The Tax Reform and Inclusive (TRAIN) law is the centerpiece of the Duterte administration’s fiscal program. The only part of that law’s name that is true is the word “tax”; it is a tax measure. But the rest of it is not true; TRAIN is neither reformist nor inclusive.
The ideal tax system is one that is fair. To fulfill this criterion, a tax system must be based on capacity to pay, with individuals receiving high incomes made subject to higher income-tax rates than individuals receiving low incomes. This kind of tax system is termed progressive because the government’s tax revenue progresses upward as individuals’ incomes progress upward. A tax system is fair if it derives more revenue from an individual who earns P2,000,000 during the same time frame.
A tax system must be not only fair; it must also be sound. Contributing support to government operations is one of the principal duties of a citizen, and fulfilling his tax obligation honestly is the best way that a citizen can support the government of his country. Since a government’s financial needs are forever growing, its fiscal authorities have to constantly look for schemes and strategies that have the potential for increasing the government’s take in a fair and sound manner.
Reconfiguring the schedule of income tax rates to introduce greater fairness while enhancing collection prospects is the strategy that is usually chosen by fiscal authorities that are oriented towards reform. While concern for fairness towards taxpayers is an abiding concern, maximum tax collection—economists call this a country’s tax effort—is always the principal objective.
Allowing deserving citizens to legally pay less taxes is therefore, a part of the typical tax reform agenda; freeing them from the obligation to pay taxes is not, given their government’s need to obtain financing for an ever-expanding economic-social spending program. Foregoing tax revenue is not an option.
Yes, that—foregoing revenue—is what TRAIN has done. In what appears to have been an attempt to make its excise-taxes component acceptable, TRAIN has exempted individuals earning annually P250,000 or less from having to file income tax returns. Why should the DOF (Department of Finance) want to forego revenue when the professed aim of TRAIN is to raise revenue sufficient to finance the Duterte administration’s P8.757 billion, 75-major-projects Build Build Build infrastructure program? The inescapable conclusion is that DOF intends the program to be financed by the proceeds of the slew of excise-tax measures imposed by TRAIN.
Regressive taxes are the opposite of progressive taxes, and excise taxes are regressive taxes of the worst kind. Since it will be financed by excise taxes, Build Build Build will in effect be financed not by Filipinos with high incomes but by Filipinos with low incomes.
Today’s developed countries—the North American and European countries as well as the non-communist countries of the Asia-Pacific region—achieved their First World status on the basis of efficient income tax-based fiscal structures. They didn’t get there through tax systems based on taxes weighted heavily against the poor. Excise taxes, like all regressive taxes, are blind: they cannot differentiate between wealth and poverty. Thus, for the same food item, Henry Sy pays as much as Juan de la Cruz. At this rate, the poor will be further excluded from prosperity.
The Philippines has a tax effort ratio of around 14 percent, i.e., the ratio of total tax revenue to GDP (gross domestic product). This compares badly with the tax efforts of Singapore and Thailand. And the tax efforts of those countries—and of the Western countries—have not been based on excise taxes.
Sadly, the policy decision to exempt from income tax individuals earning annually P250,000 or less amounts to an admission by DOF that in this country collecting income taxes is a near-impossibility.
TRAIN should be changed to TNAEX for Tax Non-Reform and Exclusion.