The Market Monitor Minding the Nation's Business
By Luis Leoncio
Two local think tanks see “hidden components” in the proposed tax-reform measures of the Duterte administration as favoring the rich while providing minimal benefits for poor wage earners.
The Freedom from Debt Coalition (FDC) said the administration’s move to reform the outdated 19-year old tax scheme has some regressive effects in the five tax policy packages that may penalize ordinary wage-earning citizens.
Burden on poor
The research group IBON said the tax-reform program relieves the rich and burdens the poor and will worsen inequality in the country.
The program should be replaced by one that taxes the rich instead, and is backed with the required political will, IBON said.
The administration’s proposed tax-reform program seeks to raise an additional P600 billion by 2019. IBON noted that it would do this by raising the taxes on the country’s poor majority and reducing the taxes paid by the rich and big corporations .
Trade-offs feared
“We urge Finance Secretary Carlos Dominguez III to reveal to the public the details of the tax-reform packages he presented to Congress, so we would know how these measures will impact on the lives of millions of Filipinos to whom every centavo counts in their daily struggle to make ends meet,” FDC Secretary-General Sammy Gamboa said.
Gamboa expressed concern that the reforms would be based on trade-offs and compromises with corporate interests rather than principles of equity, fairness and justice.
“Any increase in the take-home pay of workers due to lower individual income tax would be hardly felt, with higher prices of goods and services as a result of increases in the excise tax on oil, which would hike fares in public transportation, and the reduction of value-added tax (VAT) exemptions,” FDC’s Gamboa said.
Exemptions
The Department of Finance (DOF) plans to cut tax rates on individual and corporate income, fiscal incentives to investments, property and capital income, alongside increases in excise tax on oil, property valuation, and stocks traded in the stock market.
Exemptions from the VAT will be limited to raw food, health, medicines and education.
Exemptions
Also identified were additional measures on sugary and fatty foods, mining, alcohol and tobacco, gambling, luxury items and carbon.
With the proposed five tax-policy packages, the government stands to lose P198.3 billion but collect P566.4 billion in new taxes resulting in a net gain of P368.1 billion by 2019. These figures, according to Gamboa, are worrisome.
“Net gain from the trade-off between lower personal income tax and higher excise tax on oil, lesser VAT exemptions and new levies on sugary and fatty foods will be P220.7 billion. Meanwhile, there will be a P1-billion net loss from the swap between lower corporate income tax and rationalization of fiscal incentives. This means that Duterte’s new revenue-generating measures will be borne mostly by salaried workers,” Gamboa said.
Need to know
He added that public transportation subsidies and the conditional cash-transfer (CCT) program would not be enough to cushion the effects of price increases.
He said livelihood assistance and employment for affected sectors should be assured and could be funded by earmarking the proceeds of the increased tax on oil for this purpose.
“We need to know. The public deserves to be consulted. Will the proposed revenue measures facilitate economic gains to ‘seep through’ or will it force hard-earned money to pour out of ordinary people’s pockets?” Gamboa asked.
Assumptions
IBON said the rich will benefit from lower income taxes, property-related taxes, and capital income taxes based on the following assumptions:
■ The top personal income-tax rate will go down from 32 percent to eventually just 25 percent. Around 6.7 million deserving wage and salary earners also stand to benefit from the DOF’s plan to update 19-year-old tax brackets. These will result in P139 billion less revenues for the government in just the first year of implementation.
■ The corporate-income tax will go down from 30 percent to 25 percent. Corporations will pay P34.8 billion less in income taxes.
Lower taxes for the rich
■ The tax rate on property-related transactions of the wealthy will be cut. The estate tax of 20 percent will go down to 6 percent of the value of the property being transferred. Donor taxes and transaction taxes on land will also be cut. The rich will pay P3.5 billion less in estate and donor taxes.
■ The tax on interest income earned on peso deposits and investments will also go down from 20 percent to 10 percent. The rich will pay P1.0 billion less in capital income taxes.
The Philippines’s low tax-efficiency rate compared to those of other Southeast Asian economies highlights the need to reconfigure its revenue-generation system through reforms in tax policy and administration, DOF Spokesman Paola Alvarez said.
She cited as example the VAT, which the Philippines imposes at 12 percent while Thailand’s rate is only 7 percent, yet both collect the same amount of VAT revenues at 4.2 percent as share of gross domestic product (GDP)
Gross inefficiency
“This example demonstrates the gross inefficiency of our system. which we need to correct through tax reforms designed to broaden the tax base and collect more revenues,” Alvarez said.
Alvarez noted that when it comes to the tax efficiency of the VAT system, the Philippines is only slightly better than Malaysia, which collects only 1 percent of VAT revenues as share of GDP despite a 10-percent VAT rate. This translates into a tax efficiency rate of only 9.7 percent.
Vietnam, which imposes a 10-percent VAT, has a 61-percent tax-efficiency rate, while Thailand’s tax efficiency is at 60 percent. Indonesia, with 10-percent VAT, is better with a 37.5-percent tax-efficiency rate, compared to the Philippines’s 35 percent rate.
Phl record
In terms of personal income taxes, the Philippines’s tax-efficiency rate is at 6.2 percent, only higher than Indonesia’s 0.1 percent. Vietnam has the best tax-efficiency rate among Southeast Asian economies at 25.1 percent.
The Philippines also did not fare any better when it comes to collecting corporate income taxes as it has a tax efficiency of only 11.6 percent, despite a high 30-percent tax rate.
Thus, revenues from corporate tax accounts for only 3.5 percent as share of GDP, compared to Malaysia’s, which has a corporate-tax collection-efficiency rate of 34 percent and corporate revenues as share of GDP at 8.5 percent, with a tax rate of only 25 percent.
Singapore, which has the lowest corporate income-tax rate of 17 percent, gets revenues from this tax that account for 4.1 percent as share of its GDP.
Despite a relatively low corporate-income tax, Singapore’s tax efficiency rate is 24.1 percent, one of the highest in the region.
“With the reforms put in place by the Duterte administration, it hopes that by 204 or one generation from no, extreme poverty in the country would be a thing of the past, with inclusive economic and political institutions offering equal opportunities for everyone and the country attaining high-income status,” Alvarez said.
Massive investment
She said that to realize this vision, the Philippines needs to sustain its GDP growth rate of at least 7 percent every year for the next two decades and shift the source of economic expansion from consumption to investments.
“We also need to massively invest in our people and in infrastructure to realize this vision. We should focus our spending on infrastructure, research and development, health, education, lifelong training for our labor force and social protection for the poorest of the poor,” Alvarez said.
Funding all these investments, she said, would require an additional P1 trillion per year on top of the current P1.3 trillion expected to be spent by the government in 2016 on these priorities.