Year-ender: The dilemma of Philippine income tax system

MANILA, Philippines – Danielle Clara Dandan, a 26-year-old writer from Makati, is preparing for her wedding next year. If she has her way, she would have wanted the law lowering income tax passed before year-end.

“It would allow me to save more for our wedding next year. I would have more income and it would definitely help me pay for my expenses as well,” Dandan said in a phone interview.

At the other side of the fence, there’s Finance assistant secretary Ma. Teresa Habitan, a fiscal policymaker for the past 38 years who has handled all but one group under the Department of Finance. She said nowadays, the government is far from tightening belts similar to where it was two decades ago.

“We end up always taking consideration of the deficit that time. There were times we wanted to spend for a project, but since we are thinking about the deficit, it’s either we postpone it or try to reconfigure the project to save money,” she said. “The time we have right now, we didn’t think we will come to this,” Habitan added.

For the past year, the question of whether the government or the public should get more income has taken center stage as far as state budgeting is concerned. At one end, public discontent to public services – such as what Dandan said is the “terrible” situation of the Metro Rail Transit 3 – has driven them to ask for better returns through quality provisions.

Or if not, at least minimize the burden to the middle-income earners like her. The same logic was applied by Senator Edgardo “Sonny” Angara and Marikina Rep. Miro Quimbo on filing last August separate bills to lower income tax rates, at the expense of drifting away from the stance of the Aquino administration.

Quimbo and Angara – both members of the ruling Liberal Party of which President Aquino belongs – highlighted on their bills the need to lower the individual income tax burden that goes as high as 32 percent, the second highest in Southeast Asia, according to data compiled by the Tax Management Association of the Philippines (TMAP).

“It is unfortunate the House of Representatives did not have time to pass the much needed reform measure,” TMAP president Terence Conrad Bello said in an e-mail to The STAR.

From the beginning, the income tax reform had a bleak chance in Congress. Aquino himself turned a cold shoulder to the measure last September, followed by a similar reaction from his fiscal policy chief, Finance Secretary Cesar Purisima. On a roundtable with the media last Dec. 17, Purisima reiterated his stance.

“I believe it’s about time we have a holistic and comprehensive tax reform, and not go onto piecemeal measures, whether upwards or downwards,” Purisima said. “I know five months may not be enough to talk about this, but at least we start the discussion now.”

Habitan was more candid about it: “From where we were before, we would not want to backtrack from the gains that we achieved now.”

Revenues

If government figures are of any bases, the Philippines has continued to achieve notable gains on the fiscal front this year. The National Government balance sheet, in particular, has swung from a deficit accounting for 3.9 percent of economic output in 2010 to just 0.7 percent as of September this year. The deficit cap was set at two percent.

Rewind to the years during the Estrada administration, the budget gap – which indicates the government is spending more than it gains in revenues – was at five percent of gross domestic product (GDP), a level considered unsustainable and could dent economic expansion.

“History is not on our side in terms of deficit. Wide deficits are not necessarily bad if you are deliberately doing so to support the private sector to increase growth,” said Alvin Ang, an economist at Ateneo de Manila University, in an e-mail.

“But countries with wide deficits almost always lead to fiscal crisis, meaning they could not manage leading to large debts,” he added.

Part of the success in containing the deficit now came from double-digit growth in revenues, which have gone up 12 percent as of October this year. By end-July, income taxes, which include corporate and individual levies, accounted for 58 percent of total revenues by the Bureau of Internal Revenue (BIR). From 1992 to 2011, the National Tax Research Center said income duties accounted for 45 percent of total state revenues.

Internal Revenue Commissioner Kim Jacinto-Henares said a cut on income taxes would be counter-productive since the government “is still in deficit” and thus, continues to borrow for its financing needs.

But for Emilio Neri Jr., lead economist at the Bank of the Philippine Islands, revenues have been the bright side of the Aquino administration’s fiscal performance this year, allowing it to program its 2016 borrowings.

“On tax administration side, I think the BIR has done a good job and was able to maximize raising revenues. (The Bureau of) Customs, on the other hand, still have scope for improvement,” Neri said, noting of the latter’s contracting revenues.

Much could have been done to improve tax policy however. Aside from RA 10351 that reformed excise taxes in tobacco and alcohol, Neri said the government was not able to take advantage of this year to push for other measures such as the rationalization of fiscal incentives.

“The tax incentives bill has been discussed since the Ramos administration and still it has not progressed. It would have been good if they were able to pass it,” he said.

But Angara said income tax reform should be priority. In September, the senator pointed to the other side of the equation- disbursements- to defend his proposal.

Expenditures

While revenues have enjoyed good growth in 2015, state spending lagged for the first six months. And while it has recovered some ground as of October, when it grew 17 percent, Neri said it remains a disappointment. “The bigger issue is really disbursements,” he said.

For the first three quarters, disbursements, despite expanding, remains 14 percent below program at P1.631 trillion, Treasury data showed. This prompted income tax reform advocates to push for the measure saying the government is not able to spend all the revenues it has anyway.

However, Budget Secretary Florencio Abad said there is a “clear trend towards accelerated public spending” toward the end of the year. Earlier, he also pointed to the quality of spending being pursued by the Aquino government.

When The STAR talked to the budget chief in September, he noted that while spending has been slow, the type of projects getting financed are becoming better. But Neri disagreed.

“Yes, they were able to spend on the social services much more this year. As we have seen, the outlays have been rising, but infrastructure spending was discouraging,” he said.

“There is some sense that they are trying to stay away from big-ticket items to avoid controversy.”

As of the third quarter, infrastructure outlay rose 24.3 percent at P243 billion, still 16-percent behind the target of P289.3 billion. The total accounted for 2.55 percent of GDP as against the four percent target and the recommended five percent.

Aside from slow spending however, Bello said the easy concept of fairness should be enough reason to revisit and be applied to the country’s income tax system, which has not been revisited since the 1970s.

“The inherent unfairness brought about by the unadjusted individual income tax brackets is an issue of the justice and fairness that must be corrected immediately,” Bello pointed out.

With Congress already adjourned however and the election season going full swing by January, there is no sign income tax amendments will be prioritized, not without backing from Malacanang. Quimbo himself gave little information when asked for the next steps.

“We will be discussing the legislative agenda with the Senate leadership right after Christmas,” he said.

Bello, meanwhile, is already looking into the next government.

“TMAP looks forward to continuing its advocacy for a comprehensive tax reform measure in the next administration that will not only restore fairness in the taxation of individuals, but would also enhance and expand the revenue base, simplify tax administration and plug loopholes and leakages,” he said. –Prinz P. Magtulis (The Philippine Star)