even just in terms of potential revenue yield. In a 2008 study, Dr. Rosario G. Manasan determined that the expanded VAT actually led to a 0.53 percentage point rise in the country?s tax effort (translation: Ratio of tax revenues to gross domestic product or GDP) from 2004 to 2007. Corporations were also hit with a temporary hike in income tax from 32 to 35 percent at the time?a move that yielded almost twice what the VAT hike did, yielding a 0.93 point improvement in tax effort. Manasan also determined that overall tax compliance dropped in the same period, which is the same as saying that tax evasion went up, to the tune of 0.8 percent of GDP in lost revenues in 2005 alone.

What is now being proposed is a 3 percentage point hike in VAT, coupled with a more than threefold reduction in corporate tax. Do the arithmetic: If a 2-point hike in the VAT improved tax effort by 0.53, while a 3-point hike in the corporate tax improved tax effort by 0.93, isn?t this telling us that the proposed corporate tax reduction will more than wipe out the additional revenues from VAT several times over?and thus leave government with far less revenues than before? And this doesn?t count the likely rise in tax evasion, as what came with the last VAT increase.

This all tells me that the only way out of our revenue bind is to put unprecedented vigor in improving tax collection and improving tax compliance. That way, we won?t perpetuate the long-standing injustice of continuously penalizing obedient taxpayers while ?rewarding? habitual tax evaders. A new government that appears to merit far more trust than the previous one has a rare opportunity, in fact, to overcome the traditional political obstacles to ramping up tax collection efficiency without raising new taxes. Will the ?President-apparent? be up to the challenge?

Comments welcome at chabito@ateneo.edu