FairTrade Statement on Lateral Attrition Bill

Lateral Attrition: A Bad Law and a Non-solution to the Fiscal Crisis

Congress is currently deliberating on the Lateral Attrition Bill as a way to address the ballooning fiscal crisis.  The House version (HB 2996) has already been approved (Lower House is now currently deliberating on the fiscal incentives rationalization bill and VAT) and the Senate is on its final stretch in approving its own version (SB 1871). The motive for this bill is to enhance the revenue of the government by providing a system of rewards and incentives for revenue-generating agencies and at the same time to penalize if these same agencies do not meet their revenue targets. But the way the two versions are evolving indicate that Congress may yet produce another animal that will neither improve the country’s fiscal position nor push more efficiency, responsiveness and credibility in the bureaucracy.

Controversial Portions of the Law

A.    Automatic allocation of no less than 5 percent in excess of target as validated by DBCC. 60% of it will go to the local level while 40 % will go to the national agency. Likewise rewards will also be in the form of citations, scholarship grants [Senate version: there will have a four-tiered incentives fund: 20% if target exceeds 10%, 25% for 20% excess collection, 30% for 30% excess collection, and 50% if revenue target exceeds 30%];

B.    Lateral Attrition Procedure: (1) transfer of post of lesser responsibilities if shortfall is 3 to <6%, (2) transfer of post or reassignment to a lower ranking district or demotion if shortfall is 6 to <105, and (3) separation from service of the concerned official/officer/employee when more than 10%. Any separation will be in accordance with civil service rules and those separated will be given right to appeal with CSC and Supreme Court without prejudice to the implementation of the decision [Senate version: lateral attrition in the form of separation if the agency miss their target by 10%. Note: only the House version calls for demotion and transfer in the attrition system];

C.    The creation of the Revenue Performance Evaluation Board. It will be composed of DOF and DOJ Secretaries, one representative from the office of the President, BOC and BIR Deputy Commissioner for Administration, two representatives from the academe and/or NGOs, representative from the recognized employees’ organization in the agency concerned, and a representative of a recognized officers’ organization if any. The Board is given a maximum of two (2) months to resolve an attritable case.

D.    Exemptions from lateral attrition: (1) when the area of responsibility has suffered economic difficulties brought about by natural or man-made calamities, industry setbacks, regional financial crisis, and like situations …

Of Travesty and Institutionalizing Corruption

The bill has many inherent weaknesses and bordering as being an incoherent and useless piece of legislation.

First, there is no clear authority stated in the bill on who will set the revenue goals or targets. The bill assumes that the concerned agencies will be the one setting the revenue targets (in this case BIR and BOC officials). If this is the case, then the bill is creating a wide latitude for these agencies to take control of arbitrarily setting targets which is not altogether fair and objective. For example, targets could be downgraded and collection bureaus will surely romp away with the reward money. Further, the law is clearly setting targets in nominal value, not bringing into context the need for incremental tax collection targets based on an improving ratio of customs collection to GDP or overall tax effort to GDP. This way, revenue tax effort may not progress in real terms. Customs and BIR officials in charge of targeting might overlook this important detail in the process of setting revenue targets.

Second, the Senate version of allocating 20 to 50 % of the excess collection is excessive. Remember that the motive why BIR and BOC are exempted from the Salary Standardization Law (SSL) is to enjoy higher compensation primarily to discourage them from being bribed but evidently it did not work. These agencies are still graft-ridden. Since the principle in the SSL exemption is the same with this bill, what is the empirical basis then that this new remuneration system will work this time? In fact, with almost the kind of money the officials get every day or every week in their various modus operandi, the incentives will just be “barya” for those officials. This system of rewards will instead aggravate and even institutionalize corruption in those agencies. Giving extra remuneration for their work that they should be doing on the first place is quite nonsensical and unfair to other employees of non-revenue-generating agencies who are even efficient at their jobs.

Third, the law is not clear on the administrative and legal mechanisms for transfer, demotion or separation for those concerned. Though the bill states that “revenue generating agencies along with Civil Service Commission will draft the guidelines for the implementation of this Act”, it is still quite vague if the guidelines will include these mechanisms. Again, objectivity question arises obviously because the BIR and BOC will certainly draft rules that will not substantially hurt them. The bill also appears to have set in motion the downsizing of bureaucracy (the Arroyo government remember has a plan to streamline the bureaucracy during her current term).

Fourth, the Evaluation Board itself is not an independent entity. Sitting on the Board are the deputy commissioners from Customs and Internal Revenue for administration who can heavily influence whatever decision the entire Board may arrive in the course of evaluation of revenue performance. Even if this body is just a review body, its power on whether to transfer, demote or separate an employee is strong. Ironically, a representative from the Civil Service or perhaps from the Department of Labor does not sit on the Board.

Fifth, the section on exemptions is quite expansive. In fact, these exemptions are the big legal escape avenues of those revenue officials if targets are not meet. Because of this section (Section 10) the whole bill is rendered worthless and ineffective.

Rationalizing Attrition

How the bill is evolving, its principal objective and its future implications to the economy is of paramount importance to the Fair Trade Alliance. The fiscal agenda of the Arroyo administration has lined up eight (8) revenue-enhancing bills (sin tax, tax amnesty, rationalization bill, two-step increases in VAT, tax on telecom, excise tax on petroleum, lateral attrition, and gross income taxation bill) to combat the fiscal crisis. According to President Arroyo, by the end of 2005, with the passage of these bills, the government can raise P80-100 billion. Secretary Purisima even estimates that P60 billion will be removed from the deficit in the early months of 2005.

But sad to say smuggling is not a part of the fiscal agenda of this administration. The Alliance has been constantly engaging the Bureau of Customs on the need to put a solution to the problem of smuggling. We maintain that in order to solve the fiscal crisis, smuggling should be addressed and if this is given government or legislative priority, then we can do away with the proposed new taxes that will only heavily rest on the Filipinos who are already heavily taxed.

On smuggling alone, the government losses P175 billion due to smuggling based from the FTA study. NASTF even has a higher revenue loss statistic than FTA’s. VAT leakage is also very high at 49.9 percent (or P47.5 billion in 2001 alone). Also, the foregone revenues due to fiscal incentives amounted to P340.467 billion in 2003. Tax collection is deteriorating through the years and leaking at 46 percent. Meaning, for every P100, we are only collecting P54. Today, we have a tax effort ratio to GDP of 12 percent coming from a high of 17-18 percent in 1987-1996. This inefficiency of the government to collect revenue is the height of social injustice and economic travesty.

The numbers above will speak for themselves. What the Fair Trade Alliance is stating here is new taxes legislations are no longer necessary if only smuggling is on top of the Arroyo’s economic agenda and if revenue collection is aggressive and done efficiently. Unless and until the government recalibrates its tariff structure and an import surcharge is temporarily put in place, flexes its political muscle to pass the anti-smuggling bill filed at the Lower House, charging with graft misfits at the two bureaus, and remove their culture of corruption, the law is worthless. We caution therefore Congress bicameral committee into enacting the Lateral Attrition Bill into law and suggest that it be further studied to appreciate its real economic and social implications. If the law is nevertheless enacted, corruption will be even more entrenched in these agencies and subsequently do more harm than good to the economy and the country.

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