What Prevents the Philippines from Undertaking Tax Reform? A Story of the Unravelling State

Abstract

One of the crucial areas of government policy responsible for the weak development performance of the Philippines is tax policy and administration. By 2011, the tax to GDP ratio had fallen to a meagre 12.3 per cent, 4.6 percentage points below the pre-1997 level and around 7 points below the regional average. The absence of tax reform reflects a set of inter-related factors. First, long periods of political and economic stability have meant that crises have not provided the opportunity for reform that they allowed, for instance, in Latin America. Second, the highest level of income inequality in East Asia has resulted in state capture by the elite, which in turn perpetuates and increases income differences. Third, Filipinos exhibit a marked preference for the state to deliver private over public goods as a modern and legal version of patronage. Fourth, the middle classes, on whose shoulders the tax burden largely falls, aware of the state’s inability to tax the wealthy and the relatively poor quality of public services, opt out of state services and provide privately for education, health and even security. Fifth, the disempowerment of the poor keeps them quiescent, not putting pressure on the state to cater to their needs.

Promising avenues for change include: a) academia and development partners to take a more active role in analysing and disseminating the reasons for the poor performance of the Philippine economy; b) stronger leadership by churches in encouraging integrity and pro-poor attitudes, behaviour, institutions and policies; and c) a coalition of all interested stakeholders for a more developmental, clean and pro-poor government, including committed civil servants and politicians, civil society organisations, academia, media, church groups and private sector representatives.