Tax reform for a higher level of economic development

I take up a topic of great importance and immediacy and will postpone the articulation of the Filipino dream as I had planned to make last week for a later time.

The Senate version needs to improve. The Philippine Senate is finalizing the passage of the tax reform bill that has been before it for some time now. The tax reform program is designed to improve the government’s capacity to raise fiscal revenues and to correct certain weaknesses and inequities in the current tax system.

Based on its early deliberations and decisions, the Senate appears to come up with a version that produces a weaker yield in terms of revenues.

The tax reform is intended to boost the government’s capacity to finance the nation’s public investment needs to improve the much needed lack in infrastructure facilities. In addition, it aims to sustain targeted social protection programs that help the very poor.

In essence, the reform program is intended to fund high priority development programs. Most directly, those programs will move the country to the next stage of higher economic development.

The legislation process is still on course. There are, therefore, opportunities to raise the revenue goals by adjusting earlier decisions.

As things stand, the Senate favors a lower rate of tax on fuel and falls short of the House recommendations. The downward revision in revenue goals weakens the ability to support higher investment levels.

As a result, the revenue gains from the House version of P70 billion falls to P40 billion under the Senate bill. This clearly means a net reduction of P30 billion in revenues.

Energy taxes are often used to benefit energy users. Thus, such revenue loss could be assessed in terms of transport infrastructure facilities that cannot be built. The inadequacy of roads and port facilities produces great economic inefficiencies. Relief can come only if more of those facilities are built to alleviate the high cost of production and the loss of time and effort spent in slow-moving transport.

The value added tax (VAT) should also be made to produce better revenues. For the Philippine 12 percent VAT, the efficiency of the tax in producing revenues is only at 35 percent compared to 60 percent for both Thailand and Vietnam. The efficiency of the Philippine VAT needs to rise from 35 percent to 50 percent in order to attain a revenue yield of 6.1 percent of GDP.

In order to make the VAT more efficient in producing revenues, the finance department has recommended that 70 exemptions be removed. The Senate version has removed only 37 of the exemptions. The total potential for revenue if the 70 exemptions are removed is up to P61 billion.

The ultimate tax reform package. Getting the Senate to upgrade its version of the tax reform legislation is essential in coming up with an improved final tax reform package.

Indeed, understanding the nature of legislation in a bicameral legislative assembly requires that ultimately a final version of the conference committee will have to be negotiated between the two houses.

It is most desirable that the Senate and House versions are close to each other in provisions so that, in settling the text of the final bill for signing into law, there is less need for compromise or horse-trading.

Toward a higher level of economic development. The country is currently within the ranks of middle income developing nations. But for the last four decades, it has been stuck at the “low-end of being middle income.”

Some countries in South East Asia with which the country had started the journey of economic development have now moved up to the middle-group of this middle income group of countries. Some are even pushing toward the higher reaches.

It is in our interest to accelerate the country’s efforts to move up and catch up. Undertaking the tax reform package as presented is an essential part of that catch-up effort.

Failure of the country to achieve its full targets could mean ending up struggling in the lower reaches of any possibility of catch-up.

Government revenues need to move up a scale higher in order to back up the investment needs of the nation.

To remain fundamentally sound, such additional resources are needed to fund the investment expenditures. Sufficiency in resource generation will provide the peso funds to counterpart official development and PPP (public-private partnership)-financing of infrastructure projects.

Such leveraging is essential to acquire the capacity to move on with big infrastructure projects as the subway system and other ambitious ones with long gestation periods of construction.

Finally, the Senate must be mindful that large demands for existing new and existing social programs are already creating claims on future revenues that might be raised, such as, among others, the following:

(1) Meeting and upgrading of long neglected improvements in the provision and maintenance of essential public services that have wanted improvement over the years.

(2) Raising the salaries and wages of essential law and order personnel, not to mention the program of upgrading civil service wages.

(3) Financing new programs that are associated with Mindanao, such as the reconstruction of Marawi and the finance of the new Bangsamoro entity.

(4) Providing investments for free irrigation to incentivize farmers to producer more food.

(5) Providing continuing support for social and medical services in the current programs of government, including the sustenance of the CCT (conditional cash transfer) program that is  targeted to serve the very poor.

(6) Providing cover for the risk that the recent increase in SSS (social security system) pensions, if they are not backed up by actuarial increase in pension financing will fall on the Treasury to fund.

(7) Financing the free tuition access to college education among students enrolled in state supported institutions.

All the above have been mandated and they require steadily rising need for government revenues.

All of these, plus the need for higher level of government investment expenditure, must add up so that the budget can fund them without inviting inflation and an unsustainable rise in the fiscal deficit.

My email is: [email protected]. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/