Can the Duterte administration succeed with its tax-reform package called Tax Reform for Acceleration and Inclusion (TRAIN) if it cannot move fast enough on its tracks amid mounting dilemmas and opposition to railroad it?
Is the TRAIN now on the right track? How fast this TRAIN can figuratively build up steam and momentum will depend on how the government’s financial engineers and supporters in Congress can explain it convincingly with full transparency, modify it to accommodate improvements and get it enacted the soonest.
Its early passage is crucial, as it will finance 80 percent of Dutertenomics, which is bandied around as the “Golden Age of Infrastructure”, with the 20-percent balance to be covered by foreign loans, which still have to be paid over the long-term from tax revenues.
Dutertenomics pushes for massive infrastructures anchored on TRAIN, which calls for cuts on personal-income tax and higher consumptive taxes (i.e., higher taxes on oil and cars, a tax on sugar-laced products, and a broader value-added tax [VAT] base).
Sleight of hand taxes vs poor?
The government considers its income-tax reforms inclusive and progressive, but critics from both extremes of the ideological divide argue otherwise. University of the Philippines Prof. Eduardo C. Tadem, PhD, president of the Freedom from Debt Coalition, argues the tax exemptions on earners of P250,000 per year and below is welcome, which translates to a tax relief of about P200 billion, but the higher excise taxes on fuel and cars and new taxes on sugar products will generate P500 billion, thus, offsetting the P200-billion relief for the poor by a net revenue gain of P300 billion. Tadem hints of deception, as what is granted in bigger tax exemptions is taken back much more in consumption taxes, which are considered regressive, as the majority, particularly the poor, consume more and, therefore, bear the bulk of higher consumptive taxes. It may therefore be considered as a form of sleight-of-hand taxation system.
Moreover, he says that although the bigger tax exemptions for low wage-earners is welcome, it comes with a caveat, as it really does not hold true for many of the unemployed, who do not pay income taxes to begin with. He concludes that tax reforms are prorich and antipoor, and even made a pun why the TRAIN will derail its objectives.
Or too propoor and antirich?
Bienvenido Oplas Jr., head of Minimal Government Thinkers and a free-market apologist, argues on the contrary, saying TRAIN is more propoor and antirich, as it aims to increase the income-tax rate of the rich from 32 percent to 35 percent.
An apologist of the rich, Oplas calls the idea of penalizing the rich the “politics of envy”, as society seems envious of the rich for being successful. He says the “philosophy of demonizing and overtaxing the rich and subsidizing the poor forever is wrong, as it creates moral hazards”.
Oplas claims there is no incentive to be rich, but there are incentives to be poor, like free taxes, free health, free education, free cash transfer, free housing, etc., thus, many aspire to be poor. He suggests instead to reduce the income tax of the rich to 20 percent, comparable to Singapore’s 22 percent, and reward millionaires for their entrepreneurship and hard work. Oplas’s argument may be flawed, because getting rich by itself is incentive enough, regardless of the costs and taxes.
Are lower or higher income taxes better? Economists can put government decision makers in deeper dilemmas, owing to their ambidextrous advice of saying something sensible on one hand but positing equally convincing opposing arguments on the other. The Laffer Curve theory, for instance, named after supply-side economist Arthur Laffer, argues that while lowering tax rates may logically and initially reduce revenues, on the contrary, revenues increase over the long-run, as more tend to pay their taxes at lower rates.
But Nordic countries like Sweden, Denmark, Finland and Norway tax their people so much, with tax-to-GDP ratios hitting 43 percent to 50 percent, coming both from high income taxes and consumption taxes, and still considered among the richest and happiest people. Denmark alone, despite being taxed the most at 50.8 percent, ranks No. 1 in life satisfaction. Compared to the US, its household per capita income is only 60 percent of the US’s energy use per capita, two-thirds; carbon emissions, less than half, etc. The Philippines’s tax-to-GDP ratio is as low as 14.4 percent, which means a lot of catching up to Nordic levels. However, how come Singapore is even lower at 14.2 percent, and is still among the richest because of higher productivity?
Key is transferring taxes to benefits?
IT appears whether we slap progressive taxes (i.e, higher taxes for higher incomes) or more regressive consumption taxes affecting the poor (i.e., excise tax and VAT), what is important, as Singapore and Nordic countries have shown, is they are spent seriously on “progressive” infrastructures like power, water and transport systems, and on health care and education.
Locally, however, we fail dismally due to an inefficient bureaucracy, not to mention corruption. Thus, Prof. Winnie Monsod, who has no objections to higher consumption taxes, worries that without effective “transfer” programs, the whole tax reform will screw the poor people.
Indeed, screws need tightening as tax distortions abound, like dirty coal imports are slapped 0.2 percent, while cleaner natural gas is taxed 43 percent, ex-Neda chief Cielito Habito says.
Moreover, TRAIN wants to reduce estate or inheritance tax to as low as 6 percent from the current 20-percent maximum for assets P10 million up, way below Japan’s 70 percent, which encourages rich heirs to keep on working creatively and not rely on inheritance that could be wiped out in succeeding generations.
How the TRAIN will move depends on our LOCOMOTIVE engineers. I just hope they do not have the MOTIVE to go LOCO.