PIDS papers commit ‘sins of omission’ in ignoring TRAIN impact on infra, households

Date Posted : May 17, 2019

PIDS papers commit ‘sins of omission’ in ignoring TRAIN impact on infra, households

Date Posted : May 17, 2019

Two papers released by the Philippine Institute for Development Studies (PIDS) on the preliminary effects of the Tax Reform for Acceleration and Inclusion (TRAIN) Law have committed “sins of omission” in downplaying the impact of this game-changing reform by ignoring two of its key components, which are the provision of a steady revenue base for both the government’s cash-intensive infrastructure modernization initiative and its three-year social protection program to cushion the initial impact of tax reform on the poorest Filipino families.

Department of Finance (DOF) Undersecretary Karl Kendrick Chua said the separate analyses by economists Dr. Rosario Manasan and Dr. Philip Tuaño and his team in their respective PIDS papers on TRAIN are “partial.” In being incomplete, these analysts had missed the multiplier impact of Unconditional Cash Transfer (UCT) and aggressive government spending on infrastructure, which coincide with a reduction in the country’s poverty incidence from 27.6 percent in the first half of 2015 to 21 percent in the same period in 2018, he said.

“Their conclusions are partial and media reports on these papers are misleading because the two papers committed sins of omission. The tax reform has always been a package, and any analysis of the impact of the tax package must look at the entire reform, from the tax rates to the social mitigating measures and earmarked spending on infrastructure and social services, not just selected provisions,” Chua said.

He said that on the part of the government, while “tax reform is not a magic bullet to solve all problems, not reforming our tax system would be a greater sin of omission we cannot afford to commit.”

Chua was reacting to the papers written by Manasan, who concluded that TRAIN is regressive or has a bigger negative effect on low-income Filipinos; and that of a PIDS team led by Tuaño, who claimed that the excise taxes on coal and petroleum products under TRAIN resulted in a slight increase in poverty incidence.

The DOF official said what was puzzling was that Tuano et al acknowledged that there may be dynamic effects of tax reform on output, employment, and welfare as the bulk of TRAIN revenues would be allocated to infrastructure under the “Build Build Build” program, “but these were not included in their analysis. “Why?” Chua said.

On the Manasan paper, Chua noted that the analysis explicitly left out the UCT, which is a key TRAIN provision that supports the poor and vulnerable.

“How can the Manasan paper claim to account for the overall impact of TRAIN, when it ignores the effects of the UCT program and other mitigating measures? Although distribution was initially delayed, the government took steps to alleviate the impact by distributing the entire cash grant as a lump sum, initially to the Pantawid Pamilyang Pilipino Program (4Ps) beneficiaries so that mothers and children, the most vulnerable, will be protected,” Chua said.

The Tuaño, et al paper, meanwhile, failed to consider higher government spending on infrastructure, which grew by over 40 percent and accounted for over 5 percent of the gross domestic product (GDP) in 2018 owing to additional revenues generated through TRAIN, Chua noted.

“This omission is crucial because it means that the analysis underestimates the multiplier effect of increased government spending. The multiplier is around 2, meaning, for every 1 peso of infrastructure spending, another 1 peso is spent because more jobs are created,” Chua said.

Chua noted that another paper by economist Caesar Cororaton et al that includes government infrastructure spending and UCTs showed the opposite result, that TRAIN reduces poverty.

The DOF, Chua stressed, has always acknowledged that TRAIN’s provisions on higher excise taxes will affect low-income families, which is why the reform package has social mitigating measures such as the UCTs for the country’s 10 million poorest households. “The government, through the DSWD (Department of Social Welfare and Development), has been implementing this program since last year,” Chua said.

He recalled that in 2015, Manasan advised, also through a PIDS paper, that the implementation of any proposals to restructure the personal income tax (PIT) will have to be offset by new revenue measures, including, increasing the value-added tax (VAT) rate or expanding VAT coverage, levying an excise on sugar-sweetened beverages (SSBs), implementing additional excise taxes on petroleum products, and increasing the road user’s tax.

“It appears that the author thought of the same provisions in 2015, so I am not certain why she now blames the same things for the regressiveness of TRAIN,” Chua said.

Chua said that while the welfare impact of TRAIN is generally felt over time, outcomes from 2018 already challenge the conclusions of both PIDS papers written by Manasan and Tuaño’s team.

“Among others, we can cite the consistently strong GDP growth at 6.2 percent last year despite higher inflation, a more than 40 percent increase in government infrastructure spending, and the decline in the unemployment and underemployment rates, Chua said.

“We appreciate the effort of various researchers to assess the potential impact of tax policy reforms. However, these efforts should have included in their respective analyses the impact of TRAIN as a package that includes social mitigating measures and spending on infrastructure and social services, as they are not just afterthoughts of the reform, but intrinsically at the heart of the design of TRAIN.” Chua added.

TRAIN achieved 108 percent of its target in 2018 and returned P111.7 billion to the pockets of 99 percent of taxpayers, increasing their purchasing power as shown by the significant hike in the income and sales of major retail establishments and real estate firms.


Date Posted May 17, 2019

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