Assessing TRAIN

The first package of the comprehensive tax reform, also known as TRAIN (Tax Reform for Acceleration and Inclusion), was the most significant yet very controversial piece of legislation in 2017.

Those who oppose TRAIN label it as pro-rich and anti-poor. Thus is the position of diverse Left-oriented groups like the Ibon Foundation, Bayan, and Freedom from Debt Coalition. And it is the same view articulated by liberals like Florin Hilbay. What is evident though is that those who are fully opposed to the Rodrigo Duterte administration do not spare TRAIN from harsh criticism either.

But as Vice-President Leni Robredo once said in an interview with Rogue (Special Collectors’ Issue, July 2017), the proper opposition is “one that doesn’t oppose for the sake of opposing.” Incidentally, the Vice-President is supportive of the Department of Finance’s version of TRAIN, which she says, “even if it isn’t perfect, it’s for the greater good.”

Thus, we ask: Is Ibon Foundation’s or Hilbay’s assertion that TRAIN is anti-poor an apt description?

Like the Vice-President, we at Action for Economic Reforms (AER) have taken a more nuanced position on TRAIN. That is to say, we see its imperfection but we likewise recognize the gains from it.

To say that it is anti-poor and pro-rich is an over-simplification. Those who dismiss TRAIN as such, without a deeper explanation and a reasonable justification, are ideologically driven, are opposing for the sake of opposing, are misinformed, or are not equipped with the analytical tools to dissect TRAIN.

Here thus is an attempt to have a sober if not unprejudiced assessment of TRAIN.

The legislated TRAIN yields significant revenue, amounting to an additional P90 billion in the first year. This is nothing to sneeze at, considering that the first package of TRAIN includes income tax relief, which will result in revenue loss. TRAIN will provide sustainable revenues to finance AmBisyon 2040, whose goals are to make the Philippines a high middle-income country, eradicate poverty, and create a stable middle class, in a period of one generation.

Furthermore, the increase in tax effort arising from TRAIN strengthens the macroeconomic fundamentals, necessary for sustained growth and employment. In fact, Fitch Ratings, Inc., anticipated TRAIN’s passage and upgraded the country’s credit rating from BBB- to BBB (investment grade) in early December 2017. In this sense, by creating jobs through new and increased investments, TRAIN is helping the poor.

TRAIN also gives significant income tax relief to the working classes and the middle class as well as sections of the rich. However, the richest earning a monthly compensation of P666,667 and (or P8 million and above annually) will have to pay a higher marginal tax rate of 35% (compared to 32% before). To give an example, the overwhelming majority of those employed in the business process outsourcing (BPO) industry — or those receiving a monthly salary of P20,833 and below — will no longer have to pay income tax.

But what about the poor? They have not been paying income taxes. Won’t they be hurt by TRAIN because of the increase in the excise taxes on consumption, particularly fuel?

Let’s explain the fuel tax issue, and it can be a bit complicated. Fuel taxes have not been adjusted to inflation since 1997. Thus, in real terms, excise taxes from fuel have been declining. Worse, under the Gloria Arroyo administration, the excise tax on diesel was even removed. It is but reasonable to keep the fuel tax rates in tune with inflation. This is no different from increasing wages and salaries to at least adjust to inflation or having income tax levels re-bracketed and lowered to prevent inflation creep.

The fact is, fuel is mainly consumed by the well off, not the poor. Scrutinize the data from the Family Income and Expenditure Survey (FIES). The households that constitute the richest 10% of the population consume 3.7% of their consumption spending for fuel. In contrast, the poor’s fuel consumption is equivalent to 1.1% of their total household expenditure. The richest 10% accounts for 51% of total fuel consumption. Some economists have thus argued that the fuel tax is “moderately progressive.”

Yet, it cannot be denied that the consumption taxes will increase prices, thus affecting the poor. The effective response is that government will provide unconditional cash transfers to those households from the first to seventh deciles that will not gain from the income tax relief but will be affected by the consumption taxes. The amount of transfer for the household beneficiary — P2,400 in the first year and P3,600 in the second and third years — more than offset the higher spending resulting from the higher consumption taxes.

Further, the independent Bangko Sentral ng Pilipinas and economists from various quarters project that the inflation growth that can be attributed to the new taxes will be low. Inflation rate for 2018 can peak at below five percent, which is quite tolerable.

To be sure, TRAIN is a product of compromise. The outcome would have been bad, if the President did not veto several items, including perks for economic zones and free ports.

TRAIN has removed 56 lines of exemption from the value-added tax (VAT), another significant reform towards improving efficiency and tax administration. But note that from before, the Philippine tax regime had 143 lines of VAT exemption from the tax code and special laws, with some overlap). From an equity perspective, only the essential goods and services consumed or used by the poor are justifiably exempted. TRAIN’s package 1 has failed to remove the exemption for some vested interests like the housing sector, but the compromise of having a threshold level for exemption is acceptable.

Vested interests are still protected in aviation fuel, luxury cars that enjoy a lower effective tax rate than the lower-end automobiles, dividends (the 10% rate being retained), among other items. The rich people benefit from these types of protection.

The excise tax on sugar-sweetened sweetened beverages is welcome for health reasons, but the law fails to earmark the revenue for health programs, particularly to finance nutrition programs. The absence of that can aggravate malnutrition in the country, given that it is a bigger problem than obesity.

The new excise tax on tobacco for the medium term will not address a significant reduction of smoking prevalence. Neither will it yield adequate revenue for the forthcoming expansion and strengthening of the universal health coverage (UHC) program. Nevertheless, at least for the first year, the increase of P2.50 in the tax rate for the first semester and another increase of P2.50 in the second semester can deter new smokers from acquiring the habit. In that sense, it is a gain for health, but it remains urgent to press for further increases in 2019 and beyond.

Thus, we cannot oversimplify our description to assess TRAIN. Gains have been secured, but serious problems remain and still have to be addressed through continuing advocacy.

From a long-run perspective, TRAIN will be good for the country, for AmBisyon 2040. Even those strongly opposing Duterte should be thankful for TRAIN’s passage.

The post-Duterte administration, hopefully one that is truly progressive and democratic, will benefit from TRAIN. At least, the post-Duterte reformers will no longer worry about having such a hard economic reform passed and thus can focus on rebuilding political institutions.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph