• The tax reform package is an economic time bomb

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    Ben D. Kritz

    ADDRESSING the issue of tax reform, which the Duterte administration has made an early-term policy centerpiece, is a bit tricky. The initiative has been met with wide approval from business groups and multinational institutions, and there is clearly a need for some kind of tax reform, so one runs the risk of looking foolish in arguing against what the government is proposing.

    That risk has never stopped me before, however, and I’m not even going to let it slow me down this time. The Comprehensive Tax Reform Package (or CTRP, because nothing is official here unless it has an acronym) is in its current form an economic time bomb, and when it explodes, it is going to severely dent Filipinos’ spending power and, as a consequence, have a dampening effect on the entire economy at just the time growth is needed to fuel infrastructure expansion and other programs.

    The package – which is described as the “first” package of a larger reform vision – that is before Congress now and looks likely to pass largely unaltered from what Finance Secretary Carlos Dominguez 3rd presented, has four main parts: an adjustment of the personal income tax structure; an expansion of the value-added tax (VAT) base; an increase in the excise tax on fuels, particularly diesel fuel; and an increase in vehicle excise taxes.
    In addition, there is a proposal to lower the corporate income tax to 25 percent from 30 percent, but that particular component of the plan is best addressed separately from the others, since it does not directly affect consumers.

    None of these proposals in the reform package are a bad idea in a general sense, but the way they are designed is going to do more harm than good. The personal income tax brackets do need to be adjusted because Filipino taxpayers have suffered the ill effects of bracket creep for about 20 years.

    However, the objective to ease the tax burden of low- and middle-income taxpayers is sabotaged by the proposed removal of the basic exemption, which means that a family of five would pay the same taxes as a single taxpayer earning the same amount, foregoing P150,000 of otherwise useful exemptions in the process. The actual result, because of adjustments to the tax rates, is that a family of five will see a benefit of P47,000 from the new tax rates, P32,000 less than a single taxpayer and an amount that would almost certainly evaporate in the higher prices brought about by the VAT and fuel excise tax increases.

    A well-known businessman and one of my personal role models, who I had a chance to chat with at the recent Manila Times Model Cities Forum, described the tax reform plan as “giving back P100 to taxpayers, and then demanding P500 in different kinds of taxes.” Given the way the tax reform package is set up, it’s not really an exaggeration. The income benefit to the biggest part of the country’s consumer spending base – which accounts for about 70 percent of the economy – is relatively small, while the costs to consumers from new taxes and higher prices as a result of new taxes are many times higher by comparison.

    The most glaring “anti-consumer” measure in the CTRP is the proposed excise tax increase on diesel fuel, which is P3 per liter for this year or next, depending when the package is passed and can be implemented, P6 for the succeeding year, and then incrementally increased annually according to an inflation index. The Department of Finance has been adamant that this is not an anti-poor measure and will not lead to inflation, but simple logic (and actual math) says otherwise.

    The 70 percent of the population that does not own a car (and a significant proportion of the 30 percent that does) powers its movement with diesel fuel, and will be faced with higher transportation costs. Higher transportation costs will also push the price of goods higher, which will in turn drive up inflation. At best, the gain in disposable income from income tax reform will be balanced by higher expenditures, which means that consumer spending will not expand, and there will be no net gain for the economy. More likely, there will be a downturn as part of families’ discretionary spending is shifted to necessities. Reduced discretionary spending typically correlates to slower spending on big-ticket items as well – cars and homes – an effect that will be aggravated by the proposed higher vehicle excise taxes.

    All this has been pointed out already, of course, and every time it has, Dominguez and his colleagues and supporters have either been dismissive of the risks, or have offered various forms of subsidies to lower-income consumers as a way to compensate for any ill effects, neither of which is a sustainable solution.

    And as my entrepreneurial friend pointed out, completely absent in the administration’s push for new revenue is any reference to the supposed savings the government will realize from its efforts to stamp out corruption and inefficiency, which has typically caused a leakage of anywhere from 30 percent to 60 percent of government budgets. If these savings were actually being realized, then they should offset at least some of the need for higher taxes; the implication of this being absent from the discussions about tax reform is that it is either a gross oversight, or that the government has not made much headway in institutional reform, and does not expect to do so in the next few years.

    ben.kritz@manilatimes.net

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