Tax Reform to Ensure Safer Communities, Fairer Society, DOF Secretary Says

Finance Secretary Carlos Dominguez III said the Duterte administration is seizing on an “opportune convergence” of growth-friendly factors to reconfigure our tax system that is “crying out for reform” as a way to make Philippine communities safer and our society fairer for future generations.

Dominguez said that now is the best time to cut personal and corporate income taxes while still raising enough revenues to fund President Duterte’s vision of inclusive growth, against the backdrop of a surging economy, strong investor confidence, declining debt, a stable peso, record gross international reserves, a balance-of-payments surplus, and unprecedented public support for a sitting Chief Executive.

The President also has the political will and capital to drive this comprehensive tax reform plan at such a fast pace that was “unthinkable” in the past administration, he said.

“We will seize the opportune convergence of factors at this time: a dynamic growth rate, a robust growth potential, a stable currency, a stable fiscal profile and determined national leadership,” Dominguez said at the Kapihan sa Klub breakfast forum held this morning at Club Filipino in San Juan City.

He added: “We will not waste this opportune convergence. We will make our society fairer for the sake of the next generations. We will make our communities stronger and protect our citizens. We will make our economic growth more sustainable and inclusive.”

President Duterte has put in place a 10-point socioeconomic agenda on inclusive growth to fulfill his electoral mandate of ensuring peace and public safety and spreading the benefits of economic growth to all sectors across all regions.

Dominguez said tax reform, which was also one of Mr. Duterte’s campaign pledges, is necessary to realize the administration’s vision of inclusive growth—provide relief to wage earners, broaden the revenue base, raise spending on infrastructure and human capital, attract more investors and sustain the upward trajectory of the economy—without “courting a credit rating downgrade.”

“Bringing down individual income tax rates will boost the spending power of wage earners. Bringing down corporate tax rates will encourage investment inflows to our economy. The prevailing tax rates have been a disincentive to investments coming into our economy,” he said.

But while the new government wants personal and corporate income tax rates reduced, it also needs to generate more revenues to effectively implement its 10-point socioeconomic agenda by, among others, doing away with the kind of public underspending in the past that has prevented the benefits of growth from being felt by the Filipino majority, Dominguez said.

“Based on our reading of the resounding mandate of our voters last May, the Duterte administration outlined a 10-point economic program,” he said. “This includes: raising our investments in human capital; increasing investments in infrastructure to improve the country’s logistics backbone; improving the productivity of our agriculture through investments in farm systems, irrigation; and reconfiguring our tax system to make it more equitable.”

“In the end, this is not simply about revenues and expenditures. Resource mobilization is a means to an end—building our nation,” Dominguez noted.

Dominguez said the government would focus on accelerating infrastructure spending “to ease congestion here in Manila, decrease the cost of moving people and goods through the archipelago, boost tourism and pump prime economic activity.”

“There will no longer be underspending which reined in economic performance in the past,” he said.

“All things considered, we have very good conditions in which to introduce policy and governance reforms. We have enough headroom to raise our budget deficit level from 2% to 3%. That single percentage point will allow us to undertake programs to make our economic expansion a lot more inclusive,” Dominguez added.

To make up for the revenue loss from lower income tax rates—estimated at P174 billion—Dominguez said the government would have to raise revenues from other sources “in order to invest in our infrastructure and our people, and make sure that everybody feels the economic growth.”

These measures include reviewing the tax perks for businesses and some exemptions to the value added tax (VAT), indexing oil excise tax rates to inflation, and indexing and reforming property valuations, he said.

“We are reviewing the tax incentives that were so casually given out in the past. Many of the businesses are enjoying incentives they do not really need. We are designing a system that will be more transparent, performance-based, highly targeted, and time-bound. It’s about time to rethink our policy of attracting investments into the country,” Dominguez said.

“We are, likewise, reviewing the exemptions to VAT. We hope our people will understand that it is preferable to withdraw certain exemptions than to raise the VAT rate,” he added, emphasizing that the exemptions enjoyed by the poor would not be removed.

Dominguez said the government is also considering taxes on unhealthy food items to help raise additional funds and promote public health.

Complementing these revenue-generating measures are the implementation of reforms at the Bureaus of Customs (BOC) and of Internal Revenue (BIR) to ensure transparency, reduce official corruption and expand the tax base.

Such reforms include the full computerization of transactions at the BOC “as well as (pegging the) valuation of goods to prevailing real time prices in the international market” to slowly phase out the need for brokers and the proliferation of fixers in the agency.

At the BIR, Dominguez said he has instructed the bureau to treat taxpayers better when they come to pay their taxes and to simplify the system to broaden the tax base.

“Our tax system is crying out for reform. While we have among the highest tax rates in the region, we also have among the narrowest tax bases. For instance, the BIR’s Large Taxpayer Unit monitors fewer than 3,000 taxpayers. In an economy our size, that is obviously too low,” Dominguez said.

“We cannot go on with a tax system where under a million carry the tax burden of a hundred and five million,” he added.

Dominguez assured Filipinos that while the Duterte administration plans to lower tax rates and continue with highly targeted subsidy programs for the poorest of the poor, the country’s fiscal stability would remain stable.

“In sum, we will pursue a tax reform package that will enhance inclusive growth, bring relief to our wageworkers and bring more into the tax loop without courting a credit rating downgrade.”

Dominguez pointed out that economic growth remains strong, with the Gross Domestic Product (GDP) expanding by 7% in the second quarter despite the shortfall in agricultural output as a result of the El Nino-induced dry spell.

Economic expansion is also “increasingly investments-led as opposed to consumption-led,” with the manufacturing sector finally growing even as exports appear to have stalled, he said.

Moreover, the government has maintained its balance-of-payments surplus, gross international reserves are at record levels, and the debt service levels are at their lowest since the debt crisis of the early 1980s, he said.

“This is a good time to make our systems right. We need big reforms that can steer the country toward a better future. The economy is rising. Investor confidence is high. Public support for the new President is unprecedented. The national debt has been tamed. There is consensus for the reforms,” Dominguez said. (DOF)