The Little Carrot and the Mammoth Stick

The proposal to reduce the rate of the Philippine income tax is now a pending bill for legislation. There are various version of the bill but all are aimed at slashing the Individual income tax and the corporate income tax from its current rate of 32 percent and 30 percent respectively. At a glance, the move is a welcome development and may be recognize as a pleasant milestone in history of taxation. But is it?

The initial package of reforms, the first of 4, includes the restructuring of the personal income tax system and the expansion of the value added tax (VAT) base by reducing the coverage of its exemptions, the DOF said in a statement.

The maximum rate of personal income tax will be reduced over time to 25% from the current 32%, except for the highest income earners.

Also included in the package is raising fuel excise tax, and restructuring the excise tax on automobiles with exceptions for buses, trucks, cargo vans, jeeps, jeepney substitutes, and special purpose vehicles.The DOF estimated that the overall loss of government revenue due to the proposed tax reforms would reach P173.8 billion, but said it would be offset by potential gains from revenue-enhancing reform. These include an estimated gain of almost P200 billion from raising fuel excise tax, P164.4 billion from broadening the tax base through VAT-based expansion, around P18 billion for an excise tax to be applied to sweets, and P33.8 billion from rationalizing fiscal incentives. The DOF noted that these estimates can still change.

Based on these estimates the government coffer would enjoy a net gain of P242.4 billion. As the saying goes “one cannot receive without taking”, and where do you think this P242.4 billion is to be taken from? VAT and Excise tax are indirect taxes, meaning they are eventually passed on to the consumers in the form of higher prices. Yes, the consumers of food, clothing, construction materials, shelter, gadgets, medicine and medical services, etc. , because broadening the VAT base through the elimination of exemptions will practically render almost everything vatable. The excise tax on fuel will definitely eat up a lot of ordinary man’s budget when transport companies and manufacturing companies start passing this ad valorem to the public at large. Without being over simplistic and for the sake of academic discussion, it would appear that theoretically the benefit of 7% reduction in personal income tax could easily be negated by the theoretical reduction of 71% in the purchasing power of the average consumer, which could translate into indebtedness. It would amount to indirect confiscation of the average workers hard earned income to the possible elimination of the middle class. On whose benefit then this proposed tax reform would redound to? Where did these proposals came from? Is it homegrown and as a result of an in depth research and study by a Filipino oriented technocrats? Maybe we can deduce the answers to these questions by exploring certain areas of related interest, to wit;

Let us start with the following quote;

“Debt is an efficient tool. It ensures access to other peoples’ raw materials and infrastructure on the cheapest possible terms. Dozens of countries must compete for shrinking export markets and can export only a limited range of products because of Northern protectionism and their lack of cash to invest in diversification. Market saturation ensues, reducing exporters’ income to a bare minimum while the North enjoys huge savings. The IMF cannot seem to understand that investing in … [a] healthy, well-fed, literate population … is the most intelligent economic choice a country can make.”

— Susan George, A Fate Worse Than Debt, (New York: Grove Weidenfeld, 1990), pp. 143, 187, 235

Debt and poverty has proven to ensue by following IMF/World Bank policies of structural changes in banking, finance and taxation, among others. Changes that actually caters to the need of multi- national corporations, rather than the domestic need and priorities of subject countries. The changes was proposed in the guise of alleviating the lives of people in the hope of reducing poverty by introducing western style parameters, in this particular case on taxation. But historically and on the contrary those policies had only reduced the standard of living.

The International Monetary Fund issued on March 2012 an IMF Country Report No. 12/60 titled Philippines: Technical Assistance Report on Road Map for a Pro-Growth and Equitable Tax System. The report after the purported study encapsulated recommendations (impositions?) that would transform the Philippine Tax System to the edge of being more competitive viz a viz the rest of the world. Among the recommendations (impositions?) I find relevant are the reduction of rate in income tax and effectively broadening the VAT base. The recommendation to impose additional excise tax on fuel is also included, among many others.

(Details of other Tax changes being proposed- see link below)

http://taxdoesmatter.blogspot.com/2016/10/the-little-carrot-and-mammoth-stick.html

One may not be able to recognize the oppressiveness in these proposals and how it intend to eliminate some protective layers in the tax code in favor of the big capitalist, but it can be noted, that some of the recommendations are familiar, since they were test fed to the population over the years. Some including the Corporate Income Tax (CIT), the Personal Income Tax(PIT and VAT revisions are now all in for legislation and many are still being filtered progressively to the media in its subtlety, and likewise by gradualism, you will see this tax amendments being passed into law in the near future. 

The negative effect of VAT on the lower social echelon is wide and atrocious since they spend more for their need; a large part of their income goes to taxes. An ordinary worker earning 12,000 a month would have to pay 1,200 in VAT or 12% in relation to his income, while a 120,000 worker who spend 12,000 for his needs will disproportionately pay only 1% in relation to his income. The expansion of VAT coverage will exacerbate the regressivity of VAT far from what it is already. The small and medium scale business will lose its competitiveness against big business and eventually they will close shop. The underground economy whereupon majority of Filipinos relied for livelihood will be wiped out, since capitalization and sales would be irreconcilable. The proposal to decrease income tax rate coupled with increase in indirect tax is pro-rich as it will benefit large and multinational companies, particularly the foreign ones. The influence of IMF/World Bank in Philippine legislature is obviously beyond imagined. Let us hope that there are members of Philippine government that is still sober to realize the brutal implication of this proposals. Let us not allow ourselves to trek the way of the Americans and the Europeans who fell victims to the onerous bank machinations such as the ponzi scheme that has caused the dissipation of their middle class due to the policies imposed and dictated by the world’s richest banks. One may wonder if the advertised independent policy being advocated and purportedly being pursued by the present government is true?

Nevertheless, bear in mind that the IMF/ WB policies are good; but its goodness is not meant for you and me.