Inflation and tax administration

Dindo Manhit, President of the Stratbase ADR Institute

Imposing new taxes or increasing tax rates has always been the primary means for government to improve revenue collection. Ideally, these revenues, in turn, translate into good public services.

The reality, however, is not that simple. Tax leaks occur due to corruption and irregularities in tax collection, which then greatly deplete the straightforward system of imposing more taxes to improve government revenues through taxation.

The TRAIN Law, which forms part of the Duterte administration’s comprehensive tax reform package, may have already shown its unintended effects in this regard. While exempting from taxation those who earn a maximum of P250,000 from 10 months to a year, such benefits have been offset by the record increases in the prices of basic commodities and petroleum products. As a result, it’s the majority of the population, the poor, who continues to bear the burden.

In this context, it is clear that the problem is not the lack of taxes, but the inefficient tax collection. The solution is to plug the tax leaks, and for the administration to focus its efforts on improving collection efficiency and preventing corruption.

Given the inflationary effects of TRAIN, it is only proper that Malacañang should rethink the idea of pursuing additional tax reform proposals. The cries of ordinary citizens bemoaning the high prices of goods now reverberate in the halls of Congress. With their role in the passage of TRAIN 1, legislators now feel the pressure to ease inflation. Many senators have publicly declared their apprehension about passing TRAIN 2, which seeks to reduce corporate income tax and rationalize fiscal incentives.

A way to improve collection efficiency is an all-out campaign to stop smuggling. Scandals in the Bureau of Customs reveal shocking figures lost to smuggled goods. Plugging these leaks and inefficiencies alone should cancel out the need for more taxes.

A more efficient tax collection regime means the government can invest in other things, such as technologies that could secure the country’s borders against security threats and rampant smuggling activities. The increased security would, in turn, improve customs collection as well as provide deterrence against terrorist threats.

A Pulse Asia survey in June revealed that the most urgent concerns of Filipinos include controlling inflation, improving the pay of workers, creating more jobs, reducing poverty, fighting graft and corruption, and fighting criminality. An earlier survey indicated the same set of national concerns, continuing a trend that started in 2015.

As it enters its third year in office, the Duterte administration needs to heed to these demands and explain how the government plans to address them. Clearly, the most pressing of these concerns is the inflation spike, which has now seen six months of record highs.

The administration needs to revisit its strategy for generating revenues for its flagship government programs such as the “Build, build, build” infrastructure campaign. Policies should be geared toward urgent concerns and through efficient and effective tax collection. Through improved tax administration, revenue generation concerns can be addressed without necessarily exacting more from the people, the majority of whom are burdened enough with the daily struggle to eke out a decent living.

The political gains of the administration in terms of legislation and social reforms may all be for naught should more taxes be imposed. Inflation, the lack of quality jobs, poverty, graft and corruption, and criminality can end up constituting a vicious cycle that more taxes would only exacerbate.

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