As with most government policies, the impact of the Duterte administration’s proposed first tax reform package on households depends to a large extent on their income level.
Called the Tax Reform Acceleration and Inclusion (TRAIN) Act, the proposed tax measure was approved on third and final reading by the House of Representatives on May 31, 2017. The tax package is now pending in the Senate which will deliberate and possibly introduce further amendments before subjecting the measure to a final vote. It is the first of several tax reform bills to be proposed by the Duterte administration to Congress.
The proposed tax package aims to cut personal income tax rates for 91 percent of individual taxpayers earning an annual taxable income of Php800,000 or below. The highest rate for these taxpayers will fall to only 25 percent from 32 percent. It will also exempt up to 83 percent of taxpayers earning up to Php250,000 from paying any income tax.
To offset the lower income taxes, the tax package will broaden the value added tax (VAT) system by reducing exemptions, increase excise taxes on petroleum products and automobiles, and impose an excise tax on sugary beverages. The package also includes cash transfers to poor households who will be negatively affected by higher excise taxes on petroleum products and automobiles as well broader VAT coverage.
Latest projections prepared by the Department of Finance (and posted on its website as of June 16) show that most households and taxpayers will ostensibly benefit from the tax package, including top executives and CEOs. They will enjoy higher take-home pay either because of lower tax payments or cash transfers from the government. (See table) Only the extremely wealthy taxpayers earning around Php1.4 million a month will see a reduction in take-home pay.
However, a closer look at the DOF projections show that the poorest 40 percent of households are actually at risk from a cut in their annual take-home pay. In the table, these are the households belonging to the first to fourth deciles (D1 to D4), which are classified as subsistence poor to near-poor households. A decile refers to a tenth of any sample or population.
The second table (Details of Changes in Take-Home Pay) also shows why the average income of the poorest 40 percent of households will likely decline. That’s mainly because the impact of higher consumer prices resulting from an increase in excise taxes on petroleum products and broader VAT will erode whatever benefits they get from lower personal income taxes.
To offset the potential reduction in their take-home pay, the DOF is proposing cash transfers of Php3,600 a year for these households belonging to the poorest 50 percent of households (D1 to D5 in the table) After the cash transfer, their yearly take-home pay is estimated to rise by between Php2,701 and Php4,155.
The DOF is likewise proposing cash transfers of Php1,500 for the next 30 percent of poorest households, which consist of informal workers, minimum wage workers and even above-minimum wage workers (Deciles 6 to 8 in the table). These households are seen to enjoy an increase in their take-home pay due to the tax reforms but are considered vulnerable to shocks from sudden spikes in consumer prices. After the transfer, their take-home pay is seen to rise by Php3,416 to Php9,512.
Professional and middle class households (Deciles 9 and 10) are estimated to enjoy higher take-home pay ranging from Php14,671 to Php34,794 without cash transfers. For members of these households, tax cuts from lower personal income tax rates will be more than enough to offset the impact of higher petroleum and automobile taxes as well as the resulting inflationary effects.
Even the highest-earning households among richest decile are also seen to benefit from the first tax package. Households of top executives earning Php280,309 a month will enjoy a rise in annual take-home of pay of Php53,037. Families of CEOs earning Php598,132 a month will also see their take-home pay increase by Php51,347.
Only taxpayers making Php1.4 million a month or more will be subject to higher tax rates that reduce their annual take-home pay by at least Php517,281.
The DOF’s estimates show that the poorest 40 percent of total households are vulnerable from the adverse impact of the tax package. Whether the cash transfers are enough to mitigate such risks remains to be demonstrated. The DOF’s estimates assume that the transfers will be provided only in the first four years after the tax package is approved. Is that enough?
The government also needs to show that state agencies have the capacity to deliver the cash benefits to the poorest half of households, a much bigger target than the current conditional cash transfer (CCT) program called Pantawid Pamilyang Pilipino (P3) program.
It’s just as well as the proposed tax package will still go through the Senate. Perhaps the upper legislative body can exercise more diligence in ensuring that the proposed tax measure is truly fair and equitable, especially to the lower-income households who are at most at risk from the inflationary impact of the tax proposals.