Every sound tax program is designed to achieve the most feasible balance between three socio-economic objectives, namely the financing of the operations of the government, the promotion of a progressive system for taxation and the maintenance of a growth-friendly business climate. The national budget (the proposed General Appropriations Act) for 2017 represents the Duterte administration’s attempt to achieve that balance.
Achieving a desirable balance between the three objectives has never been easy and is bound to prove difficult for the Duterte administration. Making desirable changes in one policy often results in unwanted and unexpected outcomes from the other policies. Any changes have to be sure-footed and well-thought-out.
Three agencies are in the frontline where the Duterte administration’s proposed fiscal program is concerned. They are the Department of Finance (headed by Carlos Dominguez III), the National Economic and Development Authority (headed by Dr. Ernesto Pernia) and the Department of Budget and Management (headed by Dr. Benjamin Diokno). Both Dominguez and Diokno are members of the Neda Board.
Any changes in the Duterte administration tax program—increases or decreases in existing taxes on income, increases or decreases in existing excise taxes, widening or narrowing of the incidence of existing taxes, introduction of new income or excise taxes—are bound to have an impact on whether the tax system will yield revenue sufficient to finance the government’s operations, on whether the tax system will be characterizable as progressive or regressive and on whether businessmen’s and workers’ attitudes will be positively or negatively affected.
As a rule, taxes on income are to be preferred because, being based on income levels, they take more money from the wealthy than from the poor. And excise taxes are to be avoided because they fall equally heavily on the poor and on the Forbes Park folk. But fiscal policymakers have to face a pair of realities in tax administration in a developing-world setting. One reality is that income taxes can be evaded, while excise taxes are inescapable. The other reality is that excise taxes take more, proportionally speaking, from the poor than from the rich.
Since it is poised to go on a spending spree—lots of big non-PPP infrastructure projects, doubling of soldiers’, policemen’s and other government employees’ salaries and better and more widely distributed social services—and wants to ease up on the taxation of incomes, the Duterte administration needs much revenue in order to be able to properly finance the proposed P3.350-trillion national budget. Toward that end, it has proposed changes in existing income and excise taxes and additions to the list of excise-taxable products.
To compensate for the revenue that will be lost due to the lowering of income and corporate taxes, Secretaries Dominguez, Pernia and Diokno have agreed on the introduction of taxes that will impact more heavily on the expenditures of the lower income groups. This, on the one hand, will be rendering the tax system less progressive with its proposed income-tax reductions and on the other hand it will be rendering the system more regressive with its higher and new excise taxes. And at the back of it all is the need to keep the national budget deficit-free and to safeguard the debt ratios that did much to earn the Philippines the credit-rating upgrades of recent years.
The Duterte administration has a very tough fiscal balancing job ahead of it. Will it be able to achieve the budget balance while keeping the economy on the path of much-improved growth performance? Or will its tax program prove to be a case of bad fiscal engineering?
We will know soon enough.
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