No VAT Increase For The Philippines

By Global Tax Weekly

There is a theory, usually expounded by free marketeers, that governments, and societies at large, benefit from tax cuts because: taxpayers are less inclined to find ways to avoid tax and therefore the government collects more revenue; more revenue for the government means more can be spent on public services; and a lower tax burden means people have more disposable income to spend, and businesses have more money to invest. In other words, everyone’s a winner!

But has the theory been tested in the real world? I suppose you could say that it holds true to some extent. Look at the countries that enjoyed stellar rates of economic growth prior to the last financial crisis. They tended to be low-tax economies like Singapore, the United Arab Emirates, and Ireland. Many high-tax economies, particularly in Europe, barely registered a blip on the growth radar, and are still suffering hangovers from the crash – it’s surely no coincidence that Europe’s fastest growing economy is Ireland once again.

So why don’t high-tax countries ever learn the lessons of their less heavily taxed brethren? Well, it’s probably because the real world is complex, and so are taxes. Governments must of course ensure that they collect enough revenue to cover spending, and obviously the more a government spends, the more revenue it needs. But I wonder just how much the cost of tax complexity is factored in to tax rates. As I noted in this column recently, if the United States eliminated the USD1 trillion it spends on “tax expenditures” – credits, deductions, exemptions, etc. – it could slash corporate tax from 35 percent to 21 percent and still collect the same amount of revenue, according to the Center for American Progress. This is purely hypothetical of course, because it’s a theory that’s unlikely ever to be put to the test. But at least one country is attempting to put it into practice. Instead of hiking VAT by three percent, as proposed in the 2016 Budget, budget negotiators in the Philippines have agreed to maintain VAT at a relatively low 12 percent, and just make the thing more efficient. And I congratulate them for it.

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