Aquino successor to face tough tax tack, says Diokno

A paradox awaits the next administration: How to raise more money to fund government programs while heeding the public clamor to make the tax system equitable by lowering individual income-tax rates?

Former Budget Secretary Banjamin Diokno, now a faculty member of the University of the Philippines (UP) School of Economics, said the “harsh reality” is that the next administration would be faced with more formidable spending challenges.

But the irony, he added, is that at a time when the government has to raise more taxes to generate funds, there are strong pressures for it to reduce personal and corporate income-tax rates “to make the country’s income-tax regime competitive with its neighbors in Southeast Asia.

“The K+12 educational reform is a good program but it is seriously underfunded,” Diokno said to emphasize the need to raise funds. He also said the next administration has no choice but to continue with the costly conditional cash-transfer (CCT) program.

He said that, even if the dole program is run efficiently and effectively, it would cost the government a lot of money. The funding for the program, he added, is expected to reach P70 billion in next year’s budget.

“Poverty has remained painfully unchanged. More Filipinos need government assistance to survive and live decently,” Diokno said.

The Senate is taking the lead in lowering individual tax payments possibly before the end of President Aquino’s term amid criticisms that services rendered by the government were not commensurate with the increase in tax collections.

Sen. Juan Edgardo “Sonny” Angara said a bill updating the income-tax schedule to reduce tax payments for the poor and middle-class brackets or those earning less than P1 million year has a window for enactment  “toward the end of this year or the start of next year.”

He said the bill seeks to apply lasting reforms to the tax system.

Under Angara’s proposal, the lowest tax bracket would be those earning P20,000 a year  and below who will pay a 10-percent tax from the current P10,000 and below who are assessed a 5-percent tax.

Diokno also cited the “infrastructure gap,” which, he said, has reached epic proportions, to emphasize the need for funds.

The government needs more than 5 percent of gross domestic product (GDP) for the next 10 years to keep up with its Association of Southeast Asian Nations-5 neighbors, he said, adding: “Its priorities should be air, sea and road transport, the rail system, and the urban-transit systems. Equally crucial is the provision of sufficient, affordable, and reliable power.”

The Philippines is also one of the most vulnerable countries to natural calamities. “As such, it has to build formidable defenses and reliable infrastructure against typhoons, flooding, earthquakes, storm surges, volcano eruptions, and the like in the near and long term,” Diokno said.

“Where will the next administration get the money to finance these essential public expenditures? Tax effort has to improve by at least another 3 to 5 percent of GDP,” Diokno added.

But Diokno said the high tax rates in the country are a consequence of the system’s narrow tax bases.

“For a given revenue target, tax rates may be lowered if only many more individuals and firms would pay taxes. Lower tax rates also mean lower economic deadweight loss or economic inefficiency,” he said.

Tax collections are threatened by the sharp drop—approximately by half—in world oil prices. The Department of Finance estimates the revenue loss due to lower oil prices at around P40 billion. And this low oil price regime will not go away soon.

Diokno added there are a number of tax-eroding proposals, but none that would raise revenues adequately, rationally and sustainably.

“There is one that proposes to exempt the payment of value-added tax (VAT) for power. Another proposal seeks to expand tax exemptions for senior citizens,” he said.

“And as the 2016 national election approaches, I expect more tax-exemption proposals. They are what I call ‘pork barrel on the tax side’,” he said.