TRAIN—Tax Reform for Acceleration and InclusioN—is the most significant and far-reaching tax reform and legislation under the administration of President Duterte.
This early though, some cynics dismiss it as just another TREN—Tax Reform Empowering None or No One.
The reason for such cynicism is high prices, unprecedented in the last 6.5 years.
In Duterte’s first full month in office, in July 2016, inflation was a sluggish 1.3 percent, from a heartwarming 0.7 percent in 2015.
The administration ended 2016 with 1.8 percent inflation rate. In the whole of 2017, the inflation rate almost doubled, to 3.2 percent .
In the first four months of 2018, inflation averaged 4.1 percent—28 percent higher than the 3.2 percent inflation in the whole of 2017, and 2.3 times the whole-year 2016 inflation of 1.8 percent.
The inflation spiral began at the same time that the TRAIN Law took effect, on Jan. 1, 2018. The inflation rate was 3.4 percent last January (compared with 2.5 percent in January 2017), 3.8 percent in February (3.1 percent in February 2017), 4.3 percent in March (3.1 percent in March 2017), and 4.5 percent in April this year (3.2 percent in March 2017).
The 4.5 percent April 2018 inflation rate is the highest in the last six and a half years. It is the steepest price increase, in 29 years, since inflation jumped from 10.6 percent in 1989 to 19.4 percent in 1991.
Now, inflation is bad for you and your pocket. It is like stealing money from you. The 4.5-percent inflation rate of April 2018 means the P100 you had last year is worth only P95.50, today, without you having bought anything with the P4.50 you just lost.
The other way of looking at high inflation is that it would have been better to have bought something with your P100 last year, say, a yard of cotton fabric, because that fabric is now worth P104.50. Which means that inflation encourages consumption and speculation and discourages savings (because inflation diminishes the value of your money over time when stored with a bank).
Another impact of high inflation is higher cost of money. Naturally, banks have raised the interest rates for lending. Interest rates are the price for money given out as loans by the banks. Higher interest rate means higher cost of doing business, which adds to inflation.
Interest rates should be higher than inflation rate. Otherwise, the banks lose money. If inflation is 4.5 percent and the interest rate is 5 percent, the half percent difference will not be enough to cover the bank’s operating cost (usually two percentage points) and the cost of that money (which is the interest yield of the deposit that was converted into loan, usually another two percentage points).
Naturally, consumers and wage earners are aghast. Aghast because the commodities that have shown the steepest rise in prices are those that they need most and have the greatest impact on them. Food items like fish, rice, meat, vegetables, and non-alcoholic drinks like juices and soft drinks. These five items contributed 1.6 or more than a third (35.5 percent) of the 4.5 inflation rate in April.
The rise in rice prices was particularly galling, from 0.1 of inflation in January 2018 to 0.3 in April 2018, a three-fold increase.
So people blame the TRAIN law.
Taking effect January 2018, TRAIN slapped a P2.50 per liter excise tax on diesel, from zero before; a P1 tax on LPG, from zero; and a P7 tax on gas, from P4.35 per liter last year. The tax law also imposed taxes on soft drinks and any liquid that has sugar, except when the sugar comes from coconut or corn. More higher taxes per volume of such products will be imposed in 2019 and 2020. The effect is that diesel tax would have risen from zero based on the price in December 2017 to 20 percent by 2020.
Fishermen use diesel fuel to go fishing. Farmers use diesel-fed irrigation pumps in their farms. Your jeepney driver uses diesel for you to commute. So do truckers when they bring meat and vegetables to markets. True, the rich also use diesel in their luxury SUVs but in terms of number of users, more poor people use diesel than the number of rich who consume it. In number, the poor outnumber the rich by 90 to one.
A number of legislators want either the suspension of the TRAIN taxes on fuels and other goods or an outright repeal of the law itself. They include Senators Bam Aquino and Grace Poe.
President Duterte is cool to the idea. He concedes that TRAIN contributed to inflation, which is an old problem anyway. But he says he needs money to run the government.
Indeed, Duterte has doubled the salaries of soldiers and teachers, to P40,000 monthly. He wants to modernize the economy by spending P8 trillion on infra during his presidency.
Besides, Duterte already offers free tuition in college which means parents save P3.5 billion monthly on tuition. TRAIN itself exempts workers from income tax on income of up to P250,000 a year, giving them extra P15 billion monthly in cash. Plus the poor get doles, to the tune of P2.5 billion a month. Those are generous concessions from a government which runs on a deficit.
That means people have extra cash—estimated by Finance chief Sonny Dominguez at P32 billion per month.
That extra cash is now chasing goods which are in short supply. Example: Rice. To balance demand and supply, you raise prices. So you have inflation, the worst in 6.5 years.
Government technocrats insist people should not single out TRAIN for the unprecedented and stratospheric rise in prices.
So do we tell the poor to go buy and eat cake?