A crucial part of governance, normally overlooked, is the tax system. “Overlooked” because it’s narrowly viewed merely as a revenue-generating machine. So long as the government is getting money, then the tax system is generally left alone.
Which is wrong: the tax system, like the budget or any part of our governmental architecture, plays a significant role in defining our society.
The tax reform package currently being pushed by the government (i.e., TRAIN or Tax Reform for Acceleration and Inclusion) represents a great opportunity to layout, craft, and implement a vision of what Philippine society could be.
For the moment, unfortunately, that vision is reactively fixated mostly on poverty alleviation, income redistribution, entitlements, and quick fixes towards fattening the national coffers.
The package makes much of the fact that those earning not more than P250,000 and below (along with the 13th month pay, assuming such does not exceed P82,000) are exempted from paying income taxes.
The government says this will hopefully put more money in the pockets of our poorer citizens, while at the same time simplifying the tax administration/collection process.
But this inadvertently led to certain problems, amongst which is conflicting consequences.
Much has been said of progressive taxation and the need for the rich to shoulder more. But the rich has always been shouldering the bulk of taxes collected.
The plan calls for the greater many to pay a maximum of 25% income tax, with the “ultra-rich” levied a 35% rate.
Meanwhile, increased oil and car taxes (again designed to hit the rich more) will fund the additional CCT (for the poorest 25%) of P300/month doled-out, with the “50th-75th percentile” given “public transport subsidies.”
But look at it this way, even assuming the entire wealth of the 50 richest Filipinos (said to equal 24% of the 2016 GDP) is taxed 100%, what’s collected is still just a little over half (P3.7 trillion) of the current national debt (P6.4 trillion). The national debt is actually equal to nearly half of our 2016 GDP (P15.250 trillion).
The point is: no amount of tax reform can completely help in terms of putting government finances aright if the spending side is not addressed.
Government should simply spend less by cutting welfare and entitlement costs.
The problem with being unable to manage government debt and deficit is that it leads to inflation. Right now, our October inflation rate year on year is said to be 3.6%, representing one of the fastest increases in almost three years. Blame is deflected to oil and transport costs, along with a weakening peso.
Regardless, high inflation represents higher consumer prices (along with higher loan interest rates), thus offsetting the benefits income tax reductions may bring.
Inflation could have been counteracted by the increase in wages, arising from the creation of more jobs and investments.
But this is rendered unlikely due to the high taxes imposed on the wealthy (which normally creates the jobs) and the difficulty in starting and doing business, which hinders the middle class from generating their own income (see 2018 World Bank-IFC Doing Business Report, as well as US Millennium Challenge Corp. corruption and rule of law scorecard).
Ironically, while the proposed tax structure may not necessarily encourage the creation of new wealth, a self-entitlement provision was put in place for the old rich to hold on to theirs: estate and donor’s taxes have been reduced so that both are now charged at 6% (from the previous 20% for estate taxes and 15% for donor’s).
If indeed, the bulk of the nation’s wealth is with the top 20% of our society, how this helps the poor is a mystery.
Like the CCT, it just ensures the transfer of wealth from those who worked hard for it to those who had nothing to do with its development and acquisition. If the problem were loopholes, then why not fix them rather than allowing exclusive transfer within the elite families?
Which leads, finally, to the fact that the proposed tax law is noticeably bereft of any benefit for married couples or families with children.
The explanation given was the zero taxes on the first P250,000 (along with the simplification of the system). But that’s neither here nor there. Incentives or tax benefits could still have been placed in it.
For something recognized as the greatest welfare, education, and health institution ever in history, for the Philippines to not put marriage, family, and children pride of place shows how little value we give to them.
As it stands, no difference — taxwise — is made between single, live-in arrangements, or separated individuals, and a wedded couple or traditional family.
Between getting married or building a family vis-a-vis being poor, it would seem that the latter is given greater value.
This is unfortunate for our society.
And supremely ironic because it’s long been proven that one of the best ways to economically develop countries is to encourage healthy marriages and families.
Jemy Gatdula is a Senior Fellow of the Philippine Council for Foreign Relations and a Philippine Judicial Academy law lecturer for constitutional philosophy and jurisprudence.
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