Train Law: Boon or bane

The Supreme Court explains the symbiotic relationship between the State and its citizens in the 1988 case of CIR vs. Algue, Inc., where it held, that – “Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard earned income to the taxing authorities, every person who is able to, must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values.” Thus, the State’s inherent right to tax its citizens to defray the expenses of government is aptly justified by the “lifeblood theory” of taxation.

Benjamin Franklin said that “in this world nothing can be said to be certain, except death and taxes.” Sadly, in our part of the world, corruption and poverty appear to be the third and fourth certainties. We pay taxes to the government as our altruistic contribution to national development, but even from the very start, tax evasion and corruption deprive government coffers of the rightful amounts. Then again, a great part of taxpayers’ money ends up in the pockets of corrupt individuals at the expense of the people who are robbed of the intended social benefits. Hence, the problem of poverty outlives the Filipino taxpayer, whose estate, upon his death, will be taxed again by the State, and the vicious cycle goes on and on.

Comes now the first package of the Comprehensive Tax Reform Program of the Duterte administration, which is more commonly known as the Tax Reform for Acceleration and Inclusion or TRAIN Law. Barely five months from its effectivity, some sectors including legislators, are already calling for its suspension, amendment or even repeal. They are blaming the law for the increase in prices of basic commodities, while the government is saying that only a negligible portion of the inflationary rate could be due to its implementation. Indeed, figures from the Philippine Statistics Authority show that the inflationary rate in July and August 2014 was at 4.2%, while it was 3.2% and 2.9% in April and May 2017, when there was no TRAIN law. Yet, it cannot be denied that the automatic increases in excise taxes beginning 2018 to 2020 would jack up further the prices of refined and manufactured mineral oils and motor fuels. Thus, with the Value Added Tax, increased Excise tax, and now the additional 8 centavos per liter for the mandatory fuel marking system, we can just imagine the impact on costs of living unless the world oil price will cooperate and drop in remarkable fashion.

The TRAIN Law, which actually amended or repealed some provisions of the National Internal Revenue Code, was enacted to “enhance progressivity of the tax system,” “promote sustainable and inclusive economic growth,” “improve levels of disposable income and increase economic activity,” and enable the government to provide “better infrastructure, health, education, jobs, and social protection for the people.” How can one argue against the legislative intent of taxing the rich higher so that the poor will have more benefits from the programs of government? Even though it seems that the “mighty” ones in power are the ones using up our tax-money.

The TRAIN Law adjusted the graduated personal income tax rates; imposed a tax on lotto winnings; increased the final tax on foreign exchange currency deposit units; simplified estate and donor’s taxes; expanded the Value Added Tax Base; increased the excise tax on cigarettes, petroleum products and automobiles; and imposed excise taxes on invasive cosmetic procedures and sweetened beverages.

Unlike in the old tax code, the TRAIN Law now exempts from income tax those earning P250,000 in a year. Prior to the TRAIN law, any personal income above P500,000 is taxed at 32%, but now the income tax rate at the P500,000 level is only 25%, and the 32% rate now applies to the P2,000,000 to P8,000,000 income levels. The tax-exempt threshold on the 13th month pay and other benefits was also increased to P90,000. This will necessarily increase the net take-home pay of a great majority of Filipinos earning less than P2,000,000 per annum. On the other end, those earning more than P8,000,000 will be taxed 35% on the excess amount.

Prior to the TRAIN Law, estate tax rates are from 5% to 20%, but now it has been fixed at 6%. This will stop the practice of falsifying deeds of sale to make it appear that the dead transferred the land to his children during his lifetime to avoid the higher estate tax. This is no longer necessary with a uniform rate of 6% for both capital gains tax on sale and the estate tax. The period for paying estate taxes was also extended from six months to one year from death, which is favorable to estates with real properties but no cash.

Under the old code, gifts of P100,000 are exempt from donor’s tax. Now the exemption was increased to P250,000 and the donor’s tax rate was fixed at 6% instead of the old graduated rates of 2%-15% and 30% for donations to strangers.

The expected loss in revenues on lower income tax is expected to be recouped from higher excise taxes on cigarettes, fuels, automobiles and new taxes on cosmetic procedures and certain beverages. Congress should have increased the excise tax on cigarettes to the maximum to discourage smoking, but the table shows that from the P30 per pack under the 1997 Tax code, there is a gradual adjustment from P32.50 as of January 1, 2018 to P40 on January 1, 2022. Is this the result of an effective lobby? On the excise tax on luxury vehicles worth P4,000,000 and up, the TRAIN law should have maintained the 60% under the 1997 Tax Code instead of lowering it to 50%. Was the reduction intended to benefit the lawmakers who are among the few who could really afford these luxury vehicles?

The most controversial is obviously the increase in excise tax on fuel because of the domino effect on transportation, manufacturing, supply and related costs, which ultimately results to higher prices of goods and services. It was explained on national TV that of the 4.6% inflation as of May this year, which translates to P4.60 for every P100 purchasing power, only about P.40 is due to the implementation of the law, while the bulk is attributable to the usual causes of inflation, particularly the rising world prices of crude oil. Yet, even if this is true, the ordinary Filipino feels that given the high price of oil in the world market, the increase in excise tax makes the burden more unbearable. The theory of the government seems to be that with more take-home pay, people could afford to pay for increased prices. Ideally, the higher take-home pay should offset the effects of inflation because of more money to be spent in the economy, and in theory, would result to more taxes paid by business establishments. This may not be felt now but with stricter implementation and better monitoring of corruption, there is hope, to reach even half of the ideal. The government must make sure that businessmen will only shift to the consumers the actual excise taxes on fuel and not to further make profit by adding their own mark-up.

Overall, the TRAIN law has good intentions but we should be wary about how the three branches of government spend our tax money. Abangan!