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Tax Expenditure Budget
Nov 27, 2001
 

There is reportedly a difference of views between the technocrats in both the Department of Finance and the Department of Trade concerning a proposal by the former, opposed by the latter, to include a provision in the national budget called "tax incentive expenditure".

I am not privy to details of the proposal (one of the hardest things in the world is to get a written position paper from our government officials because "it is not yet final" or "we have a policy of waiting for another branch of the government to make it public") and so must be content with what reporters say about the proposal (apparently, reporters are given better access to these papers than columnists).

It seems that the Department of Finance recommends a tax incentive expenditure provision in the budget in order to monitor the amount of tax money "lost" by the government in granting tax incentives. The Department of Trade on the other hand appears to object on the ground that without the tax incentives, the investors would not have come to our country. There was therefore nothing "lost" because tax would not have been collected from the investors in the first place since they would have invested elsewhere.

Prescinding for the moment from the dubious proposition that tax incentives effectively convince a foreign investor to come to the Philippines (more on that later), it is clear that the disagreement is merely about words. Lest we be sucked into the semantic confusion, some clarification is in order.

Tax expenditure analysis is an approach to the tax system and budget process which was started by the United States in its 1968 annual budget and gradually adopted by the developed countries since then. Less developed countries, however, have been slow in accepting the idea.

Tax expenditure analysis is premised on the view that a tax system of widespread application has two components, namely, (1) a normative component which defines who should pay the tax, the tax base, the tax rate, and other essentials of the tax structure, and (2) an exception component which contains deviations from the norm. These deviations essentially are aimed at encouraging a particular form of behavior, such as, investments and other non-tax objectives.

In effect, the concept of tax expenditure analysis is that the taxes not collected as a consequence of exemption provisions are, in a manner of speaking, expenditures by the government to achieve the avowed purpose of the exemption. It is as if the government collected the full tax (applying the normative component of the system) and then paid out an amount (equivalent to the exemption) in order to achieve the non-tax objective. It is in this sense that the tax incentive, which is no more than full or partial relief from taxation, is called an "expenditure."

It is obvious that thinking about taxes "given up" or "spent" by way of incentives to investors is only a manner of speaking. But it is a useful way of thinking. It compares the amount spent (equivalent to the tax "foregone") in wooing investors with other amounts spent on other budgetary requirements and alerts those who allocate our scare resources to the disparities and inadequacies in the process.

The DTI therefore has nothing to lose by the insertion of a tax incentive provision in the annual budget. The "expenditure" is merely notional. But it does foster disciplined thinking and, perhaps the only risk involved is that some legislator would call for a congressional hearing of why such a huge amount was spent without an appropriation made by law.

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