Why the proposed Vanity Tax sucks

I once interned for a Senator's office as part of my course requirements in college. In the two months I worked there, I've found that our lawmakers say a lot of things for the sake of keeping their names recognizable to the masses. They draft a lot of bills just in case one gains national interest. But very little gets done and when they do, it takes years!

This is why I'm not yet worried about the proposed "Vanity Tax" currently making its rounds in news outlets. Basically, it aims to add 10- to 30-percent excise tax on beauty products and services In a proposed amendment to the section for the excise tax on non-essential goods (refer to the Republic Act No. 8424 or the Tax Reform Act of 1997, which currently implements a 20% tax on precious metals, pearls, etc., perfumes and toilet waters, and yachts and similar vessels among other things). Ako Bicol Partylist Representative Rodel Batocabe stated in his bill that  "...Any increase of price for beauty and cosmetic prodcuts and services shall only be shouldered by those who choose to and can afford it," and "...Raising the 20 percent excise tax on perfume and toilet waters to 30 percent would be preferable than any rise on our fuel prices."

Nevertheless, we should all calm down for a minute and think about the rationale behind the Vanity Tax. Last September, the Department of Finance submitted its first package of proposed tax reforms to Congress. These are intended to help fund President Duterte's development plans, and include restructuring personal income taxes, increasing the value-added tax (VAT) base by reducing exemptions, raising excise taxes on oil products, and restructuring the excise tax on selected automobiles. 

The World Bank has expressed its support on the tax reforms. They noted that the Philippines still has a 9% excise tax on gasoline while other countries are at 25 to 40%. We have not adjusted fuel taxes according to inflation for 20 years now, so tax collections on fuel products have actually decreased since the late 90s. Let me quote Philippine Star on this:

"...The WB said that as income levels of the rich increased, the more it consumed petroleum products. In fact, households in the Philippines belonging to the top three income levels consume 80 percent of petroleum products in the country...The failure of petroleum excise tax rates to be indexed to inflation not only reduced tax revenues, but also caused a reduction in “distributional equity of the tax burden,” which loosely translated to the rich paying “less” taxes compared to what the poor does."

Confusing? Here's how Anton Ragos from Action for Economic Reforms (AER), an NGO composed of academics that studies possible economic reforms, explains it:

“Looking at spending pattern, the richest consume more of fuel products. Almost at 2% of total household income compared to the poor where its only 0.18% of household income,” Ragos said.

He emphasized: “We’re not saying the poor won’t be affected but its not true that they will be the most affected. They consume it the least and the burden of paying it is on higher households”.

In other words, aside from the government's diminishing tax collections over time, the rich end up enjoying the benefits of low fuel costs and increase their consumption without paying for its actual market cost - remember, the tax on petroleum products has not been adjusted in the last 20 years! If they are made to pay the taxes adjusted to inflation, the increase in government revenue can then fund infrastructure and social services (schools, health care, insurance, etc.). In the long run, the poor will ideally benefit from the increase in excise tax.

It is also worth noting that the increased excise tax on cars, along with the fuel, is intended to make private cars - a luxury - more expensive in order to clear up our massive traffic jams.

Many lawmakers are opposed to the DoF's proposed tax reforms and intend to make a counter proposal. This, of course, is how a democracy is supposed to work. A congressman then floated the idea of taxing beauty products and services instead of fuel products, rationalizing that the "heavily unregulated", "200-B dollar industry" with consumers who can afford to be “attractive, good-looking and gorgeous” should pay for the tax reforms instead of the poor who will be affected by the increased costs of fuel products.

Manila Bulletin wryly adds that the PH is currently imposing 1- to 10-percent tariff duty and a 12-percent value-added tax on imported beauty products. The Food and Drug Administration is also pretty strict as it is, and the Bureau of Customs has been recently cracking down on bulk online cosmetic orders. So no, the beauty industry - at least those in it who comply - is not "heavily unregulated".

The Vanity Tax is vague, short-sighted, and extremely discriminatory against women. Here's why:

Not all beauty products and services are equal. In the proposal, the solon counts "cosmetic products, or any substance or preparation intended to be placed in contact with the various external parts of the human body or with the teeth and the mucous membranes of the oral cavity, with a view exclusively or mainly cleaning them, perfuming them, changing their appearance, and/or correcting body odor, and/or protecting the body or keeping them in good condition" as non-essential.

Does this include fast moving consumer goods (FMCG) like soap, toothpaste, shampoo, and deodorant? These products are hardly non-essential. Certainly it includes makeup, but Ever Bilena makeup for example is hardly a luxury; its demographic covers those in the low income strata.  

The beauty industry in the Philippines is still small and unstable, compared to petroleum products. Good luck trying to hit your tax income targets from this niche industry! The increased use of beauty products outside of FMCG is still a fairly recent phenomenon in the PH (say in the last 7-8 years only, fueled by the global interest in cosmetics). The top two beauty products in the country are still actually soap and toothpaste - those who buy makeup and pay for services (facial, nose lifts, boob jobs, etc.) remains a drop in the bucket.

Once consumers are forced to turn to cheaper options (more on that in a bit), beauty businesses that pay their taxes and provide jobs will be forced to cut down on their operations or worse, shut down. How's that for lost government income?

The Vanity Tax will strengthen the grey and black market for beauty products. Taxing beauty products won't necessarily decrease the consumers' interest in being pretty, but it will force them to look for other options outside of legitimate local businesses. Those who can afford to buy luxury beauty products can easily access them in their travels or relatives abroad. Online stores like Sephora and Althea ship easily to the Philippines, and the products are even often cheaper there. This is already happening and it's already hurting local businesses.

Those who have a more limited budget for beauty products will seek even more affordable options. There's a grey market with unregistered and unregulated online sellers; there's the black market with fake cosmetics.

When consumers buy abroad or from unregistered businesses, then that is ZERO income for our local economy and businesses. The consumers then don't even pay the 12% VAT! I'm not saying we shouldn't buy from abroad and online stores - as a consumer myself, I prefer convenience, comfort, and a fair price when shopping. I'm saying that the Vanity Tax will put local businesses who are already struggling against the competition at a severe disadvantage.

It's discriminatory against women. Deputy Speaker Miro Quimbo said it best, "I think it’s going to be a segmentized or discriminatory tax because the only people who will be affected will only be one side. I know some men wear makeup but that’s completely almost irrelevant. I think it can be struck down as also sex-linked." There are male makeup artists and hobbyists, certainly, but to give you an idea, only 3% of Project Vanity's 41,000 Facebook followers are male.

Taxes are fair and equitable when they are primarily borne by those who make more money; they exist to redistribute wealth. According to the Asian Development Bank report on gender equality in the labor market (published 2013) in the Philippines, "There is a strong gendered division of domestic labor...Women are not only more likely to be in vulnerable employment, but they are also more likely to be in the category of unpaid contributing family members, which offers the least opportunities for decent work." The gender wage gap is estimated to range from 23% to 30% in our country.

Not only does the Vanity Tax seek to squeeze out income from a small, unstable industry*, it seeks to victimize only half of the population that already makes less money than the other half.

The proposed Vanity Tax is economically unsound and discriminatory. Let's make sure it doesn't become law.

*If we're not including the FMCG segment