Recto urged to pursue progressive taxes

MANILA, Philippines — Newly appointed Finance Secretary Ralph Recto should backpedal from pursuing consumption-based taxes and instead focus on more progressive ones in order to generate revenues amid the country’s limited fiscal space, economists said.

Leonardo Lanzona, economist and professor at the Ateneo de Manila University, said Recto is coming to the Department of Finance (DOF) with the major challenge of dealing with a huge debt that is worsened by high interest rates here and abroad.

Recto will face a record-high government debt of P14.5 trillion, which can go higher as interest rates remain elevated.

“The challenge for the DOF secretary now is how to raise the funds or generate tax revenues to pay for the maturing debts,” Lanzona told The STAR.

“Raising taxes can be an option, but if the taxes are again coming from the VAT (value-added tax) or are to be raised from consumption, it is unlikely to be enough,” he said.

As a legislator during the Arroyo administration, Recto successfully pushed for the Expanded VAT Law, which raised the VAT to 12 percent from 10 percent and covered additional goods.

Research and advocacy group IBON Foundation argued that Recto should backpedal from new consumption taxes that are regressive and burden ordinary Filipinos.

Recto’s predecessor, now Monetary Board member Benjamin Diokno, earlier pushed for junk food taxes and additional levies on sweetened beverages, among others.

IBON executive director Sonny Africa said fiscal space is a function of revenues and expenditures that can be used to expand social and economic spending to stimulate growth.

“The best shift in strategy is for the government to raise revenues from a more progressive tax system, with higher direct taxes on high-income and high-wealth taxpayers,” Africa told The STAR.

Africa said tax reforms during the Duterte administration included substantial revenue losses especially from cuts in corporate and personal income taxes.

Instead, the government increased consumption taxes to compensate, but these only dampened household consumption spending, domestic demand and the welfare of lower income families.

“Further consumption taxes are convenient but unnecessarily burdensome for the majority, in contrast to direct taxes, which only affect a few and, since targeted at those with the most ability to pay, will not dampen demand in such a broad-based manner,” Africa said.

For Lanzona, the ultimate goal is to generate growth and then raise consumption in order to secure the necessary revenues, and this means outgrowing the debt of the Philippines.

“But will these be enough? Unless they impose wealth taxes, the revenues through indirect taxes may not be sufficient to cover the loans, given that consumption has gone down,” Lanzona said.

Africa echoed the same sentiment, noting that the best way for the government to expand fiscal space and increase urgent spending is with a recurring wealth tax that would cover the country’s 2,900 billionaires.

He said the government can also impose higher corporate income taxes on the country’s 4,500 large corporations and higher personal income taxes on families earning P500,000 or more per month.

Data showed that a one percent tax on wealth over P1 billion, two percent on over P2 billion, and three percent on over P3 billion can potentially generate P497.1 billion in revenues.

Even with such a tax, this will still leave the country’s billionaires with a huge P7.6 trillion in wealth.

While a wealth tax is an ideal tax reform, Lanzona is doubtful that such a measure stands a chance of approval.

“It seems unlikely given the background of this administration and the composition of Congress. Nonetheless, there may be a chance if (Recto) does advocate it,” Lanzona said.

“In the long run, however, growth remains the more sustainable option,” he said.