Diokno revives call for higher VAT

MANILA, Philippines – Economist and former Budget Secretary Benjamin Diokno urged the government anew to raise the value-added tax (VAT) rate to shore up revenues, saying additional collections from higher sin taxes wouldn’t be enough.

The government must broaden the country’s tax base so it could spend more for infrastructure, including much-needed investments in the power sector, Diokno told the Foreign Correspondents Association of the Philippines in a conference on Thursday, January 17.

Diokno wants the VAT raised to 15% from 12%, and personal and corporate income taxes reduced pointing out that income must be rewarded, not penalized.

“Infrastructure investments should be P500 billion annually. We only spend P200 billion,” he said. “A government that does not invest now will not grow in the future.”

Diokno said the government must increase its tax to gross domestic product (GDP) ratio by 5 percentage points to 13% so it could sustain economic growth.

In 2009, the former budget chief also called for an increase in VAT, although at that time it was to arrest revenue shortfalls and lower the risk of a fiscal crisis.

That year, the budget deficit of former President Gloria Macapagal Arroyo’s administration reached P293 billion, equivalent to 3.7% of GDP.

The Arroyo administration once came on the brink of a fiscal crisis, and raising the VAT rate to 12% from 10% saved it from falling through. The higher tax helped the government cut its budget deficit from P210 billion in 2002 to about P68 billion in 2008.

When the administration of President Benigno Aquino III took over in 2010, the deficit was at a record high of P310 billion or 3.7% of GDP.

Aquino implemented fiscal reforms by launching a strong campaign against tax evaders and smugglers, and keeping a tight lid on spending, allowing it to substantially reduce the deficit. He also promised to restructure the sin tax system to increase revenue collections.

The reformed sin tax law, which is expected to generate P34 billion additional revenues for government in the first year alone, took effect this month.

The country’s budget deficit stood at only P127.3 billion in the first 11 months of 2012, less than half of the full-year program of P279 billion.

In 2011, the country’s budget deficit stood at only P197.8 billion, or 2% of GDP. Aquino wants to keep it at this level or trim it down further when his term ends in 2016. –with a report from Cai Ordinario, Rappler.com