A Tax on Wealth

The news that Pacquiao is the Philippines’ Number One taxpayer was expected, but it is also rather strange. Previously, it was Kris Aquino who was the No.1 taxpayer; but as a result of better tax collection, a lot of celebrities and businessmen are now paying more than her. But why is Pacquiao No.1? Why not the Filipino billionaires who were recently listed by Forbes Magazine (Forbes recently published a list of the world’s 500 richest people, in which 11 Filipinos were listed) ?
The reason for this is that our tax system taxes income, but not wealth. Pacquiao’s earnings are publicly known (as were those of Kris Aquino, to a lesser degree) and this is readily taxed. Billionaires, on the other hand, own shares of stocks that are worth billions of dollars, but they are only taxed whenever the companies they own declare dividends. These companies often declare minimal dividends, and often even none at all..
Billionaires also have formal positions in the companies they own, which entitles them to have a lot of their expenses declared as company expenses e.g. travel, restaurant meals, company cars, exclusive club memberships, etc. These expenses are not counted toward personal income, and thus would not be taxed.

Incomplete Tax System
The unfair situation of billionaires paying less tax than celebrities, and of government employees paying a bigger proportion of their income than millionaires, needs to be addressed. But first  we need to take a look at the Philippine tax system as a whole.
We have taxes on consumption, in the form of the Value Added Tax (VAT) and various specific taxes. Then, there are taxes on income, in the form of the income tax, capital gains tax,etc. And there is the tax on real property and an estate tax (on inheritance)..
Consumption taxes fall more heavily on the poor people, because they consume most of what they earn. Income taxes fall heavier on the middle classes, especially those who earn fixed salaries e.g. government employees. Property taxes are paid by those who own land. But millionaires (and especially billionaires) mostly own stocks in companies, as well as bonds and other financial instruments.These are taxed only on income earned from them. Estate taxes are low and the rich can easily avoid them.

In order to have a fair tax system – one which is borne evenly by all layers of the population – there needs to be a tax on wealth, and not merely on income gained from wealth. That way, the rich will  bear a more equal share of the tax burden. A wealth tax will make the tax system not only more fair, but also more complete.

Specifics
A wealth tax could be imposed on all of a person’s property – stocks, bonds, bank deposits, other financial instruments, real estate, vehicles and other valuables (e.g. jewelry, art). Most of these would be valued at  the price which they were acquired. Company shares of stock will be assessed at their current book value.
I propose that the first P5 million worth of wealth would be exempted from the tax. From above P5 million to P10 million, the tax would be 0.5%; and above P10 million, 1% per year. This may sound small, but it would mean that Philippine dollar billlionaires would pay hundreds of millions, even billions of pesos a year. Henry Sy, for example, who is worth more than P640 billion, will need to pay P6.4 billion/year. Even Manny Villar (No.11 in Forbes’ list) will pay P720 million yearly in wealth tax.
The reason why the first P5 million should be exempt from wealth tax is to spare many middle income people from it – a person’s house, their car(s), bank accounts and some investments or land could amount to a few million pesos already.

The wealth tax will be imposed on all persons with wealth. Foreign owners of Philippine financial assets will be taxed for the assets that they hold in the Philippines – corporations would pay the tax for their foreign owners. Properties for which real estate tax has been paid, will be exempt from the tax. ( the land tax does not tax buildings, buildings should be counted toward the wealth tax)

A prerequisite for implementing the wealth tax is that the tax authorities would have access to everybody’s bank accounts. There should also be rules to prevent rich people from hiding their wealth in charitable foundations or various fiscal constructs.

In addition to generating tax revenues, the wealth tax will also make it possible to have a complete inventory of property in the country. The ownership of every piece of land, building and financial instrument will be known and recognized. This means that nobody can claim to own anything without having paid a tax for it. The wealth tax will allow authorities to catch dummy constructions or to spot property whose ownership is hidden.

Everyone who owns wealth (e.g. a house or stock investments) will be required to declare it in their wealth tax return, even if they eventually do not need to pay any wealth tax. If they fail to do so, the government will assess their wealth for them.

A “Sin Tax” on Junk Food?

A tax on junk food – this is not as crazy as it sounds. In the first place, the government should tax activities that it wants to discourage, in the form of a “sin tax”. And junk food is not a “basic necessity”; people could live well even if they don’t eat any junk food at all. A tax on junk food should help to discourage people from eating junk food. In the beginning, it will not hinder people at all, since the tax won’t be that high; but it will be a good start anyway towards getting people to eat better.

How should we go about having such a tax? Well, I think the tax should be done quite simply. Tax the manufacturers and importers of junk food. Don’t tax the retail outlets, or the kinds of “junk food” that are too small scale.  And most importantly, it should be “budget neutral” (i.e. have a zero net effect on the tax burden of the average citizen).

Let’s say that the government imposes a 20% tax on junk food, to be collected from the manufacturers. This will translate to 5% or less increase in the consumer price. No real suffering there. And let us then say that in order to balance the effect on people’s budgets, the VAT will be reduced by 0.5% – this should balance, since people would consume at least 10 times more in terms of “non junk food” than in junk food (i.e. transportation, meals, phone and electricity bills, etc.) Of course, the government should compute the balance well, to make sure that the net effect will indeed be zero.

What should be considered “junk food”? Well, products such as softdrinks, chips and other finger foods in plastic or aluminum wrappers, chocolates, cookies (for sale in groceries), ice cream, candies, among other things. It should not include fast food (even though some will consider these as “junk”) products, since this is retail, and also difficult to implement.  Products with a certain level of sugar in them should also be taxed; but this should exclude jams and jellies.  For implementation purposes, there would be some “strange” cases; e.g. street foods, no matter how unhealthy, would not be taxed; or cookies and cakes sold by bakeries will not be taxed, while it would be taxed if sold in groceries.  There is a need to keep the tax simple, so only manufacturers and importers will be taxed.

This tax on junk food should increase the level of government income, without decreasing the overall buying power of people. It will be relatively easy to collect the tax; thus, tax compliance is easy to achieve. And, the best part of all, is that people will be discouraged (even to a small degree) from eating junk food.

Lowering Electricity Prices

The Philippines has one of the most expensive electricity rates in the whole world. And this is due to corruption, inefficiency, and the onerous contracts the government went into with the IPPs (Independent Power Producers).  There are various ways of reducing electricity prices; some are relatively straightforward, while others more complicated. I suggest that people look into these to see which ones should be done.

Abolish the VAT for Electricity
This is the easiest to do in a technical sense. But of course, it all depends on how the government handles its finances. Eliminating VAT for electricity will mean a reduction of at least PhP 1/KwH.  This would be great for residential consumers; although it will make no difference for commercial/industrial consumers.

Renegotiate with IPPs
The Philippine government should renegotiate the contracts with the Independent Power Producers (IPPs). The provision that they get paid for capacity instead of actual electricity supplied should be changed.  Instead, they should merely be paid for the actual amount of electricity produced. After all, these days, with many shortages, we can safely say that a well-managed electricity supplier will surely be able to find buyers for all the energy they can produce.

The government is afraid to do this because it fears that investors will shun the Philippines as a result. I don’t think this will happen. We are giving investors too good a deal – this is not normal in the world, and the investors are taking unfair advantage of us. I think we should simply offer investors a good deal; and our growing energy market is indeed a good deal in itself. We will offer them a deregulated market, with no upper or lower limits. This should be enough for them.

Day/Night Rates
The electricity distribution companies e.g. Meralco should implement day/night rates. By this, I mean that the rates for use in the evening and at night should be significantly lower than that for the “day”. Let’s say that the day rate will be valid from 7 am to 7pm, and the night rate for 7pm to 7 am. Then, let the electricity during the night be 30% cheaper than during the day. This will encourage consumers to shift their electricity consumption to the nighttime. Thus, washing machines, flatirons, etc. could perhaps be used more at night.  Even companies will be encouraged to shift their production when possible to the nighttime.

The advantage of the lower night rates is that it will make the consumption of electricity more distributed across a 24 hour period, thus maximizing the utilization of the grid and the generating power. At the same time, consumers will benefit because part of their consumption will inevitably fall at night. Many BPO companies will benefit a lot from this, since most of their operations are done at night.

The problem with having day and night rates is that consumers need to have new electricity meters installed. This will cost money, and it will take time. I believe, though, that it will all be worth it.

Allow more Direct Sourcing of Electricity
Business of a certain size should be able to directly acquire energy from other providers, and not only the one which holds the distribution system for an area. This would mean, for example, that a hotel should be allowed to source its electricity from some other company than say, Meralco. Or a factory. Or a subdivision. This can be done. It is the system here in the Netherlands. The geographic distributor merely charges a (reasonable) fee for transporting the electricity to the customer. The various providers would then source their electricity from whichever generating source gives the best price.

This way, there would be more competition in the whole system. And Meralco will no longer be able to simply pass on the generating cost charged to them by their suppliers, but would have to shop around for the best source of electricity themselves. And consumers will be able to get a chance to buy electricity directly for the cheapest price possible.

In the Netherlands, the system is such that all customers could shop around for the cheapest energy provider. Thus, the electricity provider for my neighbors are different from ours – and all providers simply pay the holder of the local grid money for transporting electricity.

The possible problem with this approach will be how the distribution companies behave. They could harass consumers who seek to change providers; and they could also harass the other providers by imposing too high transport fees. The government will need to enforce good rules regarding these and other steps that distribution companies will take to hinder the process.

Make Electricity Companies Declare Prices for 6 Months at a Time
Electricity companies should no longer have the present assured profit system. What kind of business is that? Business means risk taking, and electric utilities should be no exception. We should not pay for all the “passed  on” costs of these companies. Electric companies should take on longer-term contracts (i.e. 6 months) that have a fixed price for everything from fuel oil to exchange rates. These should all be fixed through longer term contracts, warrants or options. Then, these prices should be offered to the public as a choice. If some people don’t want this, they should have the option (above) of transferring energy providers.

This would make energy distribution more predictable, and prices more stable. And the contracts, warrants or options, if handled correctly should prevent electricity distributors from suffering losses. This is the way pricing is done in other countries; the Philippines is rather unique in that its electricity prices jump from month to month.

See also:Why Meralco Rates are High