TRAIN: risk or opportunity?

When President Duterte signed the Tax Reform for Acceleration and Inclusion (TRAIN) Act into law last December, a number of leading economists lauded the move. After all, the first package of the tax reform law is arguably the Duterte administration’s most important legislative victory to date. In his speech, the President remarked that the passage of the TRAIN is the administration’s biggest Christmas gift to the Filipino people. The lower income tax rates were supposed to provide Filipinos with higher disposable incomes, which, in turn, could boost domestic consumption. The TRAIN will also generate revenues to finance much-needed social and physical investments — the necessary foundations for sustaining rapid economic growth. Citing these developments, several multilateral institutions and ratings agencies upgraded their economic forecasts for the country.

But as the law took effect at the start of the year, the optimism toward the TRAIN became more subdued as consumers anticipated the pinch of higher commodity prices. Electricity rates, for instance, are expected to go up by 8 centavos per kilowatt-hour. This means that a household consuming 200 kWh monthly will see a P16 increase in its electricity bill.

Even before excise taxes on fuel kicked in, oil prices have already increased, reflecting movements in international oil markets. The new taxes on fuel will then squeeze consumers’ pockets even more.

While the government has assured the public that inflationary effects resulting from the TRAIN will be minimal, the central bank acknowledged that it may raise interest rates if secondary impacts, including higher prices of consumer goods indirectly affected by the TRAIN, as well as a clamor for higher wages, would push inflation beyond target.

At the core of the debates on the TRAIN is its impact on ordinary Filipinos, especially those who are earning below minimum wage—the same segment exempted from income taxes but who will have to bear the brunt of higher commodity prices. To cushion this inevitability, the government will provide targeted cash transfers to the poorest 10 million Filipinos, arguing that this is a more efficient way of protecting the poor. The 2018 budget earmarks around P25 billion to cover monthly cash transfers of P200. But cash transfer programs are typically riddled with issues including duplicate or fraudulent households, the untimely release of funds, and unliquidated funds due to distance or ineligible beneficiaries. Moreover, the Department of Social Welfare and Development, the agency tasked to implement cash transfers, remains without a head after the Commission on Appointments rejected Mr. Duterte’s appointee five months ago. Thus, while targeted earmarks are a positive step toward boosting social investments, the government still needs to iron out kinks in its program implementation. With no mitigating measure in place, poor households will undoubtedly lose out on the tax reform.

To the government’s credit, it has been aggressively pursuing efforts to make the economic environment more attractive for investors. The Department of Finance recently submitted its proposal for Package 2 of its tax reform program to Congress. The second package aims to reduce corporate income tax rates and rationalize fiscal incentives. In crafting future packages, however, the administration should refrain from levying new taxes that will further burden ordinary Filipinos. Instead, measures that would make the tax system more efficient, simplify compliance among taxpayers, and plug leakages and loopholes in the system should be prioritized.

Of course, the challenge is for revenue collection agencies to meet their collection targets and for implementing agencies to spend incremental revenues efficiently. Rolling out key projects within the timelines will also be a given challenge. As I have pointed out in earlier commentaries, imposing new taxes without the commensurate tangible reforms in efficient and transparent administration will be a bitter pill for the average Filipino to swallow.

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Dindo Manhit is founder and managing director of Stratbase Group.