Friday, June 17, 2011

The Incidental Tourist

That’s me. I’ve lost my bus ticket, so I guess I’ll just stick around and see what is happening hereabouts.

I see that Moody’s has upped the investment rating of the Philippines. This is a good thing, but it is important to read the Moody’s report deeper than the headline.
Moody’s attributes the improvement to restraint on government expenses. They note that revenue keeps coming in, so the inflow/outflow is better than it used to be. But Moody’s points out that the sources of revenue are a bit soft. Well, they use better words, but that is the essence.

So two points can be drawn from this.

One, the improved rating was largely accidental. The Aquino Administration has not spent money because it does not have a rigorous infrastructure (capital) or value building (expense) plan. It just keeps doing what has been done before, but holds back on expenses that are deemed political. That is Joe Am’s technical description, not Moody’s.

Two, Moody’s intimates that ratings could be improved further if revenue sources were firmed up. “Intimates” is one of those words you use when you don’t really understand what they are saying, and want to wrap it up in something other than a wild guess, or SWAG. I think Moody’s is intimating that there is a road that the Philippines could follow to continue to work toward investment status.

I’ve argued before that the Philippine tax structure is unsound, but now with the weight of Moody’s behind my credibility on this point, I will restate it.

The Philippines depends too much on fee-based taxes rather than taxes keyed to value creation. Fee-based taxes too often destroy value. For example, court fees constrain who gets justice. Justice in the Philippines favors the favorites. The poor are not among them. Fees don’t promote the value of “justice for all”.

Customs assessments represent 22% of the entire revenue stream. Operating under a taxation charter, Customs does little to build Philippine trade competitiveness. Indeed, outrageous Customs’ fees and burdensome paperwork undermine Philippine global competitiveness. Can you imagine the benefit of uncorking the export and trading markets? The Philippines would return to its 1800’s stature as a hub of Asian trade. But Filipino officials can’t imagine this state of affairs so they can’t figure out how to get there. They just tax away.

VAT is a good tax as long as it does not become so onerous that people stop making purchases. It is keyed to value creation. A retailer creates value when he buys goods for X and sells them for X+M, where M is the markup. The amount the customer pays is X+M+T, adding in the VAT. Well, if the mark-up M is 12% and T is 12%, then government has piled on pretty heavily. The State is essentially saying that it deserves as much money as the retailer who has worked hard to build a store, build a customer base, buy goods, and build and sell products.

Seems greedy to me.

A 12% VAT is not conducive to fostering a vibrant retail industry. It is just easy money to grab for the State.

Two other taxation sources that are roundly ignored are income taxes and property taxes. Why? Because they hit the moneyed friends of the political families. So much value created, so few taxes levied. Property taxes, which could fund school improvement, are a joke. I’ve funded the purchase of two properties and both times the attorneys advised to understate the actual purchase price to avoid taxes. Then the annual tax bill arrives and I pay like P100 for a lovely beach paradise. The annual tax could and should be P10,000.

A friend who worked in the assessor’s office said they could not tax at fully authorized rates because the people who backed the mayor would complain.

Therefore, all the kids of the Philippines suffer through insufferable, overcrowded schools with weak teachers.

So the mayor can stay in office.

That, my friends, is Filipino sacrifice and patriotism. It is the jolly, good-hearted, considerate way this island paradise stays stuck in the mud. We incidental tourists just shake our heads in wonder.

In concert with my new advisory slogan, “Man up, Philippines”, I say: find where value is created and tax it reasonably. Make the whole community wealthy, if not in money, then in service and respect, instead of coddling the rich and well-connected.

Rise up, even. Like Edsa the hell out of this baby. Throw tea into Manila Bay, or a case of San Mig. Demand taxes that will benefit your kids. Demand taxes that build wealth instead of constrain productivity.


  1. Joe,

    Our Moody's upgrade is a reflection of Noynoy's great leadership. While economies around the world are crumbling (including your beloved US of A), the Philippine tiger roars. Make no mistake, we are a rising power and we shall claim our place in history.

    As for the tax code, I am sure that Noynoy is studying that issue and carefully planning a solution. Be patient. It will take some time to fix all the mess that Gloria created. But for now, do us a favor and pay your P10,000 property tax instead of cheating.

  2. PP, you are a piece of work. I don't know why the term "delusional" comes to mind. I did not cheat. I paid the P100 bill that was presented to me. I am arguing that the property ought to be valued at P10,000, but the inept (and cowardly?) Pinoy civic tax authorities won't value it properly. As far as cheating goes, Filipinos wrote the book . . .

  3. develop the paradise, Joe, and suddenly all eyes are on you. fees here, permits there. inspectors from all manner of agencies suddenly converge every year and demand that you have state-of-the-art fire extinguisher or else no permit. just kill the fledgling business, why don't you.

  4. The administrative processes here are burdensome, for sure. Such nitpicking done with such pompous authority. I think regulation and inspections are important (restaurant hygiene, for instance), but ought to be provided within one single annual fee for a business license. I don't know why simplicity and promoting a vibrant business community cannot be envisioned by governmental authorities.

  5. i understand the need for inspection specially on safety and hygiene. we're very concerned about that. it's just it's so frustrating because our small -- very small, mind -- food processing business, apparently needs a full-time, full-pledged, professional mechanical engineer (very expensive) on it's payroll and if we can't provide an engineer we can pay the city engineer's office a sort of fixed fee (negotiable, without a receipt, obviously). if that's the case then, what is the purpose of the professional mechanical engineer? it's just so frustrating. we're still on the process of negotiating, legally, to waive that requirement. sorry joe, it's just your article hit me squarely in the gut.


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