Our taxes, unpacked: Why we tax, why we work, and how to survive a crisis
With tensions in the Middle East remaining unresolved, soaring fuel prices continue to burden Filipino drivers and commuters. To provide relief, the government has considered suspending the excise tax—a move that many economists strongly oppose, including Cielo Magno, professor at the University of the Philippines School of Economics and former undersecretary of the Department of Finance.
Magno delved deep into the intricacies of taxes and where public funds go during PhilSTAR L!fe and PumaPodcast's first Speak Easy event held at the Opal Bar in Poblacion, Makati.
The seasoned economist began her talk with a simple yet thought-provoking question: Why do we have many types of taxes?
The Philippines has a complex tax system featuring several national and local taxes administered by the Bureau of Internal Revenue. One of the most significant ones is the value-added tax, which is imposed on goods and services throughout the supply chain from production to sale.
Another is income tax, which is levied on an individual’s or company’s earnings, and is one of the government’s main sources of revenue.
But it's the excise tax that has come under the spotlight amid rising fuel prices. This is a tax imposed on specific goods—such as fuel, alcohol, and tobacco—rather than on general income or consumption.
Why so many taxes?
According to Magno, every tax in our system serves a specific role in the machinery of public finance. Some are designed primarily to keep the government running, while others act as a nudge to influence how we live and spend.
"The reason why we have VAT is because, number one, it’s easy to collect," Magno explained. "From the perspective of government, we look at efficiency in terms of raising revenue."
While she acknowledged that VAT is naturally regressive—meaning it can disproportionately affect lower-income groups who spend more of their earnings on basic needs—she pointed out that the Philippine system builds in a safety net. By exempting raw, unprocessed goods, the tax burden on essential living is lightened.
When you go to the wet market to buy chicken, fish, or meat, there is no VAT. "Kapag hindi pa 'yan processed, wala 'yang VAT," she noted.
But if VAT is efficient, why do we still need to tax the money people work so hard to earn? This is where the concept of "tax distortions" comes in.
"If you tax income, the distortion is that people can feel discouraged from working; it feels like being penalized for working hard," Magno said. This creates a delicate balancing act for the government. "You have to balance [income tax] with the tax imposed when you take something out of the economy. When you consume, you get taxed—that’s the balance between VAT and income tax."
She illustrated this with a relatable dilemma: "Kung mag-work ka at 100% level, walang distortion yan. But all of a sudden, you're taxed. And you felt like, 'I'd rather spend my weekend not working because I'm gonna get taxed anyway,' so you reduce your labor effort."
Excise tax similarly works to influence behavior as it aims to discourage the consumption of certain goods that may have negative effects on health or the environment.
"That's why you have taxes on yosi, sugary beverage, fuel kasi may carbon footprint siya, alcohol and luxury goods kasi hindi siya basic commodity," Magno said.
Which ones are crucial in times of crisis?
Magno stressed that when VAT and excise tax are suspended, the Philippines is going to have a fiscal crisis as these make up a significant portion of the government’s revenue, with excise tax being the third main source of income.
She noted that prioritizing the improvement of the country's transport system is a better response to the fuel price issue.
"Shouldn't they be spending all this money, the proceeds from excise and VAT to actually upgrade our transportation now?" Magno said. "Because when you have a crisis, it's not just about the increasing prices—it's really the lack of supply. And if there's a lack of supply, you have to manage the demand side."
"Protecting the consumers from this price increase will not change the consumption pattern of fuel. But if we have a supply problem, we should be nudging people to shift their consumption from not just saving, but looking at other forms of energy sources," she added.
Despite the seemingly bleak situation the Philippines is facing, Magno argued that the crisis could be a "window of opportunity" to push for better solutions.
"Every crisis can be an opportunity to push for significant reforms. And I'm really hoping that this crisis is the one that really modernize and improve our public transport," she emphasized.
