Noynoy urged: Increase VAT, lower income taxes


Posted at Jun 28 2010 10:23 AM | Updated as of Jun 28 2010 09:39 PM

MANILA, Philippines - A former budget secretary on Monday urged incoming President Benigno "Noynoy" Aquino III to consider increasing the 12% value-added tax while lowering income taxes as a way to rein in the country's ballooning budget deficit.

In an interview, former budget chief Benjamin Diokno said the Aquino administration should increase taxes based on consumption instead of income. He said a person who has three jobs actually loses a third of his salary to taxes before spending a single centavo of his earnings.

"You should be taxed based on consumption or what you take from society. If you do nothing but shop,  then your taxes should be higher. [Income taxes] are at 32% right now but if you cut it by 18%, it puts more money in
your pocket, which gives you more spending power. The government can now earn back that money by the higher VAT," he told ABS-CBN's "Umagang Kay Ganda."

Diokno said the new government should also consider increasing taxes on so-called sin products such as cigarettes and alcohol, and allocating the collections from that tax to health care.

He said the Aquino administration could also increase taxes on gasoline and earmark collections to public infrastructure spending.

Diokno said the government should move quickly in implementing new programs while Aquino's political capital is high. He said the country can only operate on deficit spending for the next 18 months before getting serious on the budget deficit.

The Department of Finance earlier raised this year's budget deficit ceiling to P300 billion, which is P7 billion higher than the P293.2-billion original target ceiling

Diokno, meanwhile, warned that a failure to rein in the budget deficit will lead to even higher taxes for future generations.

"We are spending more than what we are earning. It's scary because if you look at our tax collections in the first quarter compared to the amount we spent on paying for foreign debt, we are paying P127 to debt principal and amortization for every P100 we collect," he said.

He added: "So the question is -- where is the government getting the money to fund education and health and other sectors? It means we're borrowing more. It means bigger taxes for the youth or belt-tightening, which restricts services to people who really need it."

For his part, Finance Secretary Margarito Teves said the new target is still in line with the deficit-to-gross domestic product (GDP) ratio goal of 3.6%.

"What is important is the trajectory. Our deficit as a percent of the GDP is getting lower and at the same time our debt as a percent of GDP is also getting lower," he said.