‘A comprehensive tax reform to fund inclusive growth is in sight’

A major tax reform program to finance and sustain the country’s development program is due to be submitted for enactment by Congress this month.

Secretary of Finance Sonny Dominguez has given hints of its content in previous pronouncements. There is much work going on right now to flesh out its major contents.

Rationale of the tax reform. There are many reasons why the government needs to undertake tax reform: (1) to sustain the economic growth target, in this case, at seven percent per year; (2) to provide finance for public investment as an economic driver for growth from the current 20 percent of GDP (which is low) to at least 30 percent of GDP; (3) to accelerate investments in infrastructure; and (4) to enable the financing of various programs that raise the quality and capacity of the country’s human resources through training, education, health, and social protection.

The proposed tax reform builds upon many tax bills that have been put forward in Congress. While legislators want to raise the quality and volume of spending, often, they are less enthusiastic about raising taxes. For this reason, there is more resistance to tax reform proposals.

Unless a government administration stakes its political capital to pass tax measures, it is often difficult to make headway. This time, however, a serious and well-coordinated tax reform package is to be proposed.

The objective is to achieve “a simpler, fairer, and more efficient tax system characterized by low rates and a broad base that promotes investment, job creation and poverty reduction.”

Political economy.  The Duterte administration is submitting a comprehensive tax reform program shortly after taking over the helm to ensure it can finance its program of government.

The Duterte administration began its term of office with speedy action on the priorities of government, the war against illegal drugs. By and large, widespread approval of the outcomes of the war so far has given it further popularity.

It is exuding in confidence, given its electoral mandate is overwhelming. This might not appear on the surface. Rodrigo Duterte, like many Philippine presidents of late, is a “minority” president in that he won only by a plurality of votes. The total votes for him of 16.6 million constitute only 39 percent of the total 42.6 million votes cast for all candidates for president. (In Philippine presidential elections, there is no run-off among the top two candidates to obtain a decisive majority of all votes cast.)

Even so, his margin of victory over the second highest vote-getter (Mar Roxas) was by 6.6 million votes. When taken as a percentage of all the votes cast for president in the 2016 election, such difference is equivalent to 15 percent, a very substantial margin in his favor!

Taken in this light, his victory in the election was a landslide. This “landslide” victory propelled him to secure control over both the House and the Senate by virtue of the coalition of most of the legislators to align with the winning president.

Thus, as long as he remains in full control of the government machinery, he could rely on a strong legislative support for his program. According to recent polls, the Duterte government in its early months in office enjoys a trust rating of 90 percent of those surveyed. This gives the government a big mandate for reforms.

Based on the political landscape just described, the likelihood of passage of the tax reform program is high. Of course, the specific provisions on the final outcome will pass through legislative scrutiny and will likely be subject to some amendments. Maintaining the major thrust of the reform objectives is, therefore, the main test of ultimate success.

There is a high level of support for the president insofar as the drug war is concerned. The funding urgencies that are made manifest by the requirements of the drug war will be an impetus for support of the tax reform proposals.

Moreover, the demands of the development program, especially those related to the improvement of infrastructure spending would further justify the tax reform program.

Finally, many of the tax issues currently included in the tax reform proposals have been the subject of previous efforts for adoption. They are likely much easier and quicker to pass as long as there is a constant push being exerted from the president.

Components of the tax reform package. Without elaborating, there are five separate tax reform packages that compose this program of tax reform.

The first tax package deals with personal income taxation and taxes that affect personal consumption. This package outlines the reduction in personal income taxes but involves an increase in consumption taxes.

The second tax package covers the corporate income tax and the rationalization of fiscal incentives system affecting the corporate business.

The third package covers property taxation. The main idea in this tax reform package is to reduce the rate of donors and estate taxes while enabling a better system of property tax valuation to raise local government revenues.

The fourth tax package aims at harmonization of the tax on capital and the tax on investment instruments.

Finally, a fifth tax package is essentially on the taxation of luxury spending. This will tax the consumption of the very rich.

In conjunction with the tax reform program, there is a corresponding administrative reform program designed to improve the collection efficiency of the revenue agencies – the Bureau of Internal Revenue and the Bureau of Customs.

The overall gains in tax effort that such reforms hope are expected to bring in an additional three percent of GDP. In terms of actual revenues, by the year 2019, this will mean around P600 billion of new revenues.

Two-thirds of these revenues (P400 billion) will come from the tax reform program, while the rest (P200 billion) from the administrative reforms.

The gains from these economic tax and administrative reform measures will enable the government to address the 10-point economic program that is at the center of its agenda for change.

(To be continued)

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