Tax bills must be passed as a package, says DOF

By Luis Leoncio

Congress must approve the tax-reform pro­gram as a package— the popular compo­nent, which is the income-tax reduction, and the reve­nue-enhancement measures, which are considered the “bit­ter pill”—in order to achieve the desired balance, Finance Secretary Carlos Dominguez III said in a statement.

“If we fail to pass the rev­enue-enhancement measures, we will lose the growth mo­mentum that took us years to build and we will face the spec­ter of large budget deficits and move closer to a debt crisis,” Dominguez said.

The “painful” part of the package that seeks to increase government revenues are ex­panding the base for the val­ue-added tax (VAT) to plug massive leakages, adjusting the excise tax on petroleum products and indexing these to inflation, and restructuring the excise tax on automobiles through a progressive ad-va­lorem system.

Dominguez said the pro­posed comprehensive tax-re­form program, if approved in toto, will fund the Duterte administration’s goal of liber­ating 6 million Filipinos from poverty by 2022 and would be better achieved by implement­ing these initiatives, because raising productivity and im­proving competitiveness will, in turn, create more and better jobs—and thereby lift the eco­nomic status of the country’s impoverished sectors.

He said, however, that if the tax-reform program fails to get approved in its entirety by Congress, these 6 million targeted Filipinos still trapped in extreme poverty would be doomed to their fate because gross domestic product (GDP) expansion will not be sustained at 7 percent, the economy will likely suffer a credit-ratings downgrade, and the benefits of continued high growth will remain exclusive to the rich.

“Without a dramatic in­crease in investments, the country will be consigned to growth below 6 percent—a purgatory for an emerging economy with great poten­tial. Our economic simulation studies validate this,” he said.

The first package of the comprehensive tax-reform program submitted to the Congress last September un­der the Department of Finance (DOF)-proposed Tax Reform for Acceleration and Inclusion Act aims to generate a net gain of P174 billion, equivalent to one percent of GDP in 2018.

This initial package aims to make the tax system more progressive through the low­ering of personal income tax (PIT) rates to make these at par with those in the region, expanding the value-added tax (VAT) base by limiting ex­emptions to necessities such as raw food, education and health care, while increasing excise taxes on oil and automobiles.

Dominguez said the con­gressional approval of the tax-reform plan would allow the government to achieve 100-percent enrolment and completion rates, build 80,066 more classrooms and hire 157,412 more teachers be­tween 2017 and 2020, with the end in view of attaining the ideal teacher-to-student ra­tio and classroom-to-student ratio under more conducive learning environments for our youth.

In healthcare, the DOF-proposed tax-reform plan will enable the govern­ment to upgrade 300 local hospitals, build 6,793 new ba­rangay and rural health cen­ters, and hire an additional 2,098 doctors, 4,560 nurses, and 3,328 midwives between 2017 and 2020.

“It will allow us to achieve 100 percent PhilHealth coverage at higher quality of services,” Dominguez said.

In infrastructure, this will ensure that the government has enough funds to concretize 3,714 kilome­ters of national gravel roads, 10,473 kilometers of national asphalt roads, and 30,209 kilometers of local gravel roads, along with irrigating some 1.3 million hectares of land and providing some 7,834 isolated barangays and 23,293 isolated sitios with road access, he added.

Dominguez said the growing un­certainty in global prospects as a re­sult of recent external developments means the country would “need to prepare well and build a solid fiscal buffer to keep us strong when the storm comes.”

He said estimates done by the Asian Development Bank (ADB) show that the country needs to invest at least P610 billion annually in infra­structure, which is a feasible target if the government can provide a busi­ness friendly environment to inves­tors.

This means that from 2016 to 2022, the Philippines should spend a total of P1.073 trillion on urban and rural infrastructure; P718 billion on education, P139 billion on health and P268 billion on social protection, wel­fare and employment.

“We must be fiscally prepared to invest more heavily in our human capital and in much needed infra­structure,” Dominguez said.

The DOF secretary raised a dire scenario should the Congress choose to pass only the tax package’s popular component, which is the reduction in PIT rates without the corresponding revenue-enhancing measures.

“Without improving on our rev­enues, many of our children will con­tinue walking hours to get to school and our classrooms will continue to be packed beyond capacity. The poor­est Filipinos will continue to have lit­tle or no access to health services. Our farmers will be unable tor raise their productivity and thus remain poor,” he said.

Along with this bleak scenar­io, the Philippines will most possibly suffer a credit-rating downgrade as the government will be forced to rely on borrowings to manage the deficit, which means P30 billion in addition­al debt costs; consumers will have to absorb the consequences by having to cope with a permanent P2-depre­ciation of the local currency against the dollar, along with a two-percent increase in interest rates; and public funds for classrooms, health centers and rural roads will be in short supply,

Dominguez likewise noted that without the tax-reform package, growth will not only be slower but exclusive, with the rich continuing to corner the wealth created and the poor kept out of the national eco­nomic mainstream.

The government’s goal of reduc­ing poverty rates from the current 21.6 percent to 14 percent to bring the Philippines at par with Thailand and China in terms of per-capita gross national income by 2022 will floun­der.

Thus, the 2040 vision of eradicat­ing poverty and making the country a high-income country like what South Korea and Malaysia are already today, will likewise fail, Dominguez said.

“In a word, the vision of achieving prosperous country status with zero poverty by 2040 will not be achieved,” he said. “This is the time to break the vicious cycles of the past and carve a new path to a prosperous future for all our people.”

Expectations

The DOF expects to raise from its proposed Tax Reform for Accelera­tion and Inclusion Act an additional P174.2 billion in yearly revenues, of which a substantial portion would be spent on targeted transfer programs that would benefit the country’s most vulnerable sectors.

The first of a series of tax-reform packages submitted by the DOF to Congress last September seeks to lower PIT) rates.

Finance Undersecretary Karl Kendrick Chua said the PIT rates re­duction law would result in revenue losses of P127.4 billion in 2018, the first year of its proposed implementa­tion. But he added that such foregone revenues would be offset by gains totaling P301.6 billion from the ad­ditional revenues from the proposed broadening of the VAT and adjusting the excise tax on fuel and automo­biles, for a net gain of P174.2 billion.

In its original form, Chua said Package One of the tax-reform pro­gram is projected to raise an addition­al P111.2 billion from the removal of certain VAT exemptions, except for basic essentials, P45 billion from automobile taxes, and P145.4 billion more from the fuel-tax adjustment.

Chua said that up to 40 percent of the incremental revenues collected from the first DOF-proposed tax-re­form package “would be used for targeted transfers to low-income and vulnerable sectors.”

“We recognize that the tax reform will affect a number of vulnerable people. We are very much committed to protecting the poor, vulnerable, and low-income sectors. The poorer the household is, the more social pro­tection subsidies it will get especially, during the first year of the Tax Reform Package One implementation,” Chua said.

These targeted transfers, Chua said, include time-bound uncondi­tional cash transfers for the bottom 50 percent of the population; “pantawid pasada” programs for public-utility vehicles to cushion the impact of fuel excises on commuters; higher social­ized pensions or higher conditional cash-transfer amounts, plus rice sub­sidies for indigent elderly citizens; and higher Philippine health insurance (PhilHealth) coverage and other ben­efits to help them defray the ever-spi­raling costs of healthcare for persons with disabilities.

To benefit most ordinary con­sumers, the DOF plans to increase the VAT threshold for goods and services from P1.9 million to P3 million for micro and small enterprises, effective­ly exempting them from VAT.

This means that “sari-sari” stores and small grocery stores, where most Filipinos buy their everyday essentials, would be exempted from VAT and will only pay the percentage tax, he said.

Chua said in expanding the VAT base, exemptions would be retained for raw food, education, health care and other key essentials, but would be lifted for other items such as travel, restaurants and amusement so that tax savings from this effort would be used to fund the targeted transfer pro­grams for the poor.

He added that elderly citizens would continue to enjoy their 20-per­cent discount, regardless of their in­come status.

“The rich will not need exemp­tions and subsidies anymore as they are already well-off compared to the rest of the population. To achieve a more equitable society, we are go­ing to spend more equitably even in terms of highly targeted transfer programs for vulnerable sectors,” Chua said.

“As a general principle, the money we generate from the rich who do not need exemptions and subsidies will be transferred back to the poor and used to fund more and better services,” Chua said.

With the tax reform and target­ed transfers taken altogether, Chua said “we will see higher incomes for 99 percent of the Filipino peo­ple even with the increase in excise taxes. Only those in the top one per­cent will see incomes reduce, as the rich tend to spend more, and so will have to pay their fair share by way of higher total excise payments,” Chua noted.

“The result is that with transfers, there will be less inequality in our society compared to the present-day scenario. However, income inequal­ity will significantly increase only if the revenue-eroding measures—the reduction in personal income tax rates—are passed,” Chua said.

Chua said the targeted-trans­fer programs to help low-income households are not only meant to cushion the impact of higher fuel excise taxes on them, but are also long-term investments in human capital development to help the poorest of the poor become healthi­er, more educated and better-trained to take on quality jobs or set up their own means of livelihood.