Undoubtedly, Senior Citizen Discount (discount) is a great benefit given to the senior citizens of the country. I am one of those benefited. The discount is 20 percent on the selling price plus exemption from 12 percent VAT, or a combined reduction of about 32 percent, depending upon how the VAT is computed in the invoice. That’s quite a lot.
The discount is permitted on purchase of a number of items, but is mostly availed of in purchase of medicines and restaurant food. It is available to all senior citizens, age 60 and above, rich or poor.
The discount is not a tax credit on the part of the merchant. Therefore, the merchant has no recourse but to recognize it as an expense in its books.
The discount, being an expense, is certainly considered by the merchant in pricing his goods and, therefore, will tend to increase the price of goods. Of course, the price is subject to competition, but since all competing merchants bear the discount, I consider the discount as competition-neutral and its whole amount is considered in the pricing of goods.
So what is the effect of the discount in the economy? I still have not come across an empirical study done by an economist on this subject. This is one of the reasons I thought I would write about the discount. I hope to attract some economists to do further study and research on this subject, on the basis of the kind of detail that they usually do. Meanwhile, I will do my own qualitative analysis.
There is no doubt that the discount increases the price of goods, and to a significant extent in the case of medicines where probably all eligible persons avail of the privilege.
The increase in price affects everybody. A non-senior citizen pays a higher price than he would in a situation where there is no senior citizen discount. The cost of medicines for a baby would be higher. I say this because the merchants will allocate the effect of the discount on all goods and will not discriminate between old person’s medicines and baby medicines following the usual expense allocation procedure. The senior citizen himself pays a higher price, too (a higher net price, in his case), so that the 20 percent rate is illusory. Clearly, with these effects of the discount law, the government had interfered in the workings of the market place.
I often hear, be that as it may, we need to take care of the old folks even at the expense of the rest of the population. So what is the fuss all about?
First of all, we need to know which old folks we are helping at the expense of others. I take the view that much of the purchase by eligible persons is done by old folks who can afford to buy medicines and restaurant food without the discount and VAT exemption. Because of lack of money, old folks who are poor buy cheap medicines and probably in quantity and in variety not enough to cure their ailments. They rarely go to fastfoods, more so in fancy restaurants. It is the rich senior citizens who buy the expensive medicines and in adequate quantity and range to cure their ailments. They, too, are the ones who frequent fastfoods and the pricey restaurants.
The second concern relates to formulation of public policy. Our current politicians eagerly pass laws that will make them look benevolent to get them reelected, without making, on some occasions if not most, an analysis of whether the laws would cause adverse effects on the greater number. Obviously, the Senior Citizen Discount law is one of them.
Had a good analysis been made, there could be found a number of alternatives to the present discount law. For one, the privilege could be limited to poor senior citizens who really need help, thereby reducing the adverse effect on prices. Or, confine the assistance to all poor senior citizens but instead provide them with old age benefits just like in other countries. I don’t think the administrative cost of these two alternatives will be prohibitive. Or, confine the privilege to all poor senior citizens and reduce the discount to the effective rate under the present system and make the resulting amount as a tax credit. Clearly, the overall effect of all three alternatives is to lower the prices of goods, a result that will benefit everyone. Although the last two alternatives will require government spending, it may be offset by additional VAT collection that will be paid by those who became ineligible. Even when these alternatives result in net government spending, it is a better outcome than having the government interfere in the workings of the market place.
Passing of legislation must be based on adequate research and analyses to avoid causing needless adverse effects on other sectors of society, especially for proposed laws that have an economic impact. Also, using a very recent event as an example —the vetoed legislation on the increase in retirement benefits—to avoid unnecessary controversies that only create anxieties on the part of the people. This must be made a standard procedure in our legislative processes and the results of the study made available to the people.
Ben Punongbayan founded Punongbayan & Araullo (P&A Grant Thornton) in 1988. Today, P&A Grant Thornton is one of the largest accounting firms in the Philippines, with 19 partners, over 500 staff members and four offices around the country.