Implementing only the proposed reductions in personal income tax (PIT) rates without its accompanying reforms in tax policy and administration would torpedo the government’s anti-poverty agenda, jack up its debt-servicing costs by as much as P30 billion annually and pad borrowing costs for households as a result of higher interest rates.
Finance Undersecretary Karl Kendrick Chua said this dire scenario is why the Duterte administration’s Comprehensive Tax Reform Program (CTRP) balances the need for sizable cuts in PIT rates and higher tax collections to fund the government’s ambitious public investment program for high, inclusive growth.
In the absence of the corresponding tax reform measures in the CTRP that would offset the projected foregone revenues from the PIT reductions, Chua told lawmakers that the country’s poorest families would end up as the ultimate losers, given that the continued scarcity of public funds would constrain the government from spending big on education, health care, and social protection to help lift the bottom 50 percent of the population from poverty.
He also said the Internal Revenue Allotments (IRA) for local government units will collapse in three years if only the revenue-eroding cuts in PIT rates are approved by the Congress.
“If we only pass the personal income tax [reductions], then we may run the risk of only that being implemented. And that I think is not going to be progressive at all because those paying taxes today are those who are richer, above-minimum wage, and they, in turn, are the ones who will benefit, while we don’t [have any programs] for the non-taxpayers, the minimum wage earners,” Chua said at a recent hearing of the ways and means committee of the House of Representatives on the proposed first package of the CTRP.
Package One of the CTRP, as contained in House Bill No. 4774, aims to lower PIT rates and at the same time adjust excise taxes on oil and automobiles and broaden the value-added tax (VAT) base while retaining exemptions for seniors and persons with disabilities, among other measures. Rep. Dakila Carlo Cua, who chairs the ways and means panel, is the principal author of HB 4774.
A substitute bill that was approved by the House ways and means committee consolidated HB 4774 with 52 other similar bills. The substitute bill contained moderate modifications to the original measure, including expanding the earmarking of 40 percent of the proceeds from the revenue-generating measures for social protection programs from one year to three years.
Finance Secretary Carlos Dominguez III earlier welcomed the move by the Cua-chaired House committee to “approve in principle” the first phase of the CTRP as a package.
Dominguez said the decision of Cua’s committee to pass tax reforms as a package rather than on a piecemeal basis is a step closer for the Congress to help the Duterte administration fund its ambitious agenda to sustain the high-growth momentum, dramatically cut poverty and transform the country into a high middle-income economy by 2022.
He expressed the hope that the other members of the House of the Representatives, as well as the senators, would similarly see the urgency of passing this tax reform package in full “to set the economy on its irreversible path to high—and inclusive—growth under the Duterte presidency.
Albay Rep. Joey Salceda, who is the senior vice chairperson of the ways and means committee, agreed with Chua that passing only the PIT cuts would be detrimental to the poor.
“If you just pass the personal income tax [cuts] paano naman ang (how about the plight of the) bottom 50 percent, the poor who have no income? In terms of balance, what about the lowest 50 percent (of the population)?” Salceda stressed.
Besides the lack of revenues to fund pro-poor programs and sustain the high-growth momentum, Chua said passing only the PIT reforms will lead to a credit rating downgrade of below investment grade, which may lead to a spike in interest rates and a permanent 2-peso depreciation against the dollar.
“The costs to the private sector and households is much higher as everyone who borrows will see higher interest payments. Everyone who has a car loan, housing loan or any other loan will also be facing higher interest rates,” Chua said.
A credit rating downgrade, in a worst-case scenario, could lead to an increase in borrowing of up to P30 billion for the government and up to P100 billion for the private sector.
As of November 2016, total loan outstanding in commercial and universal banks amounted to P5.7 trillion. Assuming that just half of these faces variable interest rates and interest rates increase by 2 percentage points, borrowing costs would increase by P55 billion, Chua said.
“Passing only the PIT measure will lead to various degrees of revenue loss if there are no offsetting tax measures. This loss can undermine fiscal sustainability and raise the deficit to as high as 4.0 percent of GDP,” Chua said.
Moreover, Chua said, “investments will fall as the government is faced with higher borrowing risk premiums due to the resulting higher level of debts.”
He also said that passing only the PIT measure will not address the need to simplify the complicated tax structure and loopholes in the current system.
The revenue-enhancing measures under the substitute bill “primarily targets rich consumers and taxpayers so the government can still raise enough money for its unprecedented massive public investment program under the Duterte administration.”
The bill, Chua said, will shift the tax burden to rich taxpayers.
Chua pointed out though, that taxing the ultra-rich through their income is not enough because they comprise only less than 1 percent of the country’s individual taxpayers, based on Bureau of Internal Revenue (BIR) data. Those with a net taxable income of over P800,000 comprise only 3 percent of the individual taxpayer base.
The PIT reforms will lead to revenue losses estimated at P63 billion in the second half of 2017, P138 billion in 2018 and P152 billion in 2019, Chua said.
Thus, to raise enough funds for the Duterte administration accelerated spending on infrastructure, education, health, and social protection for the poorest of the poor, a set of revenue-enhancing measures is also tucked in the substitute bill.
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