IN a self-congratulatory statement on Wednesday, Finance Secretary Carlos Dominguez 3rd stressed that it had taken the Department of Finance less than 90 days to complete the first part of its Comprehensive Tax Reform Program (you can hear the capital letters when the government officials talk about it). Work began upon President Rodrigo Duterte’s inauguration on June 30, and the draft package reached Congress on September 26.
With something as fundamentally important to the country’s economic health as tax reform, “speed of preparation” is probably not the feature of the work that should be highlighted.
What Dominguez didn’t say in this week’s statement—although he has acknowledged it in the past—is that completing the proposed legislation in short order was possible because most of the work had already been done by the previous administration. The tax reform package was bequeathed to Dominguez by former finance chief Cesar Purisima, and was forwarded to Congress with relatively few revisions, although the adjustments made by the Duterte administration—primarily in terms of the VAT—were, indeed, significant.
One area in which the Duterte administration has largely compared favorably to its predecessor is in having a more practical approach to work; decisions once made tend to be acted upon quickly, with minimized processes. That works well for routine work and narrower policy decisions, but there is a concern that bigger programs that will have wider and longer-lasting impact are not being given the time and scrutiny they demand, and the tax reform package is perhaps the biggest example.
Given that the tax reform package is primarily a product of the top-heavy economic approach of the Aquino administration, it should have been subjected to a great deal of scrutiny and likely a complete rebuild if it is intended to be the “game-changer” that Dominguez enthusiastically described it as in his statement on Wednesday.
The key provisions of the tax reform package—which is routinely described as “package one,” although none of the administration’s economic managers has offered any hints about what subsequent packages might contain—is a reduction of the top income tax rate for most taxpayers from 32 percent to 25 percent; raising the taxable income exemption to P250,000; imposing stiffer vehicle excise taxes; raising excise taxes on fuel and indexing these to inflation; and removing some exemptions from the value-added tax. The package also provides for some amount—not specified, but in a range of 25 to 35 percent—of the revenue from the new fuel excise tax to be reserved for “targeted, direct transfer programs for senior citizens and other vulnerable sectors,” presumably to ease the heavy financial blow the tax reform package will deal to lower-income Filipinos.
Although much has been made of the increase in the fuel excise tax as being the most regressive part of the tax package (it was thumbed down by the House appropriations committee yesterday), the real problem is the effective expansion of the VAT tax base. This is going to be achieved by removing many of the exemptions that are currently applied; these exemptions are almost exclusively enjoyed by lower-income consumers, the vast majority of whom are either already exempt from income taxes, or informal workers who do not pay income taxes anyway. In effect, the expansion of the VAT means that the lower third of the income ladder will be obliged to subsidize the income tax break for the middle and upper thirds.
The plan to ease that particular hardship through “targeted, direct transfer programs” cannot possibly make up for it, because those programs are going to be targeted toward people whose VAT outlays are a comparatively smaller proportion of their incomes. The “transfers” will not be enough to lift them very far above their present income levels, while for Filipinos just a step or two higher on the economic ladder could be pushed downward.
That kind of situation is not a “changed” game at all, but a thinly disguised continuation of the same game that’s been played for the last 15 years or more. In one respect, it is hard to criticize Duterte’s economic gurus for not wanting to stray too far from a familiar path; after all, in the broadest sense, it has benefited the country and provided remarkable macroeconomic stability. But it is inevitably inequitable, and the government’s painting it as somehow being a significant improvement is a bit disingenuous.