Soon, probably tomorrow, we will know whether our economy will advance or falter.

The Ways and Means Committee of the House of Representatives will soon vote on the first package of the comprehensive tax reform program also known as Tax Reform for Acceleration and Inclusion (TRAIN). This package consists of the following main features:

• Decreasing the effective income tax rates by reducing personal income tax rates, exempting the minimum wage workers from paying the income tax, increasing the threshold for deductibles or exemptions, and periodically adjusting the income brackets to adjust for inflation.

• Increasing the oil excise tax rates to correct for inflation.

• Increasing the excise tax on automobiles.

• Expanding the value-added tax (VAT) base.

The package offers substantial personal income tax relief for the overwhelming majority, especially the minimum wage workers, the middle class, and even a segment of the upper class. The progressiveness of the taxation is symbolized by the topmost one percent having to pay a marginal tax rate of 30% to 35%.

To be sure, the substantial lowering of the personal income tax rate will result in a significant decline in revenue. Hence, the need for offsetting measures, namely the increase in the excise taxes on oil and automobiles and the lifting of VAT exemptions (except for those goods and services that have the biggest impact on the poor).

Such measures are intended not just to compensate for the revenue loss from the personal income tax reform but more importantly, to generate additional substantial resources to finance infrastructure and human development. This is the key to achieving the vision of eradicating absolute poverty and transforming the Philippines into a high middle-income country within a generation.

Independent of the need for compensating measures to cover the revenue loss from the personal income tax reform, the other reforms are likewise necessary to correct the fundamental weaknesses in the tax structure.

To illustrate, the excise tax on oil has not been adjusted to inflation, and diesel is not subject to excise tax collection. This has contributed to revenue erosion. Because the oil excise tax does not reflect its real price (in the sense that the rate has not been adjusted to inflation since 1997, and we are not even talking about the costs of negative spillovers such as pollution and traffic), government in effect is subsidizing a product that is mainly used by the upper classes.

According to the Family Income and Expenditure Survey (2015), the rich households (top 10%) account for half of the consumption of petroleum products. The richest one percent consumes 13% of total petroleum products.

On the VAT, too many items are exempted. The Tax Code exempts 60 items, most of which mainly benefit the non-poor. The efficiency of the VAT is achieved through simplification. Removing goods that are not basic necessities from the exemption list makes our VAT simpler and fairer. The lifting of exemptions, but protecting the few basic necessities (like food in its natural state, health and education), addresses the popular clamor to pay attention to better tax collection.

Despite these solid and meritorious arguments, quite a number of politicians want to weaken the reform. Everyone agrees to the popular reform, which is the lowering of the personal income tax rates and the exemption of minimum wage earners from the income tax. But not a few resist the hard reforms, namely the excise taxes on oil and the expansion of the VAT base. Passing the popular reform but severely compromising the hard but necessary ones will be bad for the economy and the people’s well-being.

A severely compromised bill, in which the excise tax and VAT reforms are corrupted, will translate into a public spending cutback, affecting growth sustainability as well as poverty-reduction and social protection programs. The increase in the budget deficit without sustainable revenue will result in a credit downgrade and higher interest rates. All this dampens investment, and hence results in output decline and higher unemployment.

At present, the administration has taken the risk of increasing the budget deficit to finance badly needed infrastructure and social services like education. A higher deficit, equivalent to three percent of gross domestic product or even a little higher, is understandable and acceptable, as long as fiscal sustainability via the comprehensive tax reform is assured.

However, a mangled bill on tax reform will raise the alarm. The economic consequences are frightening. In the same vein, a bad tax reform bill will adversely affect the stability of the present administration.

It is thus imperative for the Ways and Means Committee to pass the sound version of the first package of comprehensive tax reforms. It is critical for the taxpayers to monitor Congress and apply the pressure on the politicians to legislate a most fair, equitable, and efficient tax system.

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