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3 key reasons why the TRAIN tax reform bill is important


For much of his first term in office, President Rodrigo Duterte focused on a singular issue: the menace of illegal drugs, which has permeated every aspect of our society. Since April this year, however, there has been a perceptible diversification in the president’s policy agenda, with greater focus on basic bread and butter concerns.

In fact, as authoritative surveys (Pulse Asia) show, the top three concerns of the Filipino people have consistently been: wages, employment and inflation. While majority of Filipinos appreciate the president’s campaign against illegal drugs, though a greater majority are expressing concerns with the way the campaign is being waged, they clearly want the government to focus on economics.

The government seems to have recognized this fundamental reality, thus the launching of the “Dutertenomics” agenda in April (Disclosure: I was among invited speakers, as an independent academic, during the first Dutertenomics Forum in Conrad hotel. You may check my speech at the event here).

The so-called “build, build, build” agenda of the president is ambitious, yet highly necessary. It reflects a commendable re-focus on the administration’s part. More recently, another major government initiative has been put on the table: The Tax Reform for Acceleration and Inclusion (TRAIN). The TRAIN agenda is an apt acronym, considering how it is interrelated with the “build, build, build” agenda. No less than President Duterte certified the bill as “urgent” and even half-jokingly taunted the Senate to get it through during his State of the Nation Address (SONA) last month.

My fellow kapuso (and former professor) Winnie Monsod has written a series of scathing critiques of the TRAIN agenda on her column, which has stirred much debate among the policy analyst community. They are eloquently argued, well researched, and heartening. For her, the package, as it has evolved throughout deliberations in the House of Representatives, is fundamentally “anti-poor” and doesn’t impose sufficient tax obligations on the richest of the rich in the country. She is perhaps the most prominent critic of the TRAIN bill.

In past week, I sought to dig deeper into the issue by interviewing two key actors, who are deeply familiar with the TRAIN bill: The Department of Finance chief economist Undersecretary Karl Chua and Senator Sonny Angara, who currently spearheads the senate inquiry and deliberation on the issue. Both of them displayed very intimate understanding of the inherent trade-offs in any major tax reform package. The following are my three key takeaways from the interviews as well as my own independent assessment of the issue:

1. Its time has come - In a nutshell, the TRAIN reform package is extremely crucial, namely because we have an outdated and arguably regressive tax system, which undermines both our egalitarian values as well as economic vitality. The government, under the current tax system, simply can’t raise enough funds to deliver basic services commensurate to the needs of our booming economy and population.

As Chua told me, the current tax system has three main problems: There are too many exemptions; rates are stagnant and unresponsive to new economic realities; and bank secrecy laws prevent government from accurately assessing the revenue base of its citizens, especially the wealthy ones. The TRAIN reform package aims to address all these issues by reducing exemptions, creating a more dynamic and updated tax rates across the income continuum, and mitigate bank secrecy -- assuming the Congress (filled with wealthiest men in the country) is on board. Crucially, it could help increase our current tax effort (collection rate as share of national economic output) by streamlining the tax system and reducing loopholes and room for regulatory capture (corruption).

2. Funding Dutertenomics - Over the coming years, the Duterte administration is expected to allocate as much as $167 billion to revamp the country’s decrepit infrastructure landscape. This is a lot of money. Both Japan and China have expressed interest in helping out, but as the Duterte administration, particularly Budget Benjamin Secretary Diokno, has made it clear, the bulk of expenditure (66 percent) will come from government’s budget.

Only 15 percent will come from international development institutions such as Asian Development Bank and foreign governments such as China and Japan. Up to 18 percent will be based on Private-Public-Partnership (PPP) arrangements, the favored approach of the Aquino administration, which created mixed results. The good news is: We won’t be too dependent on any foreign country or institution. The difficult part is: We need to raise enough funds on our own. This is why TRAIN is extremely crucial;

3. Needs fine-tuning – I asked Usec. Chua if he is fine with the House of Representatives’ version of the train bill, and he told me that it is ‘good enough’, though not as ambitious and wide-ranging as they envisioned. Senator Angara, however, raised some key concerns about the TRAIN package, likely both on the lower-house version as well as the original package proposed by Duterte’s technocrats.

According to him, the contentious issues revolve around “the adjustment of the excise taxes on oil, the imposition of taxes on sugar-sweetened beverages (SSB), and the lifting of the VAT exemption of socialized and low-cost housing.” For Angara, he is mainly concerned by the fact that, “while we are giving out P140 billion on the right hand—by easing the tax burden of our middle class—we are collecting more or double the taxes on the left hand, affecting the poorer sectors.” For him, the final version of the bill should strike a delicate balance, which “give[s] tax relief to ordinary Filipinos and at the same time, to fund the infrastructure projects and social protection programs of the government.”

When I asked Usec. Chua about the effect on those on the lower echelons of the economic ladder, he put forward two palliative measures: First, there will be social safety nets, such as expanded conditional cash transfers, and, second, tax burdens are almost eliminated or significantly reduced for those below or close to minimum wage. His strongest argument, however, was that although there will likely be some short-to-medium term difficult adjustments, an effective tax reform package will lift the economy as a whole, thus mitigating any negative impact on more vulnerable sectors of the society.

It remains to be seen whether the final outcome is satisfactory to all sides. What is clear to me is that the TRAIN reform package has stirred a spirited debate, precisely because it could shape the destiny of our national economy for decades to come. The stakes couldn’t be any higher.

Prof. Richard Heydarian is GMA resident analyst and author of, among others, “How Capitalism Failed the Arab World” (Zed, London).

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