PIDS cautions against piecemeal tax measures

A new tax reform can only be effective if the proposed bill of the government is approved in its entirety, according to the Philippine Institute for Development Studies (PIDS).

PIDS senior research fellow Dr. Rosario Manasan, an expert in public finance, explained that approving and implementing the TRAIN (Tax Reform for Acceleration and Inclusion) in a package increases the likelihood that it will bring in more revenues for the government.

Having said that Manasan also said that it does not mean that some of the components of the package should not be reviewed further.

The TRAIN bill is part of the Department of Finance’s (DOF) Comprehensive Tax Reform Program that recommends the lowering of personal income tax (PIT) but increasing excise taxes on fuel, new cars, and sugar products to offset possible losses.

The House of Representatives has already approved its version of the TRAIN (House Bill 5636) in June this year.

Currently, the Senate Committee on Ways and Means is deliberating on the HB 5636 as well as Senate Bill 1408, the version of the TRAIN that was filed by Senate President Koko Pimentel.

“I think the good thing about the proposed tax reform of the DOF is that it comes in as package," he said.

In 1977, Manasan recalled, after a thorough study a comprehensive tax reform program was proposed but Congress approved it in piecemeal wherein only those that negatively affected revenue generation were passed.

The other measures that were supposed to give positive impact on revenues did not make it because they were unpopular.

Thus, Manasan said the proposed tax reform of the DOF is good as it comes in a package.

Based on the proposed tax reform, the PIT of regular wage earners will be lowered from the current 32 percent to 25 percent which means that those earning below R250,000.00 annually will be exempted from paying taxes.

Manasan said that through the new tax reform, the government hopes to generate more revenues to finance its “build, build, build” program.

“I think the main goal of government in passing the new tax reform is to increase government revenues but the DOF wants to do it in a way that is fair, efficient, and easier to collect taxes,” she noted.

TRAIN, she said, will also fix “bracket creep” in PIT as well as resolve issues on overtaxing wage income earners.

“In terms of PIT, the proposed tax reform package will cure bracket creep in the present system. The income tax brackets have been there for the longest time and have never been adjusted. It was in 1997 when the PIT, which we are using now, has been passed into law. It imposes 30 percent tax rate to those earning R500,000. This still applies to this day. The 30 percent tax rate is still being imposed on those earning R500,000 per year even if the value of R500,000 today has decreased compared to the same amount in 1997. Also, compared to other countries, our workers and households are more heavily taxed,” Manasan said.

Admittedly, she said, the proposed increase in excise tax on petroleum will have a domino effect on the prices of commodities and other services, Manasan stressed.

“Petroleum is an input in almost everything. In case of a fuel hike, there will be an increase in the cost of fares, electricity, and other products down the line,” Manasan said, adding that “both rich and poor will get affected” albeit, in different degrees.

In the case of the middle class and the rich, the higher taxes on the goods and services they consume due to the proposed increase in the excise tax on petroleum products and the expansion in the coverage of the value added tax under the TRAIN, will be mitigated by the reduction in the PIT, explained Manasan.

In contrast, poor families will not benefit from the reduction of the PIT because they are not paying any personal income tax even under the present system as their incomes are below the taxable threshold. But they are also bound to be adversely affected due to the proposed increase in the excise tax on petroleum products and expansion of the coverage of the VAT, she added.

However, a good feature of the DOF’s tax reform proposal, according to Manasan, is the highly targeted cash transfers that will be distributed to the poorest 40 percent-50 percent of all families in the country to address the abovementioned problem.

“Specifically, 40 percent of the increment on excise tax from petroleum will be used for targeted cash transfers. Target beneficiaries will be identified utilizing the National Household Targeting System of the DSWD, the same tool used by the Pantawid Pamilyang Pilipino Program (4Ps). But, both Congress and Senate have yet to decide whether to provide the targeted unconditional cash transfer for three years (per Senate Bill 1408) or one year only (House Bill 5636). My own recommendation is three years to give time for the transfer to have some impact on growth and benefit the poor,” Manasan said. (BCM)