Bold tax reforms seen to help economy recover

MANILA, Philippines — The Philippines would have to undertake bold tax reforms, on the rich and on the environment among others, in order to generate revenues that are needed to help the country bounce back from the pandemic, according to Asian Development Bank (ADB).

In a recent blog post, the Manila-based multilateral bank said developing countries in Asia, like the Philippines, need to take urgent actions to address weak government finances due to COVID.

ADB economists Sam Hill, Yothin Jinjarak, Donghyun Park, and Shu Tian said an efficient and equitable tax collection is necessary as economies enter a critical period post-pandemic.

“Tax revenue can be raised in a fair and reasonable way to provide much-needed public services and support the poor and disadvantaged still reeling from the pandemic,” the economists said.

Even the Department of Finance already said the new government would have to jump on a fiscal consolidation where tax rates could be increased and expenditures cut.

This as the Philippines is facing ballooning debt and the incoming administration will surely have a challenging fiscal position.

In the region, tax yields only average at about 17.6 percent of gross domestic product (GDP), well below the average of 24.9 percent.

Even before the pandemic slashed government revenues, many economies already had low levels of tax income with inequitable tax systems, high levels of tax evasion, and weak tax administration.

“Some countries in Asia, particularly in South and Southeast Asia, collect significantly less, resulting in financially constrained governments with inadequate fiscal resources,” the economists said.

As a solution, the regional development bank said imposing a higher tax obligation on the rich can raise more revenues and promote equity.

“Labor market modernization in the region is making it easier for governments to assess individuals’ earnings, which facilitates income tax collection. International cooperation is playing a key role in promoting a fairer and less uncertain system for corporate income taxation,” they said.

An Oxfam analysis showed that the Philippine government can raise as much as $6.3 billion if it taxes two percent on wealth over $5 million, three percent on wealth above $50 million and five percent on wealth beyond $1 billion.

Further, ADB said environment-related and health taxes can both contribute revenue and directly support development.

The economists said that carbon taxes and pricing schemes are growing in popularity, but their effectiveness can be enhanced via strengthened design and implementation, and quality monitoring, reporting, and verification.

However, global efforts to slap taxes on carbon remain small. Many countries, including the Philippines, have yet to ride on the carbon tax.