Policy of Attraction, part 2

  The Philippines came under American military rule in 1898.  In 1902, Congress authorized a civilian government known as the Philippine Commission, which ruled the place until the Philippine Autonomy Act of 1916. 

 

By the admittedly low standards of colonial governments, the Philippine Commission ran the islands rather well.  It spent heavily on infrastructure and education.  It purchased rice overseas during shortages and sold it at subsidized prices.  It ran a wide array of public enterprises, including a credit system.  It even ran an agricultural research program that managed to double crop yields. 

How did it pay for this?  By taxing the Philippines quite highly by contemporary standards.  Strangely, an entire literature has developed around the idea that the Commission government undertaxed the Philippines.  That literature simply happens to be wrong.    

Here are some international comparisons from 1920:

		Revenue per capita	GDP per  capita	Gov't revenue as a % of GDP
	Philippine Islands	$4	$36	10.5%
	Puerto Rico	$15	$190	7.9%
	United States	$85	$803	10.6%
Asian colonies	India			6.0%
	Malaya	$16	$181	9.0%
	Korea	$4	$42	9.5%
	Dutch East Indies	$5	$52	9.6%
	Taiwan	$7	$64	10.5%
	Burma	$5	$43	11.7%
	Vietnam	$3	$21	14.2%
Latin American states	Peru	$6	$163	3.4%
	Mexico	$9	$176	5.1%
	Argentina	$17	$444	3.9%
	Cuba	$25	$375	6.6%
	Brazil	$8	$69	11.3%

The Philippines only seemed undertaxed because few outside observers bothered to estimate how low nominal incomes actually were.  In fact, Philippine tax collection was even more advanced, because the implementation of full free trade between the U.S. and the Philippines in 1909-13 utterly devastated trade tax revenue.  The Philippine government, therefore, needed to develop a remarkably efficient system of internal taxation for such a poor nation.

This leaves a puzzle, of course:  why didn't the Philippines capitalize on its relatively efficient tax system?  The modern Philippines collects only 14 percent of GDP in taxes, barely above its revenues in 1920.  That is not enough to fund education, infrastructure, a modern judicial system, defense, police, public health, and (perhaps) anything resembling modern social insurance.

It's a mystery, along with other failings of the Commission government that will be the subject of later posts.   

Comments

[Randy McDonald]

Did the Filipino tax system have any points in common with that of Vietnam (French Indochina)?

[Noel Maurer]

To be frank, I don't know that much about it. Lakshmi Iyer and I had to move data mountains just to construct the above table.

My only detailed revenue data for Indochina (Cochinchina, actually) comes from 1898, when trade taxes produced 31% of all revenue and opium profits another 32%. That isn't fair, though, because French tax policy changed over time.

But here's what I can say about Indochinese taxes circa 1920. First, revenue from trade taxes had fallen to Philippine levels as a percentage of total revenues. The difference is the U.S. and P.I. were in a genuine full customs union by 1913, whereas French Indochina imposed export taxes, even on goods going to the metropole. (In 1928 the French backtracked on that, and Indochina imposed import tariffs on French goods. Yes, this is different from the standard and apparently incorrect story.)

Second, the French continued to generate a lot of revenue through salt, alcohol, and opium monopolies, which had no Philippine equivalent. (Well, not entirely. The P.I. had a small opium monopoly, which AFAICT the Americans eventually converted into an excise tax and then a ban.) The French appear to have abolished the alcohol monopoly in 1932.

Wish I could tell you more. I encourage you to start a Ph.D.

[Randy McDonald]

"Wish I could tell you more."

I'd thought that it might have had something to do with the nature of indirect rule in French Indochina and Vietnam but if those figures are from Cochin China, that doesn't work.

"I encourage you to start a Ph.D."

Maybe indeed--good timing, actually.