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Under TRAIN, taxes are cut on the rich

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TRAIN will make the rich richer – The net impact of the change in income taxes, expansion of VAT coverage, new oil excise taxes, and inflationary effect is that the highest-earning 40% of Filipino households, or 9.1 million households with some 40 million Filipinos, will have more money in their pockets after the tax reform. This includes among the richest households in the country.

They have net gains because their increased take home pay from lower personal income taxes more than offsets losses from additional VAT, oil taxes, auto taxes, the sweets tax, and inflation. The net gains remain even if higher taxes on automobiles and especially on high-end luxury cars, which is sensible, are factored in.

Middle class households in the seventh to ninth income deciles certainly deserve relief from changing decades-old tax brackets. These include Filipino families whose only moderate incomes are doubly-eroded by inflation and by excessively high taxes. It can even be argued that the minimum figure for tax exemptions can be raised to those earning up to around Php33,000 monthly.

However it does not make sense for supposed tax reforms to give a corporate executive already earning Php303,059 monthly (or Php3.7 million yearly) an additional Php1,212. Nor does it make sense to only tax a company’s chief executive officer earning Php706,017 monthly (or Php8.5 million yearly) just an additional Php20,694; this is probably just what would be spent on a weekend family dinner. Yet the DOF’s TRAIN does just this while, to recall, taking hundreds of pesos away from the poorest Filipinos who already have so little as it is. The poorest are made to pay more out of much smaller incomes to begin with and this is not by any reasonable interpretation a “fairer and more equitable” tax system.

The DOF cites the supposedly higher income tax rate of 35% applied to the highest income bracket, compared to the current 32%, as proof of the progressivity of their proposals. This is a half-truth though because using the complete formula which includes a minimum lump sum and applying the tax rate only on the excess of income over Php5 million means that many of the country’s rich will actually end up paying less than under the current tax system.

The DOF also gives the example of the country’s top two income taxpayers whose take home pay falls in 2018 upon the tax reform to reinforce the impression that the new tax system is progressive. This is however an exaggeration and is oblivious to how the country’s super-rich use various legal and illegal strategies to avoid paying taxes including tax havens, off-shore accounts, shell companies and trust funds, smuggling and others.

The tax reform program really does nothing to address, and actually worsens, the continuing accumulation of massive wealth in the hands of a few. The country’s richest for instance also gain additional benefit from the lowering of estate and donor’s taxes to a flat rate of 6%, with the DOF estimating that they will pay at least Php3.1 billion less per year starting 2018.​ (From Buwis(et!): DOF’s Top Five Tax Reform Lies, www.ibon.org)

Will the poor benefit from paying higher taxes?

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by Audrey de Jesus/Ibon.org

Ibon graph.

Among the hyped claims of the Department of Finance (DOF) about the government’s tax reform package is how taxes paid by the poor will go back to them in the form of infrastructure projects and social services. The reality however is that the taxes will go largely to big-ticket infrastructure projects in and around the National Capital Region (NCR) that the poor will hardly benefit from.

TRAIN: easy money for the rich

Currently undergoing Senate deliberations, the Tax Reform for Acceleration and Inclusion (TRAIN) bill is the first of five packages under the Duterte administration’s Comprehensive Tax Reform Program (CTRP). The DOF’s version of the CTRP aims to raise an additional Php157 billion in revenues per year, while the version passed by the House of Representatives (HOR) will raise Php130 billion.

Under TRAIN, there will be higher consumption taxes through the removal of value-added tax exemptions, such as on socialized and low-cost housing and power transmission; new excise taxes on fuel, sugar-sweetened beverages (SSB), and automobiles; and reduced personal income tax rates, estate taxes, and donor’s taxes.

Despite DOF claims that the poor benefit most from their tax reform program, the truth is that the poorest majority of Filipinos bear a heavier tax burden than the rich.

The poorest 60 million Filipinos will pay Php47.0 billion in additional taxes next year, or 2.3% of their combined family income of some Php2.0 trillion. Meanwhile, the highest income 40% will pay Php47.6 billion, or only 0.8% of their total family income of some Php4.1 trillion.

This means the highest income 40% who have twice as much income as the poorest 60% of Filipinos will be paying virtually the same amount in additional taxes. Measured as a share of their total income, the poorest 60% will pay three times as much as the highest income 40% including the richest Filipinos.

TRAIN to nowhere?

Aside from covering up how much the CTRP will burden the poor, the DOF claims that the poor will mainly benefit from these tax revenues, as these will be used for the government’s infrastructure program and social services.

Studying the 2018 Budget of Expenditures and Sources of Financing (BESF) that the Duterte administration submitted to Congress is revealing. The 2018 national government budget submitted to Congress presumptuously assumes that the TRAIN will be passed and implemented next year. Yet the government’s spending pattern is not consistent with the claim that TRAIN will benefit mainly the poor.

It is misleading for the DOF to say that the TRAIN is for funding infrastructure AND social services.  TRAIN is really about funding the infrastructure program, while much-needed social services continue to take a back seat, as seen in the proposed 2018 national budget.

The 2018 BESF shows that there is an exceptional 27.5% increase in infrastructure spending in 2018 to Php1.1 trillion from Php861 billion in 2017. The government reportedly needs an estimated Php8 to 9 trillion over the next five years, or Php1.6 to 1.8 trillion per year, to fund its ambitious “Build! Build! Build!” infrastructure program.  The Duterte administration is clearly counting on additional tax revenues to help fund this.

However, social services spending increases by only 5.4% including just a 5.2% increase in social welfare, a 5.8% increase in education, and a 9.2% increase in health, among others. These increases are unremarkable and follow the same trend as in previous budgets even before TRAIN.

The DOF itself also explains that government infrastructure spending will increase from 4.3% of the gross domestic product (GDP) in 2017 to 6.1% in 2022, i.e. a 1.8 percentage point increase. In contrast, over the same period, health spending will only marginally increase from 0.9% to 1.0%; social protection from 1.9% to 2.0%; and education from 4.4% to 4.9 percent. Cumulatively, spending in health, social protection and education will increase from 7.2% to 7.9%, or just a 0.7 percentage point increase.

There are actually even notable cuts to the social service budget. The housing budget will be markedly cut by 68.9 percent. Under the health budget, Department of Health (DOH) hospitals will see an average 24% cut in their maintenance and operating expenses, and many regional hospitals will see cuts of 30-40 percent. The budget for preventive health programs will be cut by Php16.7 billion or 52%, including those focusing on significant public health concerns like tuberculosis, malaria and HIV.

Infra for the poor?

The DOF claim that the much higher infrastructure spending will go primarily to the poor is also misleading.

Comparing the regional distribution of the government’s flagship infrastructure projects by value and poverty incidence by region, there is a general trend of higher infrastructure spending in regions of low poverty incidence, and of low infrastructure spending in regions of high poverty incidence.

For instance, the NCR has the lowest official poverty incidence of 3.9% but takes up the largest chunk of flagship projects at Php343 billion, while the Autonomous Region of Muslim Mindanao (ARMM) with the highest official poverty incidence of 53.7% accounts for among the least flagship projects at just Php5.4 billion. Central Luzon (CL; Region III) and part of Southern Tagalog (ST; Region IV-A), which also have low poverty incidences of 11.2% and 9.2% respectively, are also among the top recipients of the flagship projects. (See Chart)

It may be argued that infrastructure spending has to consider the nature and degree of economic activity, population density, geographic conditions, and a host of other considerations. But none of these detracts from how infrastructure spending is biased away from poor regions and, indeed, is biased away from the kind of infrastructure projects that the poor directly need and will be directly using.

The flagship projects, which are concentrated in urban areas, especially in NCR, CL and ST, will mainly benefit big foreign and local corporations. Such targeted big-ticket infrastructure like mass transit, roads and bridges, railways, seaports, airports, communication and information, will primarily serve and boost the profit-making enterprises of these corporations that contribute little to develop and strengthen domestic industries.

Tax the rich, not the poor

As much as the DOF claims otherwise, the Duterte administration’s tax reform program is ultimately anti-poor and pro-rich. The poor majority will have to fork over more of their already meager incomes to pay higher consumption taxes. Revenues generated from these taxes will go towards infrastructure projects that hardly benefit them, while funding for much-need social services will be cut or remain stagnant.

Instead of further burdening the poor, the Duterte administration should be challenged to implement a genuinely progressive tax reform program and aggressively collect taxes from the wealthy and big corporations. It can raise hundreds of billions of pesos by increasing direct income taxes on the wealthiest Filipinos and by correctly collecting taxes especially on the biggest corporations.

The revenues generated from a progressive tax system should then fund infrastructure projects spread throughout the country that will support real development of local industry and agriculture. It should also be used for much-need social services and development that will truly benefit the poor. ###