Core
Business World, 15 September 2015
The core elements of a broad-based, comprehensive tax reform program are lower income and corporate income tax rates, broader corporate tax base by rationalizing fiscal incentives, higher value-added tax rates, and higher real property tax.
Both the chairmen of the Senate and the House of Representatives Ways and Means Committee, Senator Juan Edgardo M. Angara and Congressman Romero Federico S. Quimbo, respectively, are right: the Philippine personal income tax system is archaic and needs to be reformed.
The present personal and corporate income tax systems have not been adjusted since almost two decades ago. With inflation-creep, the personal income tax system has collected from workers more taxes than what was originally planned.
Compared to its Association of Southeast Asian Nations neighbors, the Philippines’ personal income and corporate tax system continue to be the highest (see Tables 1 and 2).
For the personal income system, the Philippines highest marginal tax rate of 35% applies to top tax base of P500,000. Malaysia’s top tax rate of 26% applies to top tax base of P1.38-million equivalent; Indonesia’s top tax rate of 30% applies to top tax base of P1.87-million equivalent; Thailand’s top tax rate of 35% applies to top tax base of P5.5-million equivalent; and Singapore’s top rate of 20% applies to top tax base of P11.2-million equivalent.
In sum, I see no strong arguments why both systems should not be reformed now. But reducing the corporate and income tax rates should not be stand-alone measures. They should be done within a comprehensive framework for tax reform.
Because the Philippine tax effort, defined as taxes as percent of gross domestic product (GDP), is very low by international standards, a reasonable condition for the design of a comprehensive tax reform program is that the final outcome of the reform will be that it is at least revenue-neutral. Total taxes before the reform should be equal to or higher than total taxes after the reform.
Revenue losses from reducing personal income tax rates should be offset by higher value-added tax (VAT). It is not true that our VAT system imposes a heavy burden on the poor. In fact, a study by the International Monetary Fund finds that our VAT system is slightly progressive because food, in its original state, is VAT-exempt.
The poor can avoid paying VAT by cooking their own food, which accounts for about half of their budget, rather than buying them from fast-food outlets.
President Benigno S. C. Aquino III talked about the impact of higher commodity prices as a result higher VAT on petroleum products. But isn’t he aware that the price of petroleum products went down from $103 per barrel last year to less than $50 today, by more than half? The three-percentage point increase in the VAT rate would hardly make a dent in a typical consumer’s budget.
In fact a higher VAT on petroleum product is good for the government. It could make up for at least a big part of the revenue loss due to lower oil prices. It might even help ease traffic congestion in Metropolitan Manila and most urban cities.
The reduction in corporate income tax should be accompanied by rationalizing fiscal incentives. Tax perks should be rationalized, they should be fewer, focused, and performance-based. For too long, fiscal incentives have been a drain on the national treasury because of too many redundant tax sweeteners.
By limiting fiscal incentives, the corporate tax base is broadened.
The comprehensive tax reform program should include a nationwide real property tax (RPT) piggy-backed on the locally imposed RPT. The proceeds from it may be used to supplement the deficiencies in funding of the K-12 basic education system.
President Aquino should be less wary of a downgrade by rating agencies. The rating agencies are usually concerned with the risk of default. But the Philippines ability to service its debt is beyond question. Its gross international reserves total more than $80 billion, close to year’s imports requirement. Thanks to the annual inflow of some $25-billion to $26-billion remittances from Filipinos overseas.
The inflation rate is low and might even end up a tad lower than the 2% floor of the official inflation target. The 2016 deficit-to-GDP ratio of 2% is low by developing country standards, and it might even end up at less than 1%.
For a developing economy with massive infrastructure deficiency, having a budget deficit of as low as 2% is totally mind-boggling.
As President, Mr. Aquino should be more genuinely concerned with the sentiments of his “bosses”, the Filipino people, who feel that they have been overtaxed, yet get very little in terms of efficient and predictable public services.
No economist worth his soul would argue against the need for a comprehensive tax reform program (CTRP) for the Philippines. The new tax system should be broad-based, fair, efficient, high yielding, and competitive with its neighboring countries.
In terms of managing the reform, the CTRP is best left to the next administration.
With eight months before the next presidential and local elections, this might not be a good time to push for such meaningful change. A watered-down version, where tax-reducing parts would be enacted while tax raising parts would be neglected or deferred, would be counterproductive. It will only weaken the already flawed tax system.
1 comment
payroll tax reform philippines says:
Jan 10, 2017
The PDong Duterte’s Administration proposed 2016 Comprehensive Tax Reform (CTR 2016) package so – called Tax Reform Acceleration and Inclusion Act (TRAIN) is nothing but junk. Even before it can leave for a journey it is a derailed wreck.
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It supposedly tries to bring down tax rates is being insidiously compensated by upward adjustments in other taxes.
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When in fact what should be done by the mentally deficient ‘bright boys and girls of the DoF and NEDA – LEDAC cabal is to expand the Philippines Tax Base.
Tax avoidance schemes, like the many tax loopholes and corporate tax holidays and exemptions, whose elimination will lead to an increase and expansion and widening of the current ‘narrow’ Philippines Total Tax Base and a corresponding increase in revenues.
The Tax base is defined as the income or asset balance used to calculate a Tax Liability which is the amount legally owed to a taxing authority as the result of a taxable event and which is the total of the aggregate value of the financial streams or taxable assets, income, and assessed value of property on which a tax can be imposed within the Tax Jurisdiction of Philippines as outlined in the Philippines Tax Code.
The tax liability formula is tax base multiplied by tax rate.
The size and growth (or lack of growth) of the tax base is crucial to the planning efforts of any government.
This is because the size of the tax base influences the taxable revenues that are available to a government.
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There is a direct correlation between the economic condition of the government and the country or a sector within it, as a whole and the budget of the government that serves it.
Accordingly, governments must always consider how their decisions will affect their tax base by broadening and increasing the amount of economic activity subject to full taxation.
Broadening the tax base and using the revenues to lower marginal tax rates (Tax Cuts) remains a sound template for any type of tax reform.
Moving to a broader tax base and lower tax rates would:
– simplify the tax code,
– remove unfair ‘vested special interest interest’ preferences, and
– create economic growth.
In our tax reform proposals, policymakers will have the ability to pursue ambitious tax base-broadening measures and increasing their ability to cut our overall tax rates.
In practice, significant portions of national income are not included in the tax base, through deductions, exclusions, exemptions, tax loopholes and corporate tax holidays and exemptions and other preferential tax treatment.
Broadening the tax base consists of ending tax preferences to raise revenue.
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The broadening of the tax base would have to consists of removing preferential tax treatment and, by doing so, increasing tax revenue.
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Those option would end tax preferences that primarily benefit high-income earners and just maintains the Status Quo for very special entrenched vested interest of the Ultra High Net Worth Individuals and families, especially Chinoys, and their sprawling tax preferred conglomerates and affiliated consortium.
The below listed are promising directions for broadening the tax base and are as follows:
1. Uncapped provision (Tax coverage cap). The tax cap or limit on the maximum amount of income earnings that are subject to taxation is highly beneficial to the very rich and the Ultra High Net Worth, which includes a lot of our legislators, and large employers, wherein the tax cap acts as a “barrier” to further taxation.
Income above the tax cap is not subject to the tax and it means that the vast majority of the population who those earning below the tax cap tax for the entire year, but the wealthy don’t.
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It also means that the wealthy have a lower effective tax rate and their wealth for the rest of the year became fatter.
2. Untaxed Fringe benefits’. We should also limit other other tax avoidance schemes. The very high income earners are also being compensated not only in terms of wages but also in terms of fringe benefits that are exempt from taxes.
Covering these benefits as taxable compensation of taxes would broaden the tax base and improve long – term tax sustainability.
This uncapped contribution clause and inclusion of fringe benefits would help close the funding gap of the national budget.
3. Capping Itemized Deductions and exemptions of coverage. As long as the individual income tax has been around, taxpayers have been able to deduct specific items from their gross income. Over the years, itemized deductions have grown in size and scope.
A cap on itemized deductions could take several forms:
– a limitation on the tax benefit of itemized deductions;
– a limitation on the value of itemized deductions, as a percent of income; and
– a flat peso cap on the value of itemized deductions.
5. Elimination of all Bank Secrecy Laws. Those laws hinder the taxing authorities function in carrying out Tax Audits.
Summary: By eliminating the tax cap (uncapped tax coverage contribution), including fringe benefits, employer sponsored plans, minimizing deductions and bank secrecy would
equalize the overall tax rate so that all tax payers would be paying the same uniform and equitable percentage on all of their income earned, in totality.
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This in turns make the overall tax structure more fairer, simpler, proportional, progressive and equitable.
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KAILANGAN PA BA I-DRAWING YON!!!
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tsk!
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