Is TRAIN working?
Is the Tax Reform for Acceleration and Inclusion (TRAIN), the first package of which took effect in January, delivering on what it promised? We now have half a year’s data with which to find out.
The key words are “acceleration” and “inclusion.” As intended, the first implies that the tax changes will ultimately speed up economic growth, while the second says that it will ultimately benefit the wider masses of our people. To be fair, these outcomes are expected from the entire set of tax reforms contained in several intended packages of TRAIN, as proposed by the government through the Department of Finance.
Individually, the first package of tax reforms (TRAIN-1), or any of the separate packages still to be proposed to Congress, does not necessarily promise to achieve both. Neither do they promise to achieve all or even most of their intended benefits soon (that is, within a year or two), and certainly not immediately. I could surmise that a number of factors determined how the various tax reforms were split into the distinct packages/phases, including urgency, net revenue yield, distributional impact, political acceptability, and more.
TRAIN-1 addressed the urgent need to relieve our middle class and the poor, particularly wage and salary earners, from overtaxation via the income tax. Before, the top income bracket paying the highest rate of 32 percent started at an annual income of P500,000. That income may have been considered high 21 years ago, when the rates and brackets were last set. But at today’s prices, that corresponds to a middle-income earner, certainly far from deserving the top tax rate meant for the richest.
In fact, the lowest income tax rates of 10-15 percent were for monthly incomes of P800-P5,800, already far below the poverty line of about P10,000 monthly family income—which went against the intent of not taxing the income of the poor. But lowering taxes on the poor and middle classes would reduce revenues, hence the need to raise other taxes to make up, and yield more—and this is what everyone now focuses on, as if forgetting about the first and most important effect in direct support of “inclusion.”
What do the latest data tell us? I looked up the website of the Bureau of the Treasury, which provides government revenues collected from various sources up to July, and did some calculations on the data all the way back to 1986 (earliest year available on the website). The numbers are interesting.
As of the first half of 2018, our total tax revenue collections as a percentage of GDP rose to 15.2 percent, from last year’s 14.2 percent. This nearly matches our historical peak of 15.3 percent obtained in 1996 and 1997 under the Ramos administration—which incidentally achieved the highest average tax/GDP ratio of 14.6 percent, against 13.1 percent under Estrada, 13 percent under Aquino (Benigno), 12.7 percent under Arroyo, and 11.5 percent under Aquino (Corazon). The Duterte administration has so far averaged 14.4 percent.
Total tax revenues jumped 13.6 percent in 2017, from just 9.1 the year before. In comparison, annual tax revenue growth rate averaged 10.8 percent under Aquino (Benigno), 9.1 percent under Arroyo, 3.8 percent under Estrada, 14.6 percent under Ramos, and 23.2 percent under Aquino (Corazon).
With reference to TRAIN-1, it’s more illuminating to examine revenue collections of the Bureau of Internal Revenue (BIR), and specifically, of excise taxes, the focus of TRAIN-1 tax increases. As of the first half of this year, BIR collections amounted to 11.7 percent of GDP, up from 11.2 percent last year; that matches the 1997 record posted after the Ramos Comprehensive Tax Reform Program, the last such comprehensive reform. Excise tax collections so far this year account for 1.9 percent of GDP, significantly up from last year’s 1.3 percent, but still well below the 3 percent achieved in 1987 under Corazon Aquino, and 2.3 percent in 1997 under Ramos.
What is apparent is that TRAIN has indeed boosted tax revenues, as intended.
If the additional revenues are well utilized for the government’s “Build, build, build” program, then “acceleration” (in GDP growth, that is) should, in due time, follow.
