The slew of tax reforms that the Department of Finance (DOF) is submitting to the Congress for its approval is the linchpin of a broader reform package envisioned by the new government to attack generational poverty, restore peace and order, curb armed insurgencies and transform the Philippines into a high middle-income state by the end of the Duterte presidency.
Finance Secretary Carlos Dominguez III said the two benchmarks to make these year-2022 goals achievable are to 1) sustain annual economic growth at 7 percent, and 2) prevent law enforcement from becoming so weak and the judicial system so corrupt as to nourish a criminal oligarchy that keeps most Filipinos mired in poverty.
Once attained, he said, these objectives would clear the way for the Philippines to become a high-income country in one generation.
Tax reform, he said, is crucial to this task of reconfiguring the Philippine economy to attain inclusive growth because the Duterte administration needs to enhance access to opportunities for all, reduce the disparities among regions, and gird up our youths for dynamic economic roles via superior educational and healthcare systems.
“The tax reform package” that the DOF would be submitting to the Congress “may be described as the linchpin of the broader reform package envisioned by the Duterte administration,” Dominguez said in his keynote speech before the Rotary Club of Manila.
Without tax reforms, the broader strategic goals of the Duterte administration would be compromised, Dominguez said.
“This is not a pipe dream. The medium- and long-term goals are eminently achievable. There is one benchmark we need to consistently attain year after year: this is to keep growth at 7% for the next generation,” Dominguez told the Rotarians during their luncheon meeting at the Manila Polo Club in Makati City.
Said Dominguez: “Such a sustained growth performance cannot be achieved if our economic performance is exclusive: enriching only a few and impoverishing the many. Nothing can be achieved if the nation slides into the cauldron of drug addiction and narco-politics. The nation cannot be at its best if law enforcement is weak and the judicial system is corrupted. Such conditions will only nourish a criminal oligarchy that keeps the majority mired in poverty.”
Dominguez said the government plans to massively increase investments in infrastructure, human capital and social protection to achieve inclusive growth, which would require robust revenue inflows.
“Without reforming our tax system so that it becomes fairer, simpler and more efficient, government cannot undertake the volume of spending required in achieving our goals” of reducing poverty from 26% to 17% in six years and elevating the Philippines to the status of a high-income country in one generation, he said.
Dominguez said the DOF will submit to the Congress its first package of tax reforms that aims to restructure the personal income tax rate; expand the value-added tax (VAT) base by reducing the coverage of its exemptions; adjust the excise taxes imposed on petroleum and automobiles; and, impose a new excise tax on sugar-sweetened beverages as a public health measure.
“Taxes are never popular. We are emerging from a history of chronically low tax efforts and damaged institutions. This history of weak and inefficient governance is a more significant factor than colonialism in explaining our underdevelopment,” he said.
Dominguez added: “Today, we have a leadership with enough political will to alter the historical patterns and finally deliver to our people the satisfaction of modern nationhood.”
Reducing the personal income tax rate from 32 percent to 25 percent would be done over a two-year period benefiting most taxpayers except the “ultra-rich,” who are defined as individuals earning P5 million or more annually, Dominguez said.
The reduction aims to align the country’s income tax rate with the rest of the Southeast Asian region.
To simplify the filing of taxes, the DOF will also reduce income tax brackets, he added.
Dominguez said wage workers are the ultimate beneficiaries of the proposed simplified tax system and reduced personal income tax rate because these would result in higher disposable incomes, which will, in turn, help rev up the economy.
To offset the revenue losses from the lowering of the personal income tax rate, Dominguez said the DOF is proposing an increase in the excise taxes on fossil fuels, which will have a marginal impact on fuel costs as the government expects the current low price regime for petroleum products to continue.
He made it clear that the increased tax on petroleum products would not lead to a regressive tax system because economic studies show that per capita consumption of fuel hew closely to income levels. Individuals who consume these products the most are in the uppermost income tax brackets.
“It is regressive to subsidize petroleum; but it is eminently progressive to tax consumption of the product,” Dominguez said.
He added: “To cushion the impact of the tax adjustment, we will be funding direct subsidies for the vulnerable sectors that will be affected by higher fuel prices.”
In the same way that sin taxes were implemented to safeguard public health, the DOF is seeking to impose an excise tax on sugar-sweetened beverages, which would be a uniform rate of P10 per liter regardless of whether it is in liquid or powdered form, Dominguez said.
These would cover soft drinks, soda pop, energy drinks and sweetened teas and coffees.
“When all these reform measures are undertaken, we expect a net revenue gain that will help finance inclusive growth,” Dominguez said.
