Two national presidents of similar character, Rodrigo Duterte of the Philippines and Donald Trump of the US, have just succeeded in getting their legislatures to approve packages of tax regime changes. The US tax package involves $1.5 trillion worth of revenues and the Duterte administration package involves an estimated P90 billion worth of incremental revenues.
Changes in tax regimes—the imposition of taxes on previously untaxed activities and things and the removal of tax rates on such activities and things—have always been essentially socio-political exercises. Throughout history sovereigns and parliamentary majorities have sought to reward or punish their opponents by lightening or making heavier – as the case may have been – their tax burdens. “Tax them into financial impotence” has always been the favored approach to their opponents by despots and ruling political majorities.
But changes in tax regimes are not strictly socio-political in character. They also have their economic aspects. In point of fact, the fiscal weapon—the imposition or removal of taxes and changes in tax incidences and rates —is arguably the most powerful of the tools in a government’s economic-policy armory.
When deployed as a weapon for management of the economic cycle, tax regime changes are made with due regard (1) to the circumstances of the individuals sought to be affected by the tax changes and (2) to the changes needing to be made in the functioning of the economy.
The matter of incidence is of utmost importance in the making of tax policy. The issue of tax incidence boils down to the question, who will end up actually paying a tax? The answer to this question is very important because the capacity of a tax to be easily passed on will determine whether the real objective of a tax measure will be attained. What, after all, would be the point of the best-crafted tax measure if an unintended person or entity will end up paying the tax?
Another important economic aspect of tax policymaking is timing. A tax measure must be enacted after due consideration of the economy’s position in the economic cycle at the time the tax measure is enacted. Obviously, a new tax should not be instituted on the economy poised to go into a downturn. By the same token, the tax regime should not be lightened when the economy is experiencing an upturn.
Still another economic aspect of a program of tax restructuring is what economists call the marginal propensity to save (MPS) or marginal propensity to consume (MPC) of a person to whom the government will grant a fiscal benefit. If a tax measure will reduce a person’s tax liability by, say, P1,000, is that person likely to spend that windfall on P1,000 worth of additional consumption, or is he likely to save all or most of it? The determination of MPS or MPC is very important from the standpoints of both economic stability and economic growth.
The tax packages that the Philippine and US Congresses have just approved are more socio-political exercises than economic ones. Presidents Trump and Duterte got the US and Philippine legislatures to approve their tax packages not because their national economies needed them but because of the Chief Executives’ need to strengthen their political bases. The Philippine economy is currently one of East Asia’s fastest-growing economies —the second fastest-growing in fact—and the US economy is currently in the upturn phase of the economic cycle. Thus, from the standpoint of timing, the enactment of the two tax packages was wrong.
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