Raw data from the Philippine Statistics Authority (PSA) and the Bureau of Internal Revenue (BIR) showing that 27.9 percent of taxes that high-income earners should pay the government are uncollected because of the currently flawed system, emphasize the need for tax policy reforms that would shift the tax burden from low- and middle-income households to the affluent sector.
Thus, even if the BIR and the Bureau of Customs (BOC) were to improve their collection efficiency to 100 percent, taxes collected by the government to fund the Duterte administration’s ambitious public investment program will still not be enough, given the inherent systemic flaws of the current tax system that the proposed Department of Finance’s (DOF) proposed Comprehensive Tax Reform Program (CTRP) aims to correct.
Albay Rep. Joey Salceda, who is supporting the DOF’s tax reform plan, cited Department data showing the rich shouldering 28.4 percent of the tax burden, but with a tax gap of 27.9 percent, representing the taxes that the BIR fails to collect from them.
Meanwhile, taxpayers who are mostly compensation earners whose taxes are automatically deducted from their monthly pay, bear most of the country’s tax burden, with minimal tax gaps of between 3.6 percent and 9.7 percent, data presented during a recent hearing of the House ways and means committee on the proposed CTRP show.
According to data cited by the National Tax Research Center (NTRC) at the hearing, the tax gap from compensation income is around P30 billion, and a higher P67 billion from corporate income, while taxes that the BIR fails to collect from the VAT is about P153 billion.
Salceda, an economist and the senior vice chairperson of the House ways and means committee, noted, though, that this tax gap is not more than 10 percent of the total tax revenue collections.
“The so-called tax gap is not more than 10 percent. So how can you proceed in funding the very ambitious P8 trillion infra goal of the President? You cannot rely on tax efficiency regardless of whether how inefficient (or efficient) the BIR is,” said Salceda at the committee hearing, referring to the Duterte administration’s plan to spend some P8 trillion to P9 trillion over the medium term.
He said the goal of the CTRP, particularly its first package that provides for substantial personal income tax (PIT) reductions and compensatory measures to broaden the tax base and increase collections from tax revenues, is to “capacitate” the BIR and the Bureau of Customs through reforms in tax policy that would enable them to collect the taxes that they are unable to collect because of the current outdated, flawed system.
“It cannot be that we give you a (revenue) goal, but not give you the means (to accomplish it),” Salceda told BIR officials at the hearing.
The CTRP’s first package is contained in House Bill No. 4774, which was filed last month by House ways and means committee chairperson Rep. Dakila Carlo Cua.
Salceda, who described HB 4774 now pending in the House committee as “the best-studied tax reform bill I’ve ever seen,” said the measure needs to be swiftly approved to sustain the country’s high GDP growth while addressing inequality.
“Even if you collect everything under the current tax policy structure, it cannot [transform] the Philippines to an upper middle-income country,” Salceda said.
The Duterte administration’s goal is to reduce poverty rates from the current 21.6 percent to 14 percent to bring the Philippines at par with upper-middle income Thailand and China in terms of per-capita gross national income by 2022.
It also envisions eradicating extreme poverty by 2040 and turning the country by then into a high-income economy like what South Korea and Malaysia are already today.
“Is [the tax reform bill] just? I think, I’ve looked at it from the point of view of social justice. In fact, it makes our current system more just [than] unjust,” Salceda said.
Earlier, Salceda said the first package of the DOF’s CTRP will ensure that “74 percent of the annual increasing nominal GDP that goes only to the country’s richest 10 percent” would be taxed and the additional revenues go to the poor by way of unconditional cash transfers and other subsidy programs.
The lawmaker said the DOF-endorsed tax reform program is the only way to make the tax system more efficient, equitable and pro-poor, as the government cannot exclusively tax the rich because such a measure would be immediately struck down as class legislation.
Based on his calculations, Salceda said the tax reform bills they are proposing will have a total monetary impact of P354 annually on the country’s poorest households.
Thus, under the tax reform bill, the poor will get back 10-30 years of their total contribution to the tax reform package immediately in the form of targeted transfers.
Salceda said Package One, once fully implemented in 2018, would, in effect, also give back some P138 billion to low-to middle-income taxpayers in the form of tax savings.13
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