By: Adam Inocencio
The Ateneo Economics Association held KamalAEAn 2018: How pro-poor is the tax reform? on February 19, 2018, as part of the Ateneo de Manila University’s Talakayang Alay sa Bayan (TALAB) line-up for this year. With the passage of the Tax Reform for Acceleration and Inclusion (TRAIN), one of the most significant concerns which arose revolved around the social and economic repercussions of the law on the marginalized sector. KamalAEAn 2018 provided an avenue in which a critical assessment of these repercussions can be formulated.
The primary objective of the TRAIN law is to reform the inequitable and inefficient tax system by reducing the tax rate and increasing the tax base. The increased revenues generated by the new law will then be allocated to finance infrastructure and social service programs to help mitigate the rampant socioeconomic inequality of the country and level the playing field for those at the margins. This will help reduce poverty incidence in the country, and help it achieve middle income status by 2022.
At present, the Philippines has the highest corporate tax rate in Southeast Asia. Despite this, the country isn’t generating as much revenue as its regional neighbors. The TRAIN law seeks to correct the structural problems of the tax system which have made it unfair, complicated, and inefficient. The Ateneo Economics Association invited Gian de la Torre from the Department of Finance, and Weslene Irish Uy from the Albert del Rosario Institute to discuss the TRAIN law and its impacts.
Gian de la Torre from the Department of Finance tackled the key provisions and the fiscal impact of the TRAIN law. He argued that the TRAIN law was a significant milestone policy of the Philippine government because it marked the first time in Philippine economic history that such a law was passed without a financial crisis. Instead, the TRAIN law was driven internally by the political will of our legislators who took are beginning to harness the country’s robust macroeconomic conditions to our advantage. As a matter of fact, the International Monetary Fund (IMF) is beginning to take interest in the country’s economic performance because of this milestone legislation. For the first time, the Philippine government is undertaking proactive measures to facilitate economic growth without being driven by external pressures.
The key provisions of the TRAIN law aims to reinvigorate the taxation system of the country in order to ensure sustainable earnings to fund the needed Php 2.2 trillion for the country’s projected economic growth in the years to come. Non-consumption variables such as infrastructure constitute 7-10% of this growth. Proponents of the law hope to capitalize on its multi-tier effect which would stimulate and drive economic activity by financing the main drivers of growth and distributing this growth to key cities and provinces outside Metro Manila. The
TRAIN law aims to generate additional cash inflows from the pockets of Filipino citizens instead of relying on outside debt.
Because the government aims to redistribute wealth from more economically well-off segments to more disenfranchised ones, they decided to levy excise taxes on mining, cosmetics, tobaccos and financial instruments such as capital gains on non-traded stocks, foreign currency deposit units, and stack transactions. As a result, the new taxation is comparably more progressive since it aims to generate more revenues from those with higher income, and allocate these revenues to those who need it more.
The government also repealed 54 out of the 61 laws which stipulated non-essential VAT exemptions in order to lower the tax rate and further expand the tax base. This course of action allowed the government to adjust the VAT system, making it fairer and more equitable. As a result, the Value Added Tax has a more minimal impact on average Filipinos.
The TRAIN law also provides stipulations on earmarking. Over 70% of tax revenues will be utilized for the Build Build Build project which aims to diversify the country’s infrastructures outside Metro Manila. This will help not only mitigate congestion in our roads and highways, but also promote economic activity outside the confines of Metro Manila.
On the other hand, 30% of tax revenues will be allocated for social services. Social mitigating measures and investments will also be made in education, health, sanitation, protection, employment, and housing. Unconditional cash transfer will also be allocated to the poorest 10 million households. Because of its progressive nature, the new and improved tax system will bring back more to the people from those who have more, thereby rebalancing wealth and mitigating the wide disparity between rich and poor. This would provide more opportunities and benefits to the less fortunate segments of the population, especially those belonging to the lowest decile.
A major issue that arose in response to the passage of the law was the excise tax on petroleum and its price effect on inflation. Historical data demonstrated that excise tax on petroleum had no substantial impact on the price increase of our commodities. When the price of diesel was increased by 75.9% in 2016, the inflation rate of the country remained within the target range. As a matter of fact, food was the biggest driver of inflation, and not the excise tax on petroleum. However, even if the effect on inflation is minimal, there was still a segment which is heavily impacted by the higher fuel prices. The government amended this by providing unconditional cash transfer to the poorest 10 million households. This course of action constitutes what is known as an oil excise mitigating measure in order to keep the law pro-poor.
Although the provisions of the TRAIN law have downsides among certain segments of the population, generally speaking, most Filipinos will reap long-term benefits on a macro scale. One needs to exercise patience before the far-reaching, long-term, and structural benefits of the
law can come into full effect. Although it is the present generation which will make the necessary investments, it is the future generations which will reap the benefits.
CHALLENGES BESETTING THE TRAIN LAW
Weslene Irish Uy from the Albert del Rosario Institute, KamalAEAn’s second speaker, adopted a more critical stance towards the TRAIN law. According to Uy, it is premature to perform a comprehensive assessment of the inflationary effects of the TRAIN law. However, it still remains imperative to set in place mitigation measures to cushion the poor and the near poor from inflationary impacts. Uy highlighted a host of challenges besetting the TRAIN law.
The first of these is the unconditional cash transfer which allocates cash inflows to the most impoverished sections of society. Because of the leakages in the system of the cash transfer program, it was still necessary to suspend it for the time being until the said leakages are fixed. For instance, as a result of the program’s inability to validate and update its list of beneficiaries, families above the poverty line still receive benefits from the program despite not having the necessary qualifications. To make matters worse, duplicated and fraudulent entries remain rampant in the system, exacerbating the financial losses of the program. Most importantly, there is no evidence that the cash transfer program has directly contributed to poverty reduction. It is therefore necessary to optimize their information technology systems and effectively identify eligible beneficiaries to minimize leakages from the system.
Three criticisms have also been made against the Pantawid Pasada Program. First, According to COA, less than 60% of intended beneficiaries received benefits. Second, drivers remain reluctant and disinterested to claim the vouchers due to their inability to provide the necessary legal documents to avail these vouchers. Lastly, there is repeated changing in the distribution system for subsidies coupled with delays in rolling out the cash cards. These factors all make the enforcement of the program inefficient in catering to the needs of its intended beneficiaries.
Moreover, there are deep, structural flaws which still persist among revenue collection agencies. How will tax revenues be raised when the revenue collection agencies keep failing to meet their targets? Moreover, investments in transport and infrastructure have been questioned in terms of their effectiveness, as demonstrated by slow growth observed in infrastructure, and the low cash utilization of Department of Transportation. In addition to this, there is rampant delayment in the implementation of projects, difficulties in the right way of procurement and budget bottlenecks, and the ambiguous feasibility of projects.
TRAIN LAW NOT ENOUGH
The talk concluded by appraising the earmarks that the law helped set in place in a positive light. In spite of this, the government needs to implement more mitigating measures to cushion the marginalized sector from the inflationary effects of the new law. It must ensure that
the revenue collection agencies will successfully meet their stipulated targets, and that there is an efficient and effective usage of public funds. The government must effectively implement infrastructure and social projects as planned if long-term benefits are to ever be realized. Therefore, the TRAIN law must therefore be considered as a mere part of a wider set of reforms to achieve more inclusive economic growth in the long run.
Passing a law aimed at reforming a corrupt, inefficient tax system is one consideration. An equally vital matter to attend to is its effective implementation and enforcement, especially by the various government agencies who play a role in the execution of the law’s provisions. Upon first glance, the TRAIN law appears to be genuinely oriented towards the attainment of inclusive, long-term development. However, how can such a goal be realized given the inefficiencies of the government when it comes to implementation? The TRAIN law can only be authentically pro-poor if and only if its effective implementation is realized and sustained in the decades to come. All in all, the participants of the talk were substantially equipped with a deeper understanding of the ramifications that TRAIN has on the country’s macroeconomy and how it is able to facilitate inclusive, long-term economic development.
Adam Inocencio is currently a fourth year student taking up AB Management Economics at the Ateneo de Manila University.