Is ‘TRAIN’ really for tax reform?

Dindo Manhit, President of the Stratbase ADR Institute for Strategic and International Studies

Through President Duterte’s certification of urgency, the House of Representatives passed on third and final reading what it calls “Tax Reform for Acceleration and Inclusion” (TRAIN). The House mill went on overdrive as the supermajority made sure to pass the ball to the Senate before Congress adjourned.

With the longstanding clamor for tax reform, particularly the lowering of personal income tax (which is among the highest in Asia), moves to restructure it in the 1997 National Internal Revenue Code have slowly gained ground.

Among the lawmakers pushing for the lowering of personal income tax is Marikina Rep. Miro Quimbo, former chair of the House committee on ways and means. Quimbo thinks the existing tax structure burdens working-class taxpayers more than the well-to-do. This is why he has been proposing that tax brackets be indexed to current inflation, which for him would be key to inclusive economic growth.

Another lawmaker engaged in the same campaign is Sen. Sonny Angara, chair of the Senate committee on ways and means.

According to Angara, economists and experts are in agreement on the urgent need to change the tax system, which he deems outdated, excessive and oppressive, especially to ordinary workers. His proposal is to lower income tax rates and to simplify tax brackets.

It is clear that the dominant idea on tax reform is the reduction of personal income tax to ease the burden of the working class.

But looking at the TRAIN, one sees a sudden shift in what tax reform would mean to taxpayers. Yes, there remains an initiative to lower personal income tax, but the bill now

appears to be more of a revenue-generating measure. The Department of Finance presents prospective revenue losses from the lowering of income tax rates, along with providing fixed rates for the estate and donor’s tax, at P140 billion; on the other hand, revenue gains through the VAT base expansion and the petroleum and automobile excise taxes are projected at almost P190 billion. Hence, the government’s net gain from Package 1 is more or less P50 billion. This is without considering the inclusion of another revenue-generating measure in the form of excise tax on sugar-sweetened beverages.

Sen. Ralph Recto was in fact quoted as saying after the TRAIN was approved in the House that the government would be putting P200 billion in one pocket, referring to the revenue-eroding measures, but taking P500 billion from the other pocket in light of the tax increases.

What then is the rationale behind raising a projected P300 billion? The DOF claims that the revenue would essentially fund the Duterte administration’s infrastructure, health and education programs. Doubtless, these are the items on which the government must immediately invest, but the manner of raising the needed funds raises distinct issues.

For one, why is the government bent on imposing new taxes when there are other avenues to fund its programs? The preceding administration’s public-private partnership program was sound, with public infrastructure to be built at no expense to the government. The only reason the PPP did not take off was bureaucratic indecision, not fund availability. What happened between 2016 and 2017 that made the PPP no longer viable? Also, what will the government do with the supposed official development assistance from our new “ally”? This is, of course, another mode where government projects can be funded with little cost.

For another, it is difficult to understand how the poor can benefit from the TRAIN, especially if it is going to cause a marked increase in the prices of fuel and sugar-sweetened beverages. Diesel is the bread and butter of our public transport system, and experience dictates that an increase in its cost will trigger inflation. Meanwhile, soft drinks, energy drinks and packed sweetened juices are the refreshments of ordinary workers who cannot afford 100-percent-natural juices. The government’s numbers and perspective seem to be disconnected to the reality on the ground.

What began as a dream come true for taxpayers may well end up to be our worst nightmare. What is supposed to be tax reform—or a change in how taxes are imposed—may well be just a way to introduce new taxes for our people to bear.

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