Enter the dragon and change
“The only thing that is constant is change”, said Greek philosopher Heraclitus as quoted by this author in his “Tax system change: The 4 arrows,” June 20, 2016, Philippine STAR Business.
Indeed, the status quo became untenable. The populist revolt across the globe swept reformist Mayor Rodrigo R. Duterte to power in 2016 and that catapulted his likeminded childhood buddy, Carlos “Sonny” G. Dominguez, to the Department of Finance (DOF) as its secretary. Tax reform became the topmost economic agenda and a comprehensive tax reform package (CTRP) was unveiled. This came 20 years after the last major rewrite of the tax code in 1997 and within just the first 100 days of the new administration. Arguably, this was a stunning and remarkable feat. The business sector initially preoccupied with the proposed shift to federalism and economic reforms to the Constitution, forthwith switched its attention to the CTRP. (Prequel to this article – “Precursors to the 2017 comprehensive tax reform,” March 27, STAR Business).
Consensus to reform
Usually tax reform, particularly sweeping reforms such as those proposed in the CTRP, would generate contentious public debate on tax policy. But, interestingly, not in this case. At least, not in the intensity one would expect. To be sure, there are observations and constructive suggestions, mainly on proposals perceived to be affecting certain constituencies. By and large, however, acceptance of the reform package is palpable. Indubitably, it is the realization that the investment deficit, calculated at P1.7 trillion relative to fast advancing regional peer, Thailand, had to be closed--and fast. This deficit, reflected in underinvestment in human and infrastructure development, is visibly seen and felt by the people. The realization was helpful in developing this consensus to reform the tax system. Other, more personal reasons are the large current tax bite that diminishes disposable income of wage earners and the great inconveniences suffered on a daily basis owing to the infrastructure deficit.
‘Cinderella moment’ and broad support
“No previous tax reform package ever enjoyed the complete support of relevant constituencies as much as the package we have today. All the previous secretaries and undersecretaries of finance have endorsed it. Multinational institutions such as the World Bank, the International Monetary Fund and the Asian Development Bank support this package. Our development partners and NGOs applaud the tax reforms”, proudly announced Secretary Dominguez in his “public diplomacy” to promote the CTRP. This package comes amidst a benign setting of stable macro-economic fundamentals and demographic hump, called “Cinderella moment” and “demographic sweet spot” by Sec. Dominguez. Appropriately, business and professional organizations swiftly endorsed the reform package, with the Financial Executives Institute of the Philippines (FINEX) and the Management Association of the Philippines (M.A.P.), among the first, in a position paper, albeit with a few constructive recommendations to the DOF.
Game-changing reform
The objective of the CTRP, in a nutshell, is to achieve a “simpler, fairer, and more efficient tax system, characterized by low rates and a broad taxpayer base that promotes investment, job creation and poverty reduction.” The CTRP will reform and transform the “architecture of the country’s revenue system” to fund the administration’s 10-point economic agenda, added Sec. Dominguez. It is designed with the stated intention of benefiting the poor the most and being a game changer for the economy and society.
Attuned to the changed times and public need
The tax system will become attuned to the changed times and needs of both the people and government. It will be the “key link to a more inclusive economy down the road,” said Sec. Dominguez. The reformed tax system is designed to provide a more conducive environment to generating the immense fiscal resources – P3.9 trillion needed by 2022—required for human capital development and closing the yawning infrastructure gap. Both investments are requisites to unleashing the full potential of the economy to propel it through the breakout point with sustained strong growth from seven percent to 10 percent. This high growth rate, when achieved, will be unprecedented in the country’s economic history. It is necessary to achieve upper-middle income status with per capita gross national income (GNI) of $4,100 by 2020, high-income status with $12,000 GNI per capita by 2040 and to completely eradicate extreme poverty by the same year. A golden age in both human and infrastructure development will redress half a century of gross underinvestment that had hobbled economic growth.
Game plan
The overall plan is to empower the disadvantaged while mobilizing the affluent for fiscal support. Negative taxation will shield the poor from taxes, yet provide them with social safety nets through a more efficient targeted cash grant system and subsidies to offset possible effects of needed upward adjustments in consumption and excise taxes. The working middle class and small business entrepreneurs, who are the backbone of the economy, will have higher disposable income. The reward to the more affluent, who will bear the brunt of higher taxes needed for nation building, along with the enterprising, will be a better society and new opportunities that higher economic growth will produce.
The art of war
It is as if Sun Tzu’s Art of War was studied and applied in this tax reform effort. “A thousand battles, a thousand victories”, Sun Tzu taught. The master strategist advocated achieving the ultimate target by winning multiple but manageable battles, instead of betting all in one go. In line with that strategy and understanding fully well the tedious legislative process in Congress, Secretary Dominguez resisted the seemingly logical move to present the entire reform measures as one package. Instead, the entirety was subdivided into four packages. Package One includes the most sought after reform – income tax cut – which is being presented as the initial salvo. “Use alliances and strategic control points in the industry to “shape” your opponents and make them conform to your will,” Sun Tzu said. Accordingly, inclusiveness through consultations and consensus building was advanced in the process. Allies were cultivated and mobilized in both Congress and the private sector to contribute ideas and buy into the program.
TARA sa TRAIN
The tax reform package conceived in 2016 and being translated to legislation in 2017, is comprehensive in its coverage and holistic in its approach, while adopting the best practices in taxation and fiscal management. It encompasses policy and administrative measures to close the investment deficit of P1.7 trillion this year plus provide P1 trillion annually for the next six years to 2022. Over the same period, P366 billion of the deficit will be required annually through tax policy reform, the first package of which is embodied in HB4774 called Tax Reform for Acceleration and Inclusiveness or TRAIN. This bill is authored by Rep. Dakila Cua, chairman of the House ways and means committee. Revenue amounting to P433 billion will be generated through tax administration reforms in HB 4888 called Tax Administration Reform Act, or TARA, by Rep. Joey Salceda. The two House bills combined is appropriately called TARA sa TRAIN.
(To be concluded)
(Eduardo H. Yap is a board governor of the Management Association of the Philippines (MAP), chairs the national affairs committee of the Financial Executives Institute of the Philippines (FINEX) and was a licensed certified public accountant (CPA).)