NO LOGISTICAL NIGHTMARE
Prof. Monsod thinks that the transfer scheme is not the solution. Her reason is that the transfer’s implementation is going to be a “logistical nightmare.” But the government has a Listahanan, a database covering 15.1 million households, generated from house-to-house assessments. The Listahanan is a tool for targeting beneficiaries for social protection. The information or profile covers 15.1 million households. That is equivalent to two-thirds of total Philippine households (15.1 million of 22.98 million households).
In other words, Listahanan already covers two-thirds of the total Philippine households. The difficult part of any transfer scheme is having the information for effective targeting. Given that Listahanan has the information for two- thirds of total households, the likelihood of a “logistical nightmare” that Ms. Monsod fears is far-fetched.
Furthermore, the proposed transfer for the 6th to 8th deciles will mainly take the form of a public transport subsidy called Pantawid Pasada. It is a universal subsidy, thus easier to administer. Those using public transportation, regardless of income or class status, will benefit from the subsidy. The program, in fact, has been in place since 2011.
The expansion of Listahanan is important to gather the information for all households, to make social protection interventions — in health, education, pension, insurance, disaster reduction and other goods and services — effective, responsive, and fair. In other words, the tax reform is putting in place a comprehensive, evidence-based social protection program. The longer- term benefits outweigh the costs of doing a census. (Besides, the Listahanan has to be updated regularly).
The transfer’s implementation is likewise simple and straightforward. The recipients, identified through Listahanan, get the cash transfer through accredited financial intermediaries (e.g., banks and remittance centers) that have presence even in the remotest areas. The transfer can be done on a semestral basis.
NEGATIVE INCOME TAX
Prof. Monsod sees the need for a transfer program. Without the transfer, the poor will indeed be worse off. Remove the transfer, the whole tax reform will screw the poor people, to use her term. What she does not like is the bill’s transfer program. She offers an alternative: the negative income tax, which the Bureau of Internal Revenue (BIR) will administer. Note that the negative income tax is essentially a cash transfer program. But the Monsod proposal takes the form of a cash transfer that can lead to a “logistical nightmare.” The transactions costs are high. The poor and those who are already exempted from paying the income tax have to troop to the BIR and submit documents. The system can be gamed; the non-poor and the rich who do not pay income tax can claim, too. The BIR then has to bear the additional heavy task of doing incomes and means tests and determining who are qualified for the negative income tax.
Still on the transfer, Monsod asked why the transfer is limited to four years. We note that the transfer program is basically a temporary adjustment program. After the third year, the inflationary effect of the petroleum tax and the broadened VAT base will no longer be felt. The effect on inflation for the first year, which can be attributed to the reform, is merely 0.9 percentage point, and will be much less in the next two years. Furthermore, over the medium term, the outcome of the comprehensive tax reform in terms of enhancement of social protection programs, improvement of health and education services, expansion of infrastructure, credit and investor upgrade, and improved macroeconomic conditions will translate into an increase in real income and reduced living costs for the poor and working class.
ADJUST FUEL TAXES TO INFLATION
We believe that Prof. Monsod is not against the reform of the petroleum excise tax and the VAT. In the past, she wrote or spoke about her support for adjusting the fuel tax to inflation and for broadening the VAT base. The petroleum tax and the VAT are tied to the personal income tax reform. The individual gains from the PIT translate into significant revenue loss for government, which should be recovered through the increase in the petroleum excise tax and the broadened VAT base. The elements of PIT, petroleum excise tax, broadened VAT base, and tax transfer go all together. They are all integral to the reform.
But the VAT and petroleum tax reforms, even if not tied to the PIT reform, make economic sense. Monsod, the economist, is fully aware of the serious problems related to the two consumption taxes. The petroleum tax has not been adjusted to inflation since 1997, resulting in the continuing loss of revenue in real terms. The current bill intends to align the nominal rate to the real rate. Further, the adjustment to real prices will be staggered in three years, thus muting the inflationary effect. The excise tax on oil is also a good environmental tax. It is a tool to address the negative spillovers, arising from carbonemitting fuel. It goes without saying that the rich are also the main consumers of petroleum. With regard to VAT, the many unnecessary exemptions make the system inefficient, leading to significant revenue loss. Rationalizing the VAT system by lifting the number of exemptions contributes to enhancing tax administration.
ADDRESSING THE ‘INCOME CREEP’
Another point raised by Ms. Monsod is that those in the 10th decile will benefit from the income tax reform, thus making the package “pro-rich.” Our response is that the PIT addresses the “income creep” that has led to the undesirable situation wherein the middle class now pays the highest marginal tax rate. The reality is, the Philippine middle class also belongs to the 10th decile. (To illustrate, automobile owners in the Philippines only make up 6% of total families.) The PIT reform intends to correct the “income creep” by adjusting the taxable income levels to inflation and differentiate the tax rate of the middle class from the richest. In the bill, as an affirmation of the tax’s progressiveness, the top taxpayers will have to pay a higher marginal rate of 35%, compared to the current 32%.
We believe that our common ground with Ms. Monsod is vast, and the differences are narrow and resolvable. We thus ask her to join us in securing the essential reforms and correcting the remaining imperfections of the tax reform bill.