10 reasons for removing VAT on electricity

Halfway into his term, President Ferdinand Marcos, Jr. faces the weakest political position of his presidency. Approval ratings are at historic lows. Trust has collapsed. Disapproval now outweighs support in every major survey.

Filipinos are angry — and rightly so. Massive corruption scandals, the rising cost of living, especially food, the spate of disasters, excessive politicking, broken promises of reform. Filipinos wonder why should they continue to pay tax when corruption is so brazen and massive?

In short, in today’s Philippines, trust in government is the scarcest public good of all.

One way to recover that trust is to do one thing that people can see and feel immediately — by removing the 12% VAT on electricity. Marcos’ technocrats will push back — loss of tax revenue, it is regressive, broad-based VAT is more efficient, it undermines credit rating, targeting is better, and many more explanations. But they miss the real point. When your house is on fire, aanhin pa ang damo kung patay na ang kabayo*? We studied this issue and below are 10 reasons why Congress should remove VAT on electricity now.

1. The focus on headline revenue loss misses the real economic picture. Technocrats will likely argue that VAT removal will lead to a significant revenue loss for the government: the gross VAT revenue foregone — around P110 billion a year. That number is real — but it is not the whole story.

Removing VAT on electricity transfers that P110 billion back to households and firms as purchasing power. Much of that money will be spent, reinvested, and circulated through the economy by factor of about 1.3 times. Some returns will come through higher consumption, higher output, more competitive industries, and downstream tax collection.

The policy may not fully pay for itself — but it meaningfully reduces its own net cost. Treating VAT removal as money simply “lost” ignores these dynamics and leads to distorted fiscal judgments. It is good political optics for sure, but it is also good economics.

2. Concerns about regressivity are solvable through design. Technocrats will argue that VAT removal is regressive because higher-income households consume more electricity in absolute terms. But electricity is embedded in the price of everything, so lower power costs benefit poorer households indirectly as well.

Congress can make the policy explicitly progressive by exempting only a basic “lifeline” block of consumption from VAT. Poor design is not an argument against action — it is an argument for better legislation.

3. Broad based VAT is efficient. Economists will argue that a broad-based VAT is more efficient. That argument is weak when the taxed good is an inelastic necessity — like electricity — that underpins the entire economy. Households cannot meaningfully reduce consumption without sacrificing their welfare. Small businesses cannot substitute away from power without cutting output or jobs. A 12% VAT on electricity functions less like a neutral consumption tax and more like a penalty on living and working.

4. Philippine electricity is already expensive — VAT compounds an existing disadvantage. Filipino households and firms pay power prices comparable to Singapore and significantly higher than many Southeast Asian neighbors whose electricity is subsidized by their governments. In that context, VAT is not neutral. It compounds an existing competitiveness problem. It raises costs for manufacturers, service firms, and exporters before they even begin competing.

Power prices reflect many structural constraints — but VAT is not one of them. It is a policy choice, and one Congress can reverse immediately.

5. Better than ayuda** — no intermediaries, no discretion, no delay. Unlike cash transfers or subsidies that must be identified, approved, and distributed, VAT removal is automatic. Every household and every business sees it directly on their bill. In a moment when trust is badly damaged, that matters. This is precisely why it works politically and administratively: VAT removal cannot be captured, politicized, or quietly delayed. Moreover, ayuda is only for poor households. Struggling lower middle income households need as much relief as lower income households.

6. VAT removal lowers inflation where it hurts. Electricity enters inflation directly through household bills and indirectly through transport, food storage, retail, and services. Lower power costs reduce cost-push pressure across supply chains.

Even when headline inflation moderates, households still feel squeezed if bills remain high. People experience inflation through electricity statements, not through statistical averages.

7. Fiscal discipline and VAT removal are not mutually exclusive. This is not a binary choice between keeping VAT forever and blowing a permanent hole in the budget. Congress can design VAT removal responsibly: time-bound, with automatic reinstatement triggers tied to inflation or electricity prices, and with lifeline thresholds that protect basic household consumption while retaining VAT on higher usage. The Department of Finance will argue that VAT removal can undermine the country’s creditworthiness. This may be partly true but creditworthiness depends on credibility and design, not on rigid adherence to technocratic orthodoxy. A temporary, targeted, well-signaled reform does not threaten fiscal stability.

8. Universal relief restores tax morale better than selective subsidies. When citizens see corruption scandals and wasteful spending while necessities remain heavily taxed, compliance erodes. Filipinos rightfully ask why should they pay taxes that goes to the corrupt?

Removing VAT on electricity sends a powerful signal: the state will not balance its books on a basic need while citizens suffer from massive corruption. Over time, that perception of fairness strengthens voluntary compliance — the most valuable foundation of any tax system.

9. It shows the government understands the cost-of-living crisis. When trust in government is at rock bottom and citizens feel the government is manhid (numb), removing VAT shows empathy to their daily struggles. Any reduction in the cost of electricity is felt immediately and repeatedly. Few policies touch daily life as directly or as predictably. VAT removal is one of the few levers that can be pulled now, while longer-term fixes work through the system.

10. Aanhin pa ang damo kung patay na ang kabayo? Economists have an argument when they say that removing VAT leads to a loss of P110 billion in government revenues; it is regressive and there are better alternatives; it could lead to a credit downgrade, broad-based VAT is more efficient, etc. Well taken but none of these arguments matter when your house is on fire. Ask the Batangueño: “aanhin pa ang damo kung patay na ang kabayo?”

*A traditional Filipino saying — Why harvest hay when the horse is dead?

** Ayuda — assistance — referring to money or help doled out by the government or politicians.

Eduardo Araral, PhD is an associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore (NUS). This op-ed is written in his personal capacity. Dianne Araral was a teaching assistant at NUS and independent researcher and fellow at Terra.do.