The proposed Tax Reform for Acceleration and Inclusion (TRAIN) law will provide an additional P6,000 per year to some 7.5-million poorest families in the country, three to five million more households, and dramatically reduce the Personal Income Tax of low-salaried earners within defined wage brackets.
This represents the single largest direct transfer of wealth estimated at P170 billion to P30 billion in reduced personal income taxes and about P40 billion in income transfers to the lower income classes, on top of the P68 billion under the Pantawid Pamilyang Pilipinong Program or 4Ps.
Albay Rep. Joey Sarte Salceda, principal author of House Bill 4688, said the proposed scheme best balances the need to restore equity in the tax system, while raising much-needed revenues to support public spending in infrastructure and in the people.
“While restoring equity in the tax system will cost government reduced collection of income taxes by P127 billion, based on initial estimates, the increase in the taxes of goods consumed mostly by rich Filipinos will raise collections by P302 billion,” Salceda explained.
The lawmaker said TRAIN will allow government to collect additional P170 billion more taxes in 2018 to fund infrastructure projects.
The tax reform package, Salceda said, provides relief to people by lowering income taxes for the vast majority of Filipinos at the soonest possible time, by 2018 and further by 2019. Delaying approval of the bill will delay the benefits to Filipino workers.
In addition to current minimum wage earners, an additional three-million workers will no longer pay income taxes based on adjusted brackets, he added. Citing an example, Salceda said a call center agent paying P9,200 under current personal income tax rates, will only pay less than P1,600 under the proposed scheme, with a savings of about P7,600. An entry level Clerk III who earns less would be exempted. On the other hand, those earning high annual incomes will pay more taxes than they presently pay.
TRAIN is the same as the tax reform measure filed by the Department of Finance (DoF) in September 2016, except for provisions on earmarking of the excise tax rates on fuel. It is now considered a priority legislation, the backbone of the government’s decisive fiscal reform and has lately gained strong support of the country’s leading economists who believe the measure will “put more money in people’s pockets, encourage investment, ultimately leading to the eradication of extreme poverty.”
When approved, TRAIN rolls in with fiscal revisions aimed to uplift the poor, create more middle income earners and “restore equity in the tax system while raising needed government revenues,” said Salceda, senior vice chair of the House Appropriations Committee and vice chair of the Committees on Ways and Means, and Economic Affairs.
In a recent media conference, Salceda said it is clear whom the Duterte Administration targets to benefit from the fiscal reforms: “Ito po ‘yung mga ordinary working families and the rural poor. In short, the middle class who will benefit from P130 billion in income tax reduction and the lowest 50 percent who will benefit from the ‘unconditional cash transfer kasi ‘yung minimum wage earners are already not taxed, thus the need for transfers.”
He said those who will receive additional P6,000 unconditional cash transfers per year are households belonging to the lowest 30 percent based on their monthly income. The ‘near poor households, or the next 20 percent, will receive P3,000 a year, and the minimum wage earners, or the next 30 percent, will receive P1,500.
Projections of change in income after the Tax-Transfer Reform, show that some 2.5 million poorest families will experience an 11.8% rise in incomes, the next 2.5 million families will have 7.1%, the next 2.5 million group with 5.5%, and so on until the balance tilts against the 20% wealthy who will have to pay more in taxes.
Out of the projected P145 billion revenue hike from raising taxes on fuel, the richest 20 percent will shoulder P87 billion. “With the tax reform and targeted transfers taken together, we will see higher incomes for 99 percent of Filipinos even with the increase in excise taxes. Only those in the top one percent will see their incomes reduced,” he pointed out.
“The net effect without transfers is that the poorest 70 percent will see a slight decline in annual income, the middle class and professionals will see an increase and the very rich will pay more,” he added.
To achieve inclusive growth, targeted transfers will be provided to vulnerable sectors. Transfers will include unconditional cash transfer and Pantawid Pasada to mitigate the initial shock resulting from the increase in excise taxes. “Yun ang equalizing effect,” he said.
Even the 7.5 million middle class families will get P1,500 more yearly to offset any impacts of higher oil excise tax. The rich which accounts for 60 percent of oil consumption will take burden of the income transfers.
Oil excise tax revenue used to be 1.74 percent of GDP: “Ngayon 0.09 percent na lang ng GDP. Umiiyak ang sektor na ito para sila’y umambag sa nation building (Now it’s only 0.09% of the GDP. This sector cries out to contribute to nation building).”
“Hindi pwedeng ang ordinaryong mamamayan ay nagbabayad ng buwis pero yung oil ay from 1.74 percent share sa GDP ay naging 0.09, so kailangan talaga siyang palitan.” (It’s not right that ordinary citizens pay their taxes but oil, with its 1.74% contribution to GDP dropping down to just 0.09%. We really need to change this),” he said, adding that an excise tax increase of P5.65 for each liter of gasoline is supposed to make that change happen, noting that almost “90 percent of petroleum products are consumed by the upper 30 percent of Filipinos.”
An estimated P36.4 billion or 25 percent of incremental revenue for petroleum excise tax in 2018 will be allocated to fund highly targeted subsidy programs and will continue up to the third year of implementation. The remaining 75 percent is allocated for social and infrastructure expenditures.
HB 4688 also restores the efficiency of the VAT system, which in the past has been substantially weakened by unjustifiable and economically unsound exemptions. The VAT was designed to achieve maximum efficiency with little to no exemptions, thus maintaining its “paper trail” along the production of goods down to their final consumption. It is for this reason that the P87 billion from the projected P145-billion increase in fuel excise tax revenue will be shouldered by the richest Filipinos.
Salceda said TRAIN will “ultimately reduce poverty to single digit, grow the economy by 9 percent, and transform the Philippines into an Asian economic powerhouse by 2028, with a 1.2-trillion dollar Gross Domestic Product (GDP) that will qualify it for membership in the Organization for Economic Cooperation and Development.”
The Foundation for Economic Freedom, composed of ex-officials from the Department of Finance (DoF) and five former heads of NEDA, said the “proposed legislative program creates a solid foundation for the government’s vision of inclusive growth, improved public services and improved purchasing power among consumers.”