Lowering taxes in the Philippines is possible, but it will take a lot of compromise for us to move things forward.
HOW CAN IT BE DONE?
There’s been several proposals of late aiming to lower the tax rates for the Philippines’ middle class. These include, among others, lessening the individual income tax rates, exemptions for start-ups, and one-time exemptions from the estate tax. People are certainly having their fingers (and toes?) crossed as taxes here are universally acknowledged to be quite high.
Lowering the rates like tax exemption on all income below P240,000 (based on current proposal) would be a godsend. Small businesses, meanwhile, need all the support to compete with the big boys, and a tax holiday can be that booster shot. And increasing the threshold for estate taxes would surely help certain families avoid having to borrow or worse be forced sell their ancestral home, just to pay the estate tax bill. But as you lower income taxes on one end, the government needs to be certain that the total tax receipts will not decline significantly AND abruptly, that it negatively impacts delivery of basic social services. And this need to find immediate alternative sources to go along is where things get complicated.
IS TAX REFORM THE ANSWER?
The proposed tax reform package include revenue “raising” measures to offset the income tax reduction for the middle class. Like introducing a higher 35% (yes 35%) rate for any income exceeding P1,450,000 in the year 2018, elimination of VAT exemptions for seniors and PWDs, and raising VAT on petroleum products. As expected, there is now considerable pushback to the notion of increasing VAT as this would hurt the poor. Because they’re more likely to save less and spend a greater portion of their income on consumption (and VAT). So here we are now, stuck yet again. Some are now wondering if the promise of lower taxes is just that, an empty promise.
Many members of Congress (including some allied with the administration) are against raising the VAT, with some suggesting we should just tax the rich further. But think about this for a moment. The 2016 Forbes billionaires list has eleven Filipinos with a total wealth of $42.75 billion or approximately P2 trillion, and all that wealth, all of it, is not even enough to finance our government’s 2017 budget of P3.3 trillion. Suppose we seize all their wealth, what’s next and who’s next after we’ve spent all of it? Do we then target the next eleven richest families?
EFFICIENCY OF TAX COLLECTION
The obvious answer is we go after tax evaders. But it would be foolish to expect President Duterte (or any administration) to be able to eradicate tax evasion within months or years. With the millions of self-employed individuals and businesses, it may even take a generation to change this culture that one can get away without paying taxes. We may have to consider introducing a fair tax amnesty plan to encourage people out of the shadows. But this can’t be free pass and must go along with very tough penalties for dodging taxes going forward. Plus, a law that will prevent succeeding administrations from granting further tax amnesties as such would defeat the purpose.
Various self-proclaimed tax experts have a laundry list of suggestions, but one item that is absolutely necessary, however unpopular, is the need to expand the tax base. Expanding the tax base will likely include removing certain tax exemptions, and will impact certain industries and lower-income households. But taxing the rich alone simply is not enough. The math doesn’t work at all.
So how do we get things done? How can we reduce taxes without putting a big hole in our government’s budget, a budget that for many is still not enough to address our country’s infrastructure needs and increasing welfare costs? There’s only so much taxes the rich or anyone can stomach. No one would wish our business people to choose to invest elsewhere.
ROLE OF THE CURRENT ADMINISTRATION
Hopefully, the Duterte administration with its current favorable trust ratings can effectively explain to the public why expanding the tax base now, i.e. increases to VAT (but maybe a bit less than what is currently proposed) is the right long-term solution.
On the other hand, maybe they would have to scale down the proposed income tax cuts. I’m sure everyone would be happy with a lower income tax cut, rather than us being stuck and nothing happening.
This is no easy task. Every sector and every business group wants a bigger slice of the “tax-cut” pie. Virtually no one wants a tax increase if it affects them. We need to compromise for us to move things forward. We need this to finally implement sensible reforms that will finally grant much needed tax relief to our middle class in a manner that:
- does not take away funding for our infrastructure backlog;
- through tax cuts that are sustainable;
- and will not impact our country’s fiscal health and credit rating.
Our country has gone from the “sick man of Asia” to one of the world’s fastest growing economies. We can surely make this work by coming together.
Yes we can!