Senator Gordon’s killer tax

A "giant" killer
A "giant" killer

Taxes can distort incentives and have unintended effects.  This lesson in economics has application to the recent proposal to impose a 5-centavo tax on text messages.

The tax looks cheap relative to the nominal or notional price of P1 per text.  It is also paved with the good intention of improving the educational system, and legislators believe it is possible to design the tax so that it cannot be passed on to the consumer.

The two largest telecoms oppose the tax on two grounds.  One is based on the fact that the actual price of a text is well below one peso, and they have threatened to withdraw their “promo” plans which have set the price of “within network” texts to free or almost-free.  The second is that the proposed tax is “oppressive and confiscatory,” and thereby unconstitutional.

Apart from the legal issue of constitutionality, the desirability of the tax is difficult to gauge without information that can perhaps be had only through more public hearings.

The two industry leaders have reportedly arrived at a common view that they would revert to pricing texts at P1 if the tax is enacted.  If such pricing were to prevail, the profits of the telecom industry will probably fall because the volume of text messaging will also fall, and not just because of the tax.  It would be interesting to know by how much industry profits would fall.  But it is certainly true that the low-income users of cell phone text messaging will suffer if the price of text were to be uniformly P1.  It is therefore no surprise that low-income consumers also oppose the tax.

Apart from the effect on industry profits, at least three other interesting questions arise.  One is what would happen if the current pricing plans were maintained even as the proposed tax is imposed.  Only the telecoms can answer this question since they have more precise data on the actual volumes of text messaging, and they also have an idea of how much the demand for text messaging will fall with the imposition of a 5-centavo tax.  It is also hard to imagine how the tax could be imposed on a per-text basis that would not be felt by the consumer, unless the proposed tax legislation would also mandate that the present pricing plans be maintained.

Another question relates to the revenues that would be raised by the tax.  Legislators project a revenue yield of up to P36 billion per year based on a daily volume of 2 billion text messages.  This apparently presumes a flat price of P1 per text.  But if the present pricing plans were maintained and applied to the 2 billion daily volume of messages, the revenue yield would be of the order of only P3.6 billion.  (This drastic fall in the revenue yield projection is based on a statement of a Globe representative that the average actual cost to the consumer of a text message is 10 centavos or less, given that only 9 percent of total volume is actually priced at P1.   It is also based on an assumption that the revenue yield is proportional to the average price paid by the consumer per text; in other words, the 5-centavo tax will be collected as a 5% ad valorem tax on actual “load” purchases.  If the tax were set up as a 10% profits tax as suggested by Senator Gordon, the yield could be  higher than P3.6 billion but less than P7.2 billion.)

Finally, there is also the more fundamental question of whether the profits of the telecoms are abnormally high, and if so whether or how such profits should be redistributed back to the consumers, either directly or indirectly through the governmental programs that would be funded by the proposed tax.  The telecoms industry may take the view that they deserve their profits, whatever their level, given the risks they took in setting up the cellular phone network.  The consumers would likely argue that abnormally high profits arise from undue restraint of trade, or that in effect the industry players have been running a cartel.  But this latter argument would only make sense if the price of text reverted to a uniform P1 for all messages. In other words, consumers benefit the most from the existence of a cell phone industry when there is competition.  The two largest players cannot credibly threaten to withdraw their current “promo” pricing plans if there were other players who would substantially gain market share through more competitive prices.

A mirage of an oasis may cause a thirsty man to plod on through a desert.  That the government badly needs revenues may induce legislators to look for things to tax.  But if the tax yield is of the order of P3-7 billion per year, is it worth the trouble?

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3 thoughts on “Senator Gordon’s killer tax

  1. If one is thinking that the administration legislators are pushing for the tax on text messages to create more revenues, probably it is not worth the trouble. BUT if the administration legislators are pushing for the tax on text messages is to suppress the usage of the text messaging system to report election anomalies and advance election results which could put in danger the talked about plans to cheat the May 2010 automated elections, then it is worth all the trouble. Now which is the more plausible scenario?

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    1. Sounds either apocalytic or the stuff of urban legends. They will ask, “Where is your evidence?” Hoo-hah..

      But seriously, the Comelec is an upstanding independent constitutional body with great powers to suppress dishonesty and all sorts of election malfeasance. We should have faith. Then hope. I don’t know about charity, when it comes to text tax!

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