THE Department of Finance (DoF) said the tax reform program would be “fiscally unsustainable” for the government if Congress only passed the proposed cuts in personal income tax rates without the revenue-enhancing components.
In a statement on Tuesday, Finance Undersecretary Karl Kendrick Chua said the absence of accompanying reforms in tax policy and administration would torpedo the government’s anti-poverty agenda, jack-up its debt-servicing costs by as much as P30 billion annually and pad borrowing costs for households as a result of higher interest rates.
The Philippines may also lose its investment grade rating, and deficit as a share to the gross domestic product (GDP) may rise to 4 percent—higher than the 3 percent ceiling on program for the next six years.
The House Ways and Means Committee approved last week a substitute bill consolidating House Bill (HB) 4774 with 52 other similar bills.
HB 4774 contains Package One of the Comprehensive Tax Reform Program (CTRP) that aims to lower income tax rates and adjust excise taxes on oil and automobiles while broadening the value-added tax (VAT) base and retaining exemptions for senior and persons with disabilities.
With the reform measures that would offset the foregone revenues, Chua said the country’s poorest families would end up as ultimate losers given that the continued scarcity of public funds would constrain the government from spending big on education, health care and social protection to help lift the bottom 50 percent of the population from poverty.
He said the Internal Revenue Allotments (IRA) for local government units will collapse in three years if Congress approves only the revenue-eroding cuts.
“If we only pass the personal income tax [reductions], then we may run the risk of only that being implemented. And that I think is not going to be progressive at all because those paying taxes today are those who are richer, above-minimum wage, and they in turn are the ones who will benefit, while we don’t [have any program]for the non-taxpayers, the minimum wage earners,” Chua said.
Chua said passing only the income tax reforms will lead to a credit rating downgrade of below investment grade, which may lead to a spike in interest rates and a permanent P2 depreciation against the dollar.
“The costs to the private sector and households are much higher as everyone who borrows will see higher interest payments. Everyone who has a car loan, housing loan or any other loan will also be facing higher interest rates,” Chua said.
A credit rating downgrade could lead to an increase in borrowings of up to P30 billion for the government and up to P100 billion for the private sector.
The Philippines has an investment grade rating from debt watchers Standard & Poor’s Global Ratings, Moody’s Investors Service and Fitch Ratings.
As of November 2016, the loan outstanding in commercial and universal banks totaled P5.7 trillion. Assuming that just half of these faces variable interest rates and interest rates increase by 2 percentage points, borrowing costs would increase by P55 billion, Chua said.
“Passing only the PIT measure will lead to various degrees of revenue loss if there are no offsetting tax measures. This loss can undermine fiscal sustainability and raise the deficit to as high as 4 percent of GDP [gross domestic product],” Chua said.
Investments will fall as the government is faced with higher borrowing risk premiums due to the resulting higher
level of debts, the DoF official noted.
Chua pointed out that based on Bureau of Internal Revenue (BIR) data, taxing the ultra-rich through their income is not enough because they comprise only less than 1 percent of the country’s individual taxpayers.
Those with a net taxable income of over P800,000 comprise only 3 percent of the individual taxpayer base.
The income tax reforms will lead to revenue losses estimated at P63 billion in the second half of 2017, P138 billion in 2018 and P152 billion in 2019, Chua said.
To raise enough funds for the Duterte administration’s accelerated spending on infrastructure, education, health and social protection for the poorest of the poor, a set of revenue-enhancing measures is also tucked in the substitute bill.