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The author would like to thank Reza Baqir, Robert Burgess, Benedict Clements, David Coady, James Gordon, Sanjeev Gupta, Vikram Haksar, Kotaro Ishi, David Newhouse, and Masahiko Takeda for helpful comments and assistance on previous drafts of this paper. The author is responsible for any remaining errors or omissions.
Note that some incidence studies compare how spending shares vary with total income rather than total spending; however, a strong case can be made for assessing “richness” or “poorness” using total spending, since presumably utility ultimately depends on consumption rather than income. Moreover, even if lifetime income were to be a preferred measure of relative wealth, it is likely that single period consumption is a better proxy for this than annual income is.
There was a one-time 12 percent increase in alcohol and tobacco excises in 2000. Percentages are relative to the 2004 level.
Assuming a current retail price of P 23/liter.
However, cross-country revenue comparisons should be interpreted with caution, since there is significant variation across countries in revenue definitions and institutional context.
Note that further revenue could be raised by bringing the tax on diesel more into line with the tax on gasoline.
Clements, Jung, and Gupta (2003) also find the reduction in petroleum subsidies in Indonesia to have been mildly progressive using a computable general equilibrium model.
Of course, the welfare-maximizing rate will be less than the revenue-maximizing rate.
These calculations assume the following: (i) 90 percent of spending on corn, rice, fresh fruits, fresh vegetables, fresh meats, roots, tubers, and eggs is on unprocessed goods and is therefore exempt (the U.S. Department of Agriculture (2002) reports that about 70 percent of food in the Philippines is bought in informal markets; much of the remaining is likely produced at home or may still be exempt if sold unprocessed in formal markets), and (ii) 70 percent of the value-added in education, medical services, housing rent (whether imputed or actual), petroleum, coal, and natural gas is untaxed (the remaining 30 percent is taxed because VAT may apply to inputs in these sectors even though the final product is exempt). Spending on taxes and gifts is also wholly removed from VAT-able consumption.
This is a rough estimate since the relationship between NPC rates and end-user rates differs by region.
Indeed, such reasoning is implicit in the Electric Power Industry Reform Act’s (EPIRA) call for the national government to assume P200 billion of NPC’s debts. However, EPIRA also calls for a large part of the sunk costs to be paid by electricity users through a universal charge.
More detailed and published information on the fiscal cost of tax incentives given to the private sector would be useful in advancing public debate on the issue.
Admittedly, this case applies primarily to companies based in the United States, since many other countries engage in “tax-sparing” agreements that allow their businesses to retain the benefits of tax incentives offered in other countries.
Assuming that a household’s annual income also equals P600,000 and that deductions equaled P72,000 (the standard deduction for a married couple with five children; few other personal deductions are allowed), then the average tax rate would be 22 percent.