"The reports' authors had words of advice for TRAIN's drafters."
"The reports' authors had words of advice for TRAIN's drafters."
Since the day the Department of Finance (DOF) presented its TRAIN (Tax Reform for Acceleration and Inclusiveness) program to Congress for examination and approval, I have written several columns assailing the program's pro-excise-taxation bias and reiterating the relationship between regressive taxation, income redistribution and poverty reduction.
I argued that economic growth ideally should take place alongside reduced income inequality and that taxes that hit rich and poor equally perpetuate income maldistribution. I singled out for special mention TRAIN's higher taxes on petroleum products; given the connection between petroleum products on the costs of energy, transportation and manufacturing, tax increases on such products were bound to wreak havoc on the consumer price index. This proved to be the case, with the inflation rate rising, in 2018, to its highest level in four years.
That my doubts and fears were not without basis has now been validated by two recently-released PIDS (Philippine Institute for Development Studies) reports. The studies are titled 'Impacts of TRAIN Fuel Excise Taxes on Employment and Poverty' and 'Effects of TRAIN Fuel Excise Taxes on Goods and Prices.'
"(A)lthough the excise taxes on fuel products entailed a minimal increase in poverty incidence, the first package of TRAIN-increased poverty among households and individuals and across all the sectors considered," the reports' four authors concluded. "This was due to the increases in factor incomes."
The reports' authors calculated that the higher excise taxes on petroleum products added 0.16 percentage point (ppt) to the 16.48 ppt poverty rate baseline among households. They calculated, further, that TRAIN raised poverty incidence by 1.72 ppt. This was reduced by 0.28 ppt by the unconditional cash transfers (UCT) under TRAIN, they said. The UCT were made to the bottom 50 percent of households.
On an industry basis, the authors found that the most adversely affected by the higher excise taxes on petroleum products were the workers in the transportation industry; on a sectoral basis the leading victims were the fisherfolk.
The reports' authors had words of advice for TRAIN's drafters. "While the goal of TRAIN as a tax reform law—which is to raise public revenues to improve the delivery of basic services and to improve social and economic outcomes in the future—is very commendable, there are considerations that the government should make in designing tax policy. "
The other considerations that the PIDS economists found commendable to the designers of tax policy are those that I pointed out in my column about TRAIN: income inequality and the poverty-worsening that results when purchasing power is eroded by higher taxes on goods and services. DOF was amply warned about the dire effects of TRAIN's excise tax increases on prices and incomes. It insisted that the effects were manageable. They proved to be unmanageable, as the 2018 inflationary surge showed.
When the dust settled, an increase in poverty incidence was the result, as the PIDS results have shown.