No inflationary impact seen from lower taxes
THE government’s plan to trim income tax rates is not expected to be inflationary, as increased purchasing power will prod companies to also raise volumes, keeping prices at bay while also spurring further growth, a senior central bank official said.
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said higher disposable incomes will “not necessarily” drive up prices of basic goods and services, as suppliers are likely to respond with increased production to keep up with consumer demand.
“Lower income taxes at a time of favorable growth performance could in fact lead to higher consumption and investment, and ultimately higher levels of production. Therefore, while lower taxes could increase domestic demand, we would also expect some corresponding improvement on the supply side,” Mr. Guinigundo said in a text message.
The Finance department is currently drafting a comprehensive tax reform package, which would carry adjustments to the current seven- tier income bracket and reduce the top tax rate to 25% from 32%. Finance Secretary Carlos G. Dominguez III said they are also looking at trimming corporate income taxes to 25% to make the country more competitive as current rates are the highest in Southeast Asia.
Authorities are looking at a three-year window for these adjustments, which will be complemented by higher taxes and additional revenues from increased collection efficiency.
Mr. Dominguez told the House of Representatives on Monday that reducing personal and corporate income tax rates alone could result in forgone taxes amounting to around P139 billion-P173.8 billion and P34.8 billion, respectively.
President Rodrigo R. Duterte promised tax cuts during his first State of the Nation Address last month.
Despite lower income taxes, BSP’s Mr. Guinigundo said the government is currently well-positioned to take on more aggressive spending, as improved tax administration is expected to offset and even surpass forgone revenue.
“Higher public spending is possible at this time because the national government has sufficient fiscal space,” Mr. Guinigundo added.
“Any possible revenue losses from lower individual and corporate income taxes are expected to be more than matched by better tax collection, reassessment of government fees and property valuation as well as possibly additional taxes on oil products and sweetened beverages.”
Lower taxes bode well for efforts to invite more investments to the Philippines, a foreign business chamber said.
“Lower corporate income taxes will be good for foreign investment because the Philippines will be more competitive in the region,” John D. Forbes, senior adviser at the American Chamber of Commerce of the Philippines, said in a text message.
“Foregone revenue can be recovered with higher taxes on consumption, especially fuel.”
Lifting exemptions on the 12% value-added tax ( VAT) currently enjoyed by senior citizens, persons with disabilities, and other sectors form part of the tax package being drafted by the Executive, although Mr. Dominguez said purchases for food, education, and medicine will remain VAT-free.
In turn, authorities are looking to raise excise taxes on fuel products and sugar- sweetened drinks, as well as rationalizing fiscal incentives and lifting the country’s deposit secrecy law to go after tax cheats.
Sought for comment, a tax lawyer said the government should exercise caution in calibrating the amounts and the timing of the tax reform.
“Overall, we should ensure synchronization. The revenue losses are quite definite, but the revenue inflow are not too certain when you remove certain exemptions. You are not immediately assured they will translate to additional revenues, the same with incentives,” said Lina P. Figueroa, principal for tax advisory & compliance at Punongbayan & Araullo.
“We can’t compromise the financing of government... Of course we are looking forward to lower income taxes, but we also have to think of the consequences.”
Christian de Guzman, vicepresident and senior credit analyst at Moody’s Investors Service, earlier warned against a possible collapse in the government’s revenue collection strategy, saying that the Duterte government should sustain gains made in terms of tax administration even as they pursue lower income taxes.
Mr. Duterte’s economic managers are set to submit their tax reform proposal to Congress by September, with a view towards having it passed into law within the first year of the new government.