An alternative to senior citizen discount

THE SENIOR CITIZEN discount privilege has been in focus again recently because of the proposed removal of its 12% vat exemption component as part of the tax reform proposals of the new government.

This piece will not dwell directly on the removal of the VAT exemption but introduce a related issue -- the effect of the senior citizen discount itself in raising prices.

Undoubtedly, the senior citizen discount is a great benefit. I am one of those who have benefited. The discount is 20% on the selling price plus exemption from 12% VAT, or a combined reduction of about 32%, 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 buying medicines and restaurant food. It is available to all senior citizens, age 60 and above, rich and 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.

Being an expense, the discount is definitely considered by the merchant in pricing his goods and consequently increases 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. 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. Merchants are expected to allocate the effect of the discount on all goods and will not discriminate between medicines taken by seniors and babies following the usual expense allocation procedure. Senior citizens themselves pay higher prices, too (higher net prices, in this case), so that the 20% rate is partly illusory. Clearly, with these effects of the discount law, the government already 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.

In my view, it is mostly the rich and those can-afford senior citizens who avail of the discount and the VAT exemption that goes with it, and not the poor senior citizens.

Regrettably, I cannot quantify this assertion as there is no available statistics that I can use. But it is a general observation that cannot be denied. In the case of medicine, it is the rich and can-afford senior citizens who can buy the whole range of medicines that they need and in adequate quantity, while the poor tends to buy not enough of what they need to completely heal their sickness and just hope for the workings of nature to complete the healing process.

Moreover, the poor tend to buy cheaper medicines. This condition is much more true in the case of restaurant food. The eating places the poor go to, if and when they do, tend to be neighborhood eateries that do not give the discount. The requirement for giving the discount is complied with by the more organized and not cheap restaurants which are mostly patronized by the rich and can-afford senior citizens.

So, it is fair to say that it is the rich and can-afford citizens who are greatly benefitted by the senior citizen discount privilege. The question then is: Was this the real intent of the law? I would like to believe it was not.

Related to this issue is a concern regarding the formulation of public policy.

Our politicians eagerly pass laws that will make them look benevolent to get them reelected, without making, in some occasions, if not most, an analysis of whether the laws would cause adverse effects to 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, including the VAT exemption, could be limited to poor senior citizens who really need help, thereby reducing significantly the adverse effect on prices. Moreover, doing so will achieve, to a significant extent, the removal of the VAT exemption component of the senior citizen discount contained in the current tax proposals.

Or, similarly, confine the privilege, including the VAT exemption, 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 and therefore removing the adverse effect on prices.

By effective rate, I mean the 20% discount less the upward effect of the discount on prices. This effect can be calculated, but if it is not desired to go through such an effort, the discount can be reduced to an arbitrary amount of, say, 15%, and consequently recognize and remove the effect of the discount in increasing prices. I recognize that this second alternative requires government spending (in effect, the government is paying for the discount), but I believe it will be offset by the savings on VAT exemption of the rich and can-afford senior citizens who will no longer be eligible.

But more than this, treating the discount as a tax credit will remove the adverse effect on prices on all non-senior citizens and therefore reduce the cost of goods, particularly medicines.

There is a third alternative.

Confine the assistance to all poor senior citizens and give it in the form of free medicines as part of an old age benefits program just like those given in other countries. This assistance may include free hospitalization that will replace the partial benefit from the present Philippine Health System.

Indeed, this alternative will help the poor senior citizens a lot more, but it will of course require greater government spending. I will not dwell more on this option as it can be best addressed in any proposed overall program to provide adequate universal health care to all citizens.

Passing legislation must be based on adequate research and analyses to avoid causing needless adverse effects to other sectors of society, especially for proposed laws that have an economic impact. This must be made a standard procedure in our legislative processes and the results of the study made available to the people.

Benjamin R. Punongbayan is the founder of Punongbayan & Araullo, one of the Philippines’ leading auditing firms.

 As published in Business World, dated 30 November 2016