Tax reform to create buffer vs global protectionism wave

MANILA –Finance Secretary Carlos Dominguez III underscored Monday before lawmakers the urgency of passing early this year the Duterte administration’s proposed Comprehensive Tax Reform Program (CTRP) to help create a strong buffer that will shield the domestic economy from the surge of protectionism sweeping across the globe.

Speaking at the resumption of the tax reform hearing conducted by the House ways and means committee, Dominguez also said that unless the tax reform bill endorsed by the Department of Finance (DOF) is passed soon enough, millions of the country’s “hardcore poor, those with no skills and no opportunities,” will remain trapped in the vicious cycle of poverty for years to come.

“Given the uncertainty created by resurgent protectionism, we are likely to see volatility and risk-aversion among many of our trading partners. Slowing global trade translates into weaker global growth. We should seize the ‘Cinderella moment’ we now have to quickly move the fiscal reform package and create a buffer for the most vulnerable among our people,” the finance chief said at the hearing of this panel chaired by Rep. Dakila Carlo Cua.

Cua is author of House Bill No. 4774, which contains the CTRP’s first package that aims to make the tax system more progressive by lowering personal income tax (PIT) rates to make these on the par with those of other economies in the region, expanding the Value Added Tax (VAT) base but retaining exemptions for seniors and persons with disabilities, and adjusting the excise taxes on oil and automobiles, among other measures.

Dominguez assured the House committee that most cars “will still be affordable” under the CTRP, while the more expensive ones will be charged higher excise taxes to “ensure progressivity” of the proposed tax system.

“We are at a critical juncture today. The easier path is to continue with existing policies that might bring high growth but will also sadly maintain high poverty and economic exclusion. The more challenging path is to reform the fiscal and economic policies so that growth happens with equity,” he said.

Dominguez said that to attain this goal, the government needs to undertake a tax reform program that will enable the government to raise an additional Php 718 billion for education, Php 139 billion for health, Php 267 billion for social protection, welfare, and employment, and Php 1.73 trillion for urban and rural infrastructure.

“By failing to act boldly at a most opportune moment, we will betray our people. We will condemn our nation to the vicious cycle of high inflation, high interest rates and inhospitable business conditions that we endured before,” he said.

Dominguez pointed out that: “Without the tax reform package, our GDP growth cannot be sustained by at least 7 percent. Without a dramatic increase in investments, the country will be consigned to growth below 6 percent—a purgatory for an emerging economy with great potential.”

“Our economic simulation studies validate this,” he said.

“We can no longer maintain high income tax rates. Our people expect relief from them. We cannot attract the investments we need until we bring our tax rates to the regional average. To compensate for lower rates, we intend to broaden the tax base and introduce new revenue measures. The entire package needs to be passed to ensure gains in revenues to fund the President’s 10-point socioeconomic agenda and maintain our strong macroeconomic fundamentals,” Dominguez said. .

“More expensive cars will be charged higher excise taxes to ensure progressivity. When taken as part of the package, most cars will still be affordable,” he added.

Dominguez said the growing uncertainty in global prospects as a result of recent external developments means the country would “need to prepare well and build a solid fiscal buffer to keep us strong when the storm comes.”

“We must be fiscally prepared to invest more heavily in our human capital and in much needed infrastructure,” Dominguez said.

The DOF secretary raised a dire scenario should the Congress choose to pass only the tax package’s popular component, which is the reduction in PIT rates without the corresponding revenue-enhancing measures.

“Without improving on our revenues, many of our children will continue walking hours to get to school and our classrooms will continue to be packed beyond capacity. The poorest Filipinos will continue to have little or no access to health services. Our farmers will be unable to raise their productivity and thus remain poor,” he said.

Along with this bleak scenario, he said, the Philippines will most possibly suffer a credit rating downgrade as the government will be forced to rely on borrowings to manage the deficit, which means Php 30 billion in additional debt costs; consumers will have to absorb the consequences by having to cope with a permanent Php 2-depreciation of the local currency against the dollar, along with a two-percent increase in interest rates; and public funds for classrooms, health centers and rural roads will be in short supply.”

“If we fail to pass the revenue enhancement measures, we will lose the growth momentum that took us years to build. We will face the specter of large budget deficits and move closer to a debt crisis,” he said.

Dominguez likewise noted that without the tax reform package, growth will not only be slower but exclusive, with the rich continuing to corner the wealth created and the poor kept out of the national economic mainstream.

The government’s goal of reducing poverty rates from the current 21.6 percent to 14 percent to bring the Philippines at par with Thailand and China in terms of per-capita gross national income by 2022 will flounder.

Thus, the 2040 vision of eradicating poverty and making the country a high-income country like what South Korea and Malaysia are already today, will likewise fail, Dominguez said.

“In short, the vision of achieving prosperous country status with zero poverty by 2040 will not be achieved,” he said.

“This is the time to break the vicious cycles of the past and carve a new path to a prosperous future for all our people,” Dominguez said.