Palace softens stand vs tweaking of tax regime

By Butch Fernandez & David Cagahastian

Malacañang has softened its stand on the proposals to alter the country’s income-tax regime, apparently giving in to mounting lobbying for a “holistic reform” that will include viable options for filling the resulting revenue gap.

Palace Spokesman Edwin Lacierda on Monday referred to Finance Secretary Cesar V. Purisima a request for a reaction to the latest group to weigh in on the issue—the Tax Management Association of the Philippines (TMAP). The group backed proposals to cut individual and corporate income-tax rates tagged among the highest in the region.

Purisima replied: “We are open to a holistic reform, which will include an adjustment of the rates and brackets—doing otherwise is not the fiscally responsible way since it can hurt our people [in the] long run if we go down the slippery slope of populist policies.”

It was the first time in days that the Executive branch explicitly cited the proposals to cut the tax rates and/or adjust to inflation—as suggested by Sen. Juan Edgardo Angara—the brackets comprising the taxable incomes, with the Palace holding out the hope these will be included in holistic reforms.

TMAP proposal

None of those backing the proposals to reduce the tax rates had disputed the Executive branch’s insistence on a holistic reform, but the bone of contention had always been on what measures to pass alongside the tax-rate reduction in order to ensure there will be no huge revenue hole that can erode the administration’s gains in setting its fiscal house in order.

The TMAP had appealed to President Aquino to reconsider his opposition to the proposed amendments to the income-tax brackets to equitably distribute the tax burden.

TMAP President Terence Conrad Bello said lowering the tax rates and adjusting the tax brackets to arrive at a progressive tax regime would not necessarily mean that the government’s budget deficit would increase.

Bello pointed out that the low budget deficit of the government is not due to higher tax collection, but due to the state’s underspending.

Leave the spending to the people

In 2014 the government incurred a low budget deficit of P73.1 billion, admittedly due to underspending that year, which led to an economic slowdown. The budget deficit was only 0.6 percent of the gross domestic product (GDP), which indicated that there was still room for more spending, since the target budget deficit is up to a maximum of 2 percent of GDP.

“The real issue, according to economists, is the government’s perennial underspending. The lower deficit is not due to increased collection efficiency, but is due to underspending, which is ill-timed for a country desperately trying to generate jobs, build world-class infrastructure and improve the day-to-day lives of its people, the majority of which is mired in poverty,” Bello said in a statement.

“Lower income taxes increase disposable income by transferring money from the government’s hands back to the consumption budget of Filipino families, who will likely spend more on goods and services. This additional spending, in turn, fuels the economy and attracts more taxes,” he added.

Bello noted that the Department of Finance (DOF) had admitted in congressional hearings that for every P1 in additional revenue, the government will have to spend it for consumption of goods and services. “So if the government will underspend anyway, why not take the opportunity to leave the spending to Filipino families?”

The TMAP had earlier supported bills in Congress that will revise the income-tax brackets to arrive at a progressive tax regime that will equitably distribute the tax burden and do away with the current tax regime, which puts the brunt of the burden on the working class.

Income brackets

Under the current tax regime, working-class citizens, who have income of at least P500,000 per year in taxable income, are already taxed at the highest rate of 32 percent, which puts them in the same situation as high-income individuals, who have taxable income running to the millions.

The TMAP proposal is to impose the highest tax bracket on individual taxpayers that have more than P2.5 million in taxable income per year at a tax rate of 30 percent.

Those earning over P1 million but not over P2.5 million a year will be imposed a tax rate of 25 percent, while those earning over P500,000 but not over P1 million a year will be imposed a tax rate of 20 percent.

Those earning over P300,000 but not over P500,000 per year are proposed to be taxed at 10 percent, while those earning not over P300,000 a year in net taxable income will be exempt from income tax.

Lobbying for tax cut

Before TMAP’s statement endorsing the tax-rate cuts, the measure being championed by the Ways and Means panels in both chambers of Congress had gotten the support of the Joint Foreign Chambers of the Philippines (JFC), worker groups and professional sectors. Supporters also included the resident representative of the International Monetary Fund (IMF) in the Philippines, who acknowledged the tax rates were indeed very high, but joined Purisima’s warning that any reduction must be part of a “holistic reform.”

Being pushed by the IMF as a compensatory measure is a strategy to “make more people pay taxes,” noting the country’s still mediocre collection from other sectors, putting bulk of the burden on the salaried class.

President Aquino sent out mixed signals on the matter, having been quoted by Rep. Romero S. Quimbo of the Second District of Marikina as being open to the tax-rate reduction, but telling a media roundtable he was not supportive of it because he was not persuaded about the wisdom of the compensatory measures, including a hike in value-added taxes and the excise tax on petroleum products.

The TMAP argument for the adjustment in tax brackets set in 1997 was also pointed out by Senate President Pro Tempore Ralph Recto, who said the estimated revenue gap arising from the tax rate-cut measure, or P30 billion, pales in comparison to the hundreds of billions in government underspending the past three years.

Angara, the current Ways and Means Committee chairman, had earlier said he is prodding the economic managers to accept, at the very least, his counterproposal to adjust to inflation the taxable income brackets.

Angara noted that unless adjusted, it perpetuates a very inequitable setup, whereby a lower middle-class worker, whose annual income reaches P500,000, already gets levied the highest tax rate of 32 percent, putting him/her on the same footing as billionaires.

The TMAP urged the DOF to avoid viewing the tax reforms in the narrow prism of tax cuts “that will only undermine the tax take of the government.”

Echoing Recto, it said the DOF projection of P30 billion in forgone revenue from the tax-rate cuts is “very minimal from a budgetary standpoint,” or a mere 1 percent of the proposed 2016 national budget of P3.002 trillion. And yet, added TMAP, such rate cuts will significantly “affect and uplift the lives of millions of salaried workers and their families.”



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