TRAIN is necessary reform

On Jan. 22, 2018, a commentary by Dindo Manhit asked, “TRAIN: risk or opportunity?” We would like to take this opportunity to answer this question.

The Tax Reform for Acceleration and Inclusion (TRAIN) Act is an opportunity to move our country forward, and not reforming our tax system is a risk we cannot afford to take if we want to accelerate progress. The easier path is to do nothing and maintain the status quo that could sustain moderate growth. But we cannot afford to just muddle through if we want to see a Philippines free from extreme poverty in one generation’s time. We must make the difficult decision to stop doing what we have done for so long, simply because it has not worked. We must reform the system so that it truly supports progress and serves the needs of each and every Filipino, not just a few.

The TRAIN is often criticized for its perceived negative impact on the poor. Mainly, that implementing TRAIN will lead to higher prices. Yes, adjusting excise taxes would raise prices of some commodities faced by consumers, but it will be minimal and it will be temporary. The Department of Finance, Bangko Sentral ng Pilipinas, and National Economic and Development Authority estimate only around 0.4-0.7 percentage point increase in inflation during the first year of implementation with the impact tapering off over time, and the past has clearly shown this.

One case in point was when diesel increased by almost P14 between January 2016 and January 2017. The price of rice remained at P37, while that of other essential foods did not increase significantly—sardines (remained at P13.25), bangus (from P128.84 to P129.93), and noodles (from P7 to P7.10) despite this 76-percent spike in fuel price. The price of pork even declined (from P190.16 to P188.89), as well as the price of yellow corn (from P20.39 to P19.39). Transportation and electricity, gas, and water also registered minimal increase, at 2.4 percent and 1.8 percent, respectively.

Consider also when VAT was raised to 12 percent from 10 percent in 2005 and during the oil price shocks in 2011. Both shocks raised prices, but despite concerns that these would lead to devastating economic growth and skyrocketing inflation, history proved otherwise. The economy and the people are more resilient than naysayers would have us believe. Just look at the past.

Rather than short-term minimal price increases, persistent poverty and high inequality result in the systemic inability of the poor to participate in society actively and productively. It is not from lack of trying but more because of denied opportunities—they are routinely excluded from access to adequate social services and infrastructure that boosts productivity.

Prosperity for the poor and triumph over inequality will not be fully achieved from subsidies, exemptions, and freebies which we have been doing in the past. We need to invest massively in infrastructure to increase the productive capacity of the economy, thereby creating more and better jobs and, for the people—high-quality education, better health services and adequate social protection—so that everyone is accorded with equal economic opportunities toward prosperity.

This is not to say that tax reform is a magic bullet that could, with a wave of a wand, address all the ills of our economy. Instead, the TRAIN and the comprehensive tax reform program of this administration, are important pieces among a number of bold reforms that the government is undergoing to live up to the promise of tunay na pagbabago.

KARL KENDRICK CHUA, undersecretary, Department of Finance