Efficiency of Consumption Taxes vs. Income Tax in Redistributing Income and Wealth

1. Efficiency of Consumption Taxes vs. Income Tax in Redistributing Income and Wealth Milwida M. Guevara

2. The Philippine VAT was regressive.

3. What makes for a regressive VAT? The proportion of income that is spent on food decreases as income increases. • A narrow tax base—the VAT in 1988 covered goods and excluded services. The exemption of services guaranteed a VAT that was not buoyant and regressive. • Poor people spend a greater percentage of their annual income on consumption of goods and would pay a greater percentage of their income on VAT.

4. The VAT expansion in 1997 was a revenue, equity, and efficiency measure. With the inclusion of services into the VAT base , the VAT became progressive up to the 7th income level.

5. What can enhance the progressivity of the VAT? A reduced rate or exemption of food can provide a larger absolute benefit to the rich and can turn into a subsidy for them. • Exemption of the consumption expenditures of the poor –unprocessed food • Differentiated rates—but they with significant administrative and efficiency costs. • Exemption of small traders—assuming they are owned by the poor but their inputs are taxed.

6. Studies on the Progressivity of VAT have varied results. • Ebrill- Single VAT rate appears regressive when viewed against current income; more progressive when burden is related over total spending; broadly proportional relative to consumption. • Gastaldi, 2014- Regressivity of the VAT in terms of disposable income is driven by the very bottom and top quintiles---thus it is important that reduced rates are correctly targeted.

7. Caspersen and Metcalf--The VAT is less regressive when viewed against lifetime income • J. Acosta Margain- The 2% VAT seems to be progressive depending on the compensatory mechanisms for the bottom group. • Faridy an • Faridy and Sarker-Bangladesh, 2011- The VAT is more regressive without exemptions than with exemptions. The VAT at the rural level is less regressive than at the urban level.

8. The wisdom of Prof. Richard on the Progressivity of VAT The economic costs of taxation can be reduced by a more efficient use of the VAT. • Bird- Is VAT regressive?---not always or necessarily There may be circumstances in which a good VAT may be better in distributive terms than a bad income tax. If combined with increased excises, indirect taxes may be more progressive than an income tax that is badly administered.

9. Is the Philippine Income Tax a fair tax? Yoingco, Guevara, and Gracia

10. Are equals treated equally? The peronal income tax is horizontally inequitable. Yoingco, Guevara and Gracia

11. Is the corporate tax a fair tax? Yoingco, Guevara, and Gracia

12. The distributive effects must be viewed not only from the tax side. Even poor countries can deliver expenditure goods more effectively than poorly targeted exemptions. • The budget is a more efficient tool for redistribution. • The main goal of taxation is to raise revenues in the most efficient and equitable way. • What matters is the overall impact of the budgetary system on the distribution of wealth and income.

13. Total Effects of the Philippine Fiscal System • “After netting out the tax burden and transfers from the public expenditure program, the poor emerges as the beneficiaries and the middle income and high income families as contributors. • The fiscal system increases income of the poorest families by 116% and reduces income of the topmost bracket by about 27%.” Yoingco, Guevara and Gracia, 2000