If they are having difficulty fully comprehending TRAIN (Tax Reform and Inclusiveness), the Duterte administration’s four-part tax package, students of the nature and role of taxation should not be blamed. The truth is that TRAIN is turning on its head practically everything they were taught in Taxation Theory I class.
The rationale underlying the Duterte administration’s tax reform package is indicated by the following quotation from Secretary of Finance Carlos G. Dominguez III: “The Duterte administration sees raising the oil excise tax as the best way to raise revenue after it lowers the personal income tax rates.” The economist’s-lingo translation of that statement would be that the Duterte administration sees raising a regressive tax —i.e., a tax on consumption—as the best way to raise revenues after it lowers the personal income tax rates (of lower-income taxpayers). TRAIN is retaining the top tax rates of 32 percent and 35 percent for incomes in excess of P2 million.
This is contrary to what economists were taught in the course of their studies. They were taught two things about taxes. First, taxation should, to the greatest extent, be progressive, i.e., seek to reduce inequality in the income structure. Second, because of their proportionately heavier impact on the lower-income groups, progressive taxes should be preferred to regressive taxes. And, third, because of the relatively greater collection difficulty involved, administrative efficiency should be maximized in the collection of personal income taxes.
Under TRAIN individuals earning up to P250,000 a year will be imposed a flat income tax of P2,500, as against the P50,000 that they currently have to pay; the tax relief is P47,500. Individuals earning “more than P250,000 but not more than P500,000” currently have to pay income tax of P95,000, but with the implementation of TRAIN they will have to pay P32,500; the tax relief is P62,500. According to BIR (Bureau of Internal Revenue) records, individuals annually earning P250,000 or less accounted for 83 percent of all 2013 taxpayers.
But there also will be relief for the remaining 17 percent of tax payers, i.e., who earn more than P50,000 a year, the three percentages—30, 32, 35 —of income-exceeding-a-certain-figure that they are currently paying will be adjusted downward every year until they reach 25 percent. There is a competitive element to this: the top individual income tax rate in most of the ASEAN (Association of Southeast Asian Nations) is 25 percent.
The Department of Finance (DOF) has placed at P139 billion the revenue that will be foregone with the downward adjustments in personal income tax rates.
Now, the regressive – i.e., excise taxation – part of the first TRAIN package.
To compensate for the lost revenue, TRAIN is relying mainly on three measures, to wit, (1) an increase in the taxes on petroleum products, with the taxes indexed to inflation, (2) an expansion of its VAT (value-added tax) base through limitation of exemptions, and (3) a tax on “sugary” products. VAT exemption will be limited to raw food, health and education expenses and a few other essentials. DOF estimates that the combined revenues from these excise-taxation measures, considered against the P139 billion foregone revenue, will give rise to a net gain of P220 billion.
Raising taxes on goods in order to be able to make possible reductions in tax rates on incomes (including the personal incomes of the wealthy, which will gradually be taxed less): that really turns on its head the role and practice of taxation.
When the first TRAIN package goes up to their chamber, the Senators should ask themselves four things that have to do with making taxation policy an effective tool of economic development. The first question is, what will be the likely outcome of placing more purchasing power at the disposal of taxpayers, especially low-income taxpayers, if —as is likely—most of the additional purchasing power will go towards consumption. Has a study been made of the Philippine economy’s capacity to absorb the resulting incremental demand? Second, does the use of excise tax revenues to fund income tax reductions mean that the DOF now considers excise taxation as the better approach to income-inequality reduction? Third, what happens to the past administration’s—especially the Aquino administration’s—campaign against high-income tax evaders, e.g. RATE (Run Against Tax Evaders) now that TRAIN intends to gradually reduce the tax rates for high-income tax payers? And, fourth, has DOF studied the price elasticities—the likely effect on consumer buying decisions—of the goods whose excise tax rates it proposes to raise? The right answers to these questions are crucial because, whereas excise tax revenues are mere estimates, personal income tax reductions, when granted, immediately become operational realities.
There’s a TRAIN coming your way, Senators. Don’t let it run over you.
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