There are three principal ways in which the government of a high-income-inequality country can redistribute income. One is to skew the income tax rate structure in favor of the low-income groups, even exempting the poorest from income taxation altogether. Another way is to subsidize the prices of goods and services that figure prominently in the consumption pattern of the poor. The third—and only direct—way is to give cash outright to the low-income groups.
This country’s government has tried two of these three ways. In the past it has at one time or another subsidized the price of fuel and basic food items such as rice. Through the 4Ps (Pantawid Pamilyang Pilipino Program) the government has made monthly CCT (conditional cash transfers) of P1,400 to families determined by the local government units (LGUs) to be very poor. It is about to try the third means, to wit, the discriminatory use of the Tax Code’s income tax rate structure. A Duterte-administered-sponsored bill seeking to amend the Tax Code has been approved by the House of Representatives and now awaits Senate consideration.
That an urgent need exists for the government to take effective steps toward significantly reducing income inequality in this country is indicated by the self-rated-poverty survey conducted by SWS (Social Weather Stations) in September 2016. The survey found that approximately four out of every 10 – 42 percent of Filipino families, equivalent to around 9.4 million families – rated themselves poor. Of that total number, 71 percent – equivalent to 6.7 families – rated themselves food-poor.
The Duterte administration’s bill bears the picturesque acronym TRAIN (Tax Reform and Inclusion). Upon the approval of TRAIN as currently structured, an individual with an annual income of P250,000 or less will receive a tax reduction of P47,500 (present tax liability of P50,000 as against a TRAIN liability of P2,500) and an individual with an annual income of between P250,000 and P500,000 will receive a tax reduction of P62,500 (present tax liability of P95,000 as against a TRAIN liability of P32,500). According to the Bureau of Internal Revenue (BIR), 83 percent of all 2013 individual taxpayers belonged to the P250,000-and-below tax bracket.
But the impact of these tax reliefs on income inequality will be blunted by the reduction of the rates that the individual annual incomes between P500,000 and P5 million—the five succeeding tax brackets—will undergo every year until the 25 percent level is reached. It will also be blunted by TRAIN’s take-back-with-the-right-hand-what-you-give-with-the-left-hand strategy. With simultaneous excise tax measures, the Department of Finance expects to convert the P139 billion worth of foregone income tax revenue into a net revenue gain of P220 billion. Considering that excise taxes have a relatively greater negative impact on low-income consumers, the income-inequality reduction effect of TRAIN is likely to be much less than projected.
Apart from their costliness, the principal argument against subsidy programs is the difficulty that attends their administration. When abuse and corruption come into the picture—and this is the case in most developing countries—subsidy programs become very heavy burdens on national treasuries. Creditors, especially international institutions, tend to have a bias against subsidy programs.
Although there is some validity to the assertion that it encourages laziness, the 4Ps program is, in the end, the most effective approach to income-inequality reduction. True, politics inevitably manages to get into the picture, but the program’s P1,400 monthly per-family grant reaches the poorest of the poor families.
Whatever the approach adopted and the means chosen, the inequality of incomes in this country must be reduced. Income-inequality reduction must be undertaken not only because it is the right thing to do but also because economic development demands it.