AER Position paper on the Comprehensive Tax Reform

POSITION PAPER

Committee on Ways and Means

House of Representatives

25 January 2017

 

We support the Tax Reform for Acceleration and Inclusion or the Comprehensive Tax Reform Package for the reasons stated by the Department of Finance, specifically to generate substantial revenues to achieve our development objectives as articulated in Ambisyon 2040. We believe that the comprehensive proposal will address the present binding constraint of our country through greater public investments in infrastructure and human capital that will improve the quality of lives of the Filipino people.
The tax reform is essentially a development program that will uphold the principles of equity, progressivity, and social justice. It should not be seen simply as a revenue generation measure. The reforms will correct inequities in the current tax structure and address administration challenges for the ease of tax payers.
For the tax reform to be a genuine policy for development, a holistic approach must be taken. For example, the gain from the reduction of the income tax rates has to be accompanied by reforms that will not only compensate for the revenue loss from the lowering of persona income tax rates but will generate sufficient revenues to support the huge financing requirements for our infrastructure expansion, development of modern mass transportation, and improvement in access to education and health for all.
Precisely because this is a development program, not merely for revenue generation, the reforms must be complete, solid and coherent. Hence, unnecessary compromises must be avoided. Our position is not a unique one. In fact, it is an affirmation of the original proposals of the Department of Finance.
In this light, we are concerned over some of the compromises that have already been introduced, mainly:

 

  • The compromise on the tobacco taxation – the reversal of the cigarette tax from a unitary rate to a two-tiered structure – as specified in House Bill 4144, which not only undermines the country’s health objective of reducing smoking prevalence, in the sense that it will cause downshifting to cheaper cigarettes, but also translates into suboptimal revenue generation, given that there is a superior proposal to have a higher unitary tax rate as espoused by House Bill 4575;

 

  • The lowering of tax rates or the staggered increase in the tax rates on petroleum as proposed in House Bill 4774. We must emphasize that the proposed tax rate of House Bill 4688 rightly adjusts the rate to inflation. The tax rates only intend to recover the real value of excise tax rates that have not been adjusted since 1997. The petroleum tax must likewise be reformed in the same way that tobacco and alcohol taxes were reformed in 2012 and the income tax rate is likewise being reformed now precisely to correct for erosion of revenues arising from inflation.

We also stress that the increase in excise tax on petroleum is not just about compensating for the loss from the personal income tax reform, but together with other excise taxes, is the most effective and progressive way to generate the domestic resources for development. After all, the burden of taxation on petroleum falls mainly on the richest 10 percent of the population.

 

Lastly, excise taxes such as on tobacco, alcohol, petroleum and automobiles are a powerful tool for government to shape behavior towards healthier and more environment-friendly choices. Higher taxes leading to higher prices of petroleum serve another progressive aspect—an ecological or environmental tax to help regulate a good that has negative spillovers. Petroleum use emits carbon, which is harmful not only to the environment but also to the health of the Filipino people.

 

  • Items that do not directly and substantially benefit the poor should not be exempt from value-added tax (VAT). We strongly agree that products consumed by the poor, like food in raw state should be exempt from VAT. But failure to rationalize the exemption narrows the VAT base instead of broadening it thereby worsening the revenue leakages and the inequity of the tax structure.

 

We believe that the welfare of vulnerable sectors such as persons with disabilities and senior citizens is important. But what they really need is universal access to public services such as socialized pension, inclusive mass transportation, and the right health care. We need to focus our resources on these programs and not on unnecessary VAT exemptions, especially on restaurants, cinemas, etc. which the poor do not avail themselves of and thus do not benefit from because of unaffordability. These exemptions only highlight the inequity of our current tax structure.

 

We also hope that the proposed features of social protection, like the unconditional transfers to the poorest 50% Filipinos and subsidized public transportation fare, and legislated allocation for infrastructure, health, and education will be explicit in the deliberations. There is a tendency to just focus on the tax increase without considering the public investment component of these reforms.
To repeat, this is not the time for compromise. We need bold tax reforms to attain poverty eradication, prosperity, equity and inclusivity, and sustainability.
We also wish to emphasize that being a comprehensive tax reform, the proposals must likewise be accompanied by tax administration reforms. Therefore, we welcome the statement of Honorable Salceda that he will be introducing the “Tax Administration Reform Act” or TARA that contains key reforms in tax administration.
These reforms are long overdue. We commend the authors of these two bills, the Committee, and the members of the 17th Congress for committing to take on this difficult but necessary action for change. (END)

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