Significance of the Comprehensive Tax Reform Program aka TRAIN

I wish it had been the talk of the town, that it would become the focus of the Rodrigo Duterte administration. I refer to what is generically called the comprehensive tax reform package (CTRP). But to distinguish it from the old CTRP (passed in 1997) during the Fidel Ramos administration as well as Cory Aquino’s 1986 Tax Reform Program that supplanted the Marcos dictatorship’s tax regime, the new initiative is called Tax Reform for Acceleration and Inclusion (TRAIN).

TRAIN is truly comprehensive, and it addresses the serious problems that plague our tax system. Among the problems: an individual income tax system that is unfair and inequitable, corporate taxation that is uncompetitive, redundancy of nontransparent fiscal incentives resulting in incalculable revenues forgone, specific excise taxes that are not adjusted to inflation leading to revenue erosion (petroleum products), low taxes for goods that impose a higher cost to society than what their prices show (alcohol, tobacco, unhealthy food), well-intended laws that ironically abet tax evasion (law on secrecy of bank deposits), and complex rules that enable tax avoidance and make tax compliance difficult.

As part of the package, TRAIN will reduce the effective individual income tax rates for all individuals, except for the richest of the rich, those who anyway bask in the glory of being ranked and recognized as the country’s top 500 individual income tax payers. This proposal is most fair and progressive. At present, because of the failure to adjust the income tax brackets, resulting in “creeping income” over time, a professional like a senior public school teacher is categorized in the same tax rate bracket as the top 500 individual taxpayers.

But because the individual income tax reform will lead to substantial revenue losses, offsetting tax measures are necessary.

The reduction of individual income taxes must go hand in hand with increasing the excise taxes on petroleum products, automobiles, tobacco, and alcohol as well as the introduction of an excise tax on sugar-sweetened beverages. The broadening of the base for value-added tax (VAT) is also worthy, instead of a proposal, favored by a few, to increase the VAT rate from 12% to 14%.

With respect to corporate income tax, the tax will be reduced from the current rate of 30% to 25%. This intends to make our corporate tax regime competitive vis-à-vis similarly situated middle-income countries. The effect will be a temporary drop in revenues. Hence, the reduction of corporate income tax must be paired with the rationalization of fiscal incentives.

Fiscal incentive rationalization is overdue. This reform will subject fiscal incentives to transparency and discipline. Fiscal incentives must be bound by industrial and technology policy, performance, time limit, and redundancy criteria.

It has to be stressed though that increase in excise taxes and the rationalization of fiscal incentives are not just about offsetting the losses arising from the individual and corporate income tax reforms. The objective is not revenue neutrality but a significant increase in tax effort so the government can have the resources to accelerate spending for infrastructure and logistics, improve the quality of education, expand the coverage and benefits of universal health care, and strengthen the systems to satisfy the requirements arising from climate change and natural disasters. The government estimates that P600 billion, equivalent to three percent of gross domestic product (GDP), must be raised for this strategy of economic acceleration and inclusion to work.

Furthermore, the excise taxes on the aforementioned goods are by themselves good taxes.

Increasing the tax rate on petroleum taxes has to be done to correct for inflation. The specific tax on gasoline has not been adjusted to inflation since its legislation in 1997. Worse, diesel is exempted from the excise tax, despite being the dirtier fuel. The tax on oil products must likewise be seen as an ecological tax, a tax for the environment.

With regard to alcohol and tobacco, increasing excise taxes is a most effective way to reduce smoking prevalence and heavy drinking. They are taxes for health.

But what about the impact of, say, the increase in gasoline taxes and the expansion of the VAT base on the people’s spending?

First of all, the tax incidence analysis (e.g., on oil) shows that the non-poor will mainly pay for the higher consumption tax. In the case of the VAT, essential goods and services used by the poor and the vulnerable, like food in its raw state, medicines, and medical services, will still be exempted.

But more importantly, the TRAIN package includes social protection and transfer programs.

Part of the incremental revenue to be gained from the increase in oil taxes will be earmarked to improve and modernize public transportation and provide temporary subsidy for public transportation fares to mute the price impact. Moreover, for one year, government will provide unconditional cash transfers of P500 monthly for the poorest 25% of households and P250 monthly for the households belonging to the 25th to 50th percentile.

Persons with disabilities (PWDs) will benefit from cash transfers and expanded PhilHealth services. Senior citizens, specifically those with low income, will benefit from a socialized old age pension.

All in all, TRAIN is holistic.

It is exceptional, compared to previous comprehensive tax reform measures, for not only addressing increasing taxes and making our tax system truly progressive (unlike now, which is progressive only on paper), fair, simple, and robust, but also in making commitments to social protection and to allot additional revenue for infrastructure, education, health, and the like.

TRAIN is thus a most significant vector that will enable the Philippines to achieve its vision, as articulated in the National Economic and Development Authority’s AmBisyon 2040. In gist, by 2040, the Philippines has eradicated extreme poverty and has achieved per capita income comparable to the current status of prosperous Asian countries like South Korea.

One lesson in economic history since Britain’s rise to prosperity in the 18th century and its becoming the most dominant world power to boot, is how the generation of tremendous revenues, the rate of which surpasses the economic growth rate, spurs rapid economic development. The huge revenues collected become the source of building the institutions of the State, making them capable, efficient, and meritorious.

In this context, the whole country benefits. Even the rich, who will have to shoulder a bigger burden of taxation, will benefit from the favorable economic and business environment and the strong institutions that comprehensive tax reform will bring.

TRAIN deserves utmost priority. President Duterte has to make a declaration that asserts TRAIN’s importance and urgency.

The struggle is going to be hard. Some politicians and the vested interests want to derail TRAIN. The Speaker has contradicted the position of the Cabinet economic cluster led by Finance Secretary Sonny Dominguez III. This shows the administration itself has yet to consolidate its ranks. The administration’s political capital and Duterte’s muscle are necessary to have TRAIN passed in its entirety. It cannot be passed in pieces, for that defeats its development objectives.

We cannot leave the responsibility of advancing TRAIN to Secretary Dominguez, the Department of Finance, and the Cabinet’s economic cluster. It is a struggle that requires the support of every citizen. For everyone benefits, from the poorest of the poor to the richest of the rich.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

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