SHORT- and LONG-RUN EFFECTS

a. Short-run

a.) Increase in prices

One of the immediate effects of the EVAT is the increase in prices of goods because the VAT rate was increased from 10% to 12%. In addition, the other goods and services which were previously VAT exempt became subject to VAT.

b.) Measures to cushion the impacts

Seeing the immediate effect that the implementation of EVAT, some procedures have been formulated in order to lessen the effect that it will have. One of which is to remove the franchise tax on power distribution utilities which serves to temper the effects of imposing VAT on power. In addition, the manufacturers of products such as sardines, milk, noodles, cooking oil and sugar are also allowed to credit against their output VAT a presumptive input VAT equivalent to 4% of the value of their purchases of primary agricultural products which are used in the production of these goods. In terms of petroleum products, there will be a reduction of excise tax on petroleum products such as kerosene, diesel and bunker fuel oil. The technicalities of the effect of the reduction of excise tax on petroleum products is illustrated below

o DOE figures as of June 30, 2005

As the table shows, there will be a lesser percentage increase in the final price because of the reduction of the excise tax. With these measures the burden that the EVAT will have especially on the poor consumers will be minimized. As a matter of fact, according to the research that was conducted, the poor will not really be heavily burdened with the implementation of the EVAT because most of the goods which the lower income households consume are VAT exempt. Usually, households with an income below Php60,000 spend only 0.02% of their expenses on taxes while those who spend more than Php250,000 annually spends 4.10% of their expenditures on taxes at the minimum. Some of these goods are agricultural and marine products in their original state such as vegetables, fish, meat, rice and the like which remain VAT exempt despite undergoing simple preparation processes or preservation for the market. Educational services by both public and private schools are also VAT exempt, as well as educational and informational materials such as books, newspapers and magazines. In terms of housing, the sales of low-cost house and lots which do not exceed Php2.5 million and the monthly lease of houses which do not go beyond Php10,000 monthly are also VAT exempt. Finally, sales of persons and establishments such as sari-sari stores, carinderias and the like which do not earn more than Php1.5 million annually are also free from VAT.

Better tax collection would allow deeper fiscal adjustment and additional public services for growth and poverty reduction. This could lead to another virtuous circle of tax collection and better government services. The rationalization and transparency of public expenditures as well as credible measures against corruption will increase the trust of citizens in the state. Public support for adequate taxation will increase.” –World Bank

b. Long term effects

The rewards of an expanded value-added tax will be reaped in the long-run, long after its costs are experienced. The benefits are experienced after a long time because the development of programs for which the funds are going to be used takes a long time. Nevertheless, its effect on the fiscal condition of the country will take its toll when taxes are collected. With a larger pool of funds, potential economic crises are avoided and market confidence is increased. Government borrowing costs are reduced and savings in interest payments will increase. The gains in interest savings, according to Asian Development Bank, far outweigh the pain of additional tax payment. In addition, with additional revenues for the government, the need to borrow will be lessened. Thus, the phenomenon of crowding-out is eliminated because there will be no need for the government to compete with the private sector for loans.