Winnie Monsod’s recent series of Philippine Daily Inquirer (PDI) columns on the tax reform bill (House Bill 5636 or TRAIN, which stands for Tax Reform for Acceleration and Inclusion) has stirred debate. The position of Action for Economic Reforms, Foundation for Economic Freedom and like-minded groups is that despite the bill’s imperfection (legislation of a difficult reform is almost always a product of compromise), the bill retains the essential good features. For my take on TRAIN, please see “Tax Reform Bill: A Big Advance,” BusinesssWorld, 5 June 2017.
What did Prof. Monsod say? In her PDI column titled “Saving Train (2),” 17 June 2017, Monsod summarized her position: “TRAIN is essentially antipoor. Or prorich. Its net effect is to decrease the purchasing power of the bottom 60 percent of the population and increase that of the top 40 percent (especially the very rich). And the so-called ‘transfer’ measures that are supposed to alleviate this (or compensate the poor) are only for a four-year period, plus the fact that it is not clear how those ‘transfers’ are to be effected.”
In the earlier PDI column dated 10 June 2017 and titled “What I discovered about TRAIN (1),” Prof. Monsod wrote that the transfer program is not a great solution because “a) It will be a bureaucratic and a logistical nightmare….And b) Far worse, it turns out, the transfer scheme does not continue as long as TRAIN does.”
Here is my response to Prof. Monsod’s two columns:
The tendency is to focus only on package 1 of TRAIN. Package 1 mainly consists of the reform on personal income tax (PIT), the broadening of the value-added tax (VAT) base, the correction of the excise tax on petroleum products, and the increase in the excise tax for automotive vehicles. But then, TRAIN is a comprehensive tax reform program. It consists of several packages. The other packages include the rationalization of fiscal incentives, corporate income tax reform, health taxes, mineral taxation, amendment of the Bank Secrecy Law, and tax administration (Joey Salceda’s bill called TARA, which stands for Tax Administration Reform Act). The above-mentioned reforms will not only make the tax system efficient but more importantly, will further enhance its progressiveness (or being propoor).
In the same vein, we agree with Prof. Monsod regarding the imperative of reforming mineral taxation and increasing tobacco taxes. The fact is, they are already part of the comprehensive tax reform, but are found in other packages. The good news is that the Department of Finance (DOF) will introduce all the remaining packages for the next round of reforms. Thus, the DOF is asking stakeholders, including civil society, a “solidly ready” bill on mineral taxation.
On the tobacco tax, the Senate has to deliberate on the bill submitted by the Lower House. It is a weak bill, which even the DOF and the Department of Health oppose, in the sense that the proposed increase in the excise tax is low, and it reverts to the two-tiered rates. Our task then is to push for a higher unitary rate, which will increase revenue to be allocated for health programs and will reduce smoking-related diseases.
On the one hand, Prof. Monsod wrote that “TRAIN is negative for the majority of the people.” On the other hand, and this is what matters, she acknowledges the revenue transfer will be “more than enough to compensate for the losses.”
How then can the tax reform’s package1 be antipoor when the subsistence poor, the poor, and the near poor will have an increase in their income because of the cash transfer? In truth, the combination of the transfer and the PIT reform results in a net income gain for all households—the poor, the workers, the professionals and the middle class—except the richest.
The table below on the effect of revenue transfer illustrates how everyone (except the richest one percent) gains from the reform. The estimates are subject to change. For example, the amount of the proposed transfer can be higher, and the DOF is studying the proposal to have a cash transfer for the unskilled nonpoor. The table does not include the proposed public transportation subsidy (Pantawid Pasada). The essential message, nonetheless, is that the revenue transfer will offset the price effects arising from the excise tax increase from petroleum and the broadening of the value-added tax (VAT). Moreover, the design of the package that combines the transfer and PIT relief will result in a positive change in the take home pay of the subsistence poor, the poor, the near poor, the informal worker, the minimum wage worker, the workers receiving more than the minimum wage, the professionals, and the middle class. (Take note of the last column. The light green shade indicates an income gain. The red color denotes a loss.)
In part 1 of her series, Prof. Monsod asked why those who comprise the sixth decile will not receive the same amount of tax transfer as those who belong to the lower deciles? The basic answer is that the sixth decile does not constitute the poor. Nor the near poor. It is the first five deciles that make up the subsistence poor, the poor, and the near poor. Taking into consideration the Social Weather Stations’ (SWS) self-rated poverty, we see that those who rate themselves poor do not belong to the sixth decile. In the survey for the first quarter of 2017, SWS says that 50 percent of families are self-rated as poor, and 35 percent are “food-poor families.” In short, to quote the Catholic Church, we have a “preferential option for the poor.”
That said, the design of package 1, as the table shows, will have a positive change in the income of the sixth and higher deciles. Those belonging to the sixth decile will not be “left out to dry.”
NO LOGISTICAL NIGHTMARE
Prof. Monsod thinks that the transfer scheme is not the solution. Her reason is that the transfer’s implementation is going to be a “logistical nightmare.” But the government has a Listahanan, a database covering 15.1 million households, generated from house-to-house assessments. The Listahanan is a tool for targeting beneficiaries for social protection. The information or profile covers 15.1 million households. That is equivalent to two-thirds of total Philippine households (15.1 million of 22.98 million households).
In other words, Listahanan already covers two-thirds of the total Philippine households The difficult part of any transfer scheme is having the information for effective targeting. Given that Listahanan has the information for two-thirds of total households, the likelihood of a “logistical nightmare” that Ms. Monsod fears is far-fetched.
Furthermore, the proposed transfer for the sixth to eighth deciles will mainly take the form of a public transport subsidy called Pantawid Pasada. It is a universal subsidy, thus easier to administer. Those using public transportation, regardless of income or class status, will benefit from the subsidy. The program, in fact, has been in place since 2011.
The expansion of Listahanan is important to gather the information for all households, to make social protection interventions—in health, education, pension, insurance, disaster reduction and other goods and services—effective, responsive, and fair. In other words, the tax reform is putting in place a comprehensive, evidence-based social protection program. The longer-term benefits outweigh the costs of doing a census. (Besides, the Listahanan has to be updated regularly).
The transfer’s implementation is likewise simple and straightforward. The recipients, identified through Listahanan, get the cash transfer through accredited financial intermediaries (e.g., banks and remittance centers) that have presence even in the remotest areas. The transfer can be done on a semestral basis.
NEGATIVE INCOME TAX
Prof. Monsod sees the need for a transfer program. Without the transfer, the poor will indeed be worse off. Remove the transfer, the whole tax reform will screw the poor people, to use her term. What she does not like is the bill’s transfer program. She offers an alternative: the negative income tax, which the Bureau of Internal Revenue (BIR) will administer. Note that the negative income tax is essentially a cash transfer program. But the Monsod proposal takes the form of a cash transfer that can lead to a “logistical nightmare.” The transactions costs are high. The poor and those who are already exempted from paying the income tax have to troop to the BIR and submit documents. The system can be gamed; the nonpoor and the rich who do not pay income tax can claim, too. The BIR then has to bear the additional heavy task of doing incomes and means tests and determining who are qualified for the negative income tax.
Still on the transfer, Monsod asked why the transfer is limited to four years. We note that the transfer program is basically a temporary adjustment program. After the third year, the inflationary effect of the petroleum tax and the broadened VAT base will no longer be felt. The effect on inflation for the first year, which can be attributed to the reform, is merely 0.9 percentage point, and will be much less in the next two years. Furthermore, over the medium term, the outcome of the comprehensive tax reform in terms of enhancement of social protection programs, improvement of health and education services, expansion of infrastructure, credit and investor upgrade, and improved macroeconomic conditions will translate into an increase in real income and reduced living costs for the poor and working class.
ADJUST FUEL TAXES TO INFLATION
We believe that Prof. Monsod is not against the reform of the petroleum excise tax and the VAT. In the past, she wrote or spoke about her support for adjusting the fuel tax to inflation and for broadening the VAT base. The petroleum tax and the VAT are tied to the personal income tax (PIT) reform. The individual gains from the PIT translate into significant revenue loss for government, which should be recovered through the increase in the petroleum excise tax and the broadened VAT base. The elements of PIT, petroleum excise tax, broadened VAT base and tax transfer go all together. They are all integral to the reform.
But the VAT and petroleum tax reforms, even if not tied to the PIT reform, make economic sense. Monsod, the economist, is fully aware of the serious problems related to the two consumption taxes. The petroleum tax has not been adjusted to inflation since 1997, resulting in the continuing loss of revenue in real terms. The current bill intends to align the nominal rate to the real rate. Further, the adjustment to real prices will be staggered in three years, thus muting the inflationary effect. The excise tax on oil is also a good environmental tax. It is a tool to address the negative spillovers, arising from carbon-emitting fuel. It goes without saying that the rich are also the main consumers of petroleum. With regard to VAT, the many unnecessary exemptions make the system inefficient, leading to significant revenue loss. Rationalizing the VAT system by lifting the number of exemptions contributes to enhancing tax administration.
ADDRESSING THE INCOME CREEP
Another point raised by Ms. Monsod is that those in the 10th decile will benefit from the income tax reform, thus making the package “prorich.” Our response is that the PIT addresses the “income creep” that has led to the undesirable situation wherein the middle class now pays the highest marginal tax rate. The reality is, the Philippine middle class also belongs to the 10th decile. (To illustrate, automobile owners in the Philippines only make up six percent of total families.) The PIT reform intends to correct the “income creep” by adjusting the taxable income levels to inflation and differentiate the tax rate of the middle class from the richest. In the bill, as an affirmation of the tax’s progressiveness, the top taxpayers will have to pay a higher marginal rate of 35 percent, compared to the current 32 per cent.
We believe that our common ground with Ms. Monsod is vast, and the differences are narrow and resolvable. We thus ask her to join us in securing the essential reforms and correcting the remaining imperfections of the tax reform bill.