"How do we narrow the gap?"
"How do we narrow the gap?"
The economies of all non-communist countries are characterized by inequality. On the distribution of incomes, the inequality is severe, with most of the income earned in the country going to a small percentage of the income-earners. In other countries the inequality is more moderate, thanks to the equality-promoting measures taken by governments over the years. Whatever the degree of inequality, right-minded economic authorities strive to frame economic policies with a view to making the distribution of incomes less uneven.
The road leading to reduced income inequality and the road leading away from income inequality both run through the tax system. The distribution of the national income and the tax system are interconnected. When framed soundly, taxes can lead to income-inequality reduction; when framed in an unsound manner, they can bring about an exacerbation of income inequality.
Ideally, a country’s tax system should be weighed in favor of taxes that affect citizens according to their ability to pay and against taxes that affect the rich and the poor equally. The first group of taxes are termed progressive because they target incomes on the basis of progression, the tax rates rising as income increases. The second group of taxes – excise taxes – are termed repressive because, being across-the-board imports, they afflict the poor proportionately more.
This country’s tax system has long been biased toward income and business taxes, revenue from excise taxes historically have accounted for a minor part of the total tax take. But the Duterte administration’s TRAIN (Tax Reform Acceleration and Inclusion) program has sought to bring about a reconfiguration of the Philippine tax system. It has exempted a class of income tax payers—those with annual incomes below P250,000 —from having to file ITRs (income tax returns) and it has imposed some new excise taxes or raised the rates of existing ones. Among the new excise taxes it has raised are the taxes on petroleum-based fuels.
There is a beautiful side to excise taxes, and there is an ugly side. The beautiful side is efficiency of collection: excise taxes cannot be evaded because they are embedded in the prices of goods and services. The ugly side of excise taxes is that they hit Mr. Forbes Park Resident and Mr. Informal Settler with equal severity. Thus, excise taxes can be collected with equal efficiency from both Don Jaime and Mang Juan.
Because of the breadth of their incidence, economic policymakers should—nay, must—select with utmost care the goods and services that they subject to excise taxation on a first-time or an increased-rate basis. The goods and services with which they should be most careful are those that are used in the production of other goods and services. The most prominent of this cluster of goods and services are petroleum-based fuels; they are very important because they are production inputs in three industries of high importance to the low-income groups, namely, manufacturing, power and transportation.
Increased excise taxes on fuels quickly translates into a triple whammy—more costly manufactured goods, higher fares and higher electricity bills—for the low-income groups. That the 2018 inflation began right after January 1, the date of effectivity of TRAIN I, established beyond any doubt the close connection between excise taxes and prices of goods and services. Those who still refuse to see the connection either need to read up on price or are just plain hard-headed.
In spite of the strong empirical evidence, the economic managers of the Duterte administration have decided to proceed with TRAIN 2’s 2-percent increase in 2019 fuel excise taxes. A greater display of bravado I have never seen. Perhaps the economic managers know something about price behavior that the rest of us citizens don’t.
In the meantime, the Philippine Development Plan’s interest in reduced income inequality will have to be put on hold.