Some tax proposals are billed as reform measures, but not all tax proposals merit that characterization. A tax proposal cannot be termed a reformist measure if all that it does is tinker with some tax rates or change some definitions. A reformist tax package is one that (1) changes entirely or largely, the profile of a tax regime or (2) corrects, in broad fashion, the inequities or economic irrationalities of the regime.
A reformist orientation is not synonymous with economic rationality, and some economists may have objections to proposed tax changes that in their view fail the test of economic rationality. Cases in point are the tax packages signed into law last month by President Rodrigo Duterte (Tax Reform for Acceleration and Inclusion, or TRAIN) and President Donald Trump (Tax Cuts and Jobs Act).
During the 2016 campaign Republican candidate Donald Trump complained that the US tax system was causing American capital to leave the US and establish business overseas—in the process depriving American workers of jobs—and he vowed that, if elected, he would propose legislation to bring the US’s corporate tax rate to an internationally competitive level. To keep his promise to his political base, the victorious Trump lost no time sending to the US Congress a tax measure calling not only for a reduction of the corporate income rate from 35 percent to 21 percent. Considering that the Tax Cuts and Jobs Act was touted as a measure intended to benefit the middle class, America’s economists were hard-pressed to accept the Trump administration’s explanation for the inclusion, in the measure, of a personal income tax cut for the US’s richest taxpayers. They could understand that the US’s corporate income tax had to be made internationally competitive, but they had difficulty accepting the Congressional sponsors’ argument that America’s super-rich could be expected to spend their tax savings on investment-making and job creation activities.
The critics of tax relief for the richest Americans directed tough questions at President Trump and his Congressional allies. The first and most obvious was, why do the super-rich need a tax break? Another question was, is there a certainty that the super-rich will not use their tax savings to increase their bank deposits and portfolio investments instead of establishing job-creating enterprises? A further question was, why was tax relief not concentrated on the middle class which was the ostensible beneficiary of the Tax Cut and Jobs Act and which constitutes the backbone of the US economy? There have been no satisfactory answers to these and related questions.
Like its American counterpart, TRAIN has given rise to questions about fiscal-policy consistency. The flagship fiscal measure of the Duterte administration, TRAIN was touted as a measure that would bring relief to millions of Filipino middle-class taxpayers. True to its billing, the measure that emerged from Malacanang exempted all Filipinos earning annually P250,000 or less—the Bureau of Internal Revenue says that that covers around 99 percent of all income earners – from having to file an income tax return (ITR). But if they thought that they were now better off financially, those income earners were wrong. In classic retrieve-with-the-right-hand-what-you-give-with-the-left fashion, the Department of Finance (DoF) raised the taxes on sales of products which are major components of the cost of living of middle-class and poor Filipinos.
This has left economists asking themselves what TRAIN really seeks to achieve. What do the fiscal policymakers really want to accomplish with TRAIN? Do they want to give the middle class and the poor real relief from taxation? If they do, why raise, at the same time, the excise taxes on electricity and transportation, which figure importantly in their daily living expenses? Do the fiscal policymakers—DoF and Congress—really believe that the Filipino middle-class folk cannot see through what TRAIN is doing —simultaneously benefiting them (with an income tax exemption) and screwing them (with higher excise taxes)?
Questions have also been raised about the wisdom of deliberately reducing government income-tax revenue at a time when the Duterte administration is embarking on a very ambitious infrastructure program. Considering that P3.1 trillion price-tag of “Build, Build, Build,” wasn’t it more advisable to concentrate on revenue-raising —yes, bring on the tax increases on motor vehicles and cosmetic repair jobs—rather than on tax-relief-giving?
This brings me back to the theme of this piece, which I laid down at the outset.
Labeling a tax program as reformist does not make it reformist. Whether or not it truly deserves to be called a tax reform program depends on whether it fulfills one of two criteria, or both. Those criteria, to repeat, are (1) whether the program changes, entirely or largely, the profile of a tax system and (2) whether the program corrects, in broad fashion, the inequities or economic irrationalities of the existing tax system. In my view, the newly approved “tax reform” program of the Duterte and Trump administrations fulfill neither criterion.
E-mail: romero.business.class@gmail.com
