Tax Reform Plan to Help Free 6-M Filipinos From Poverty

Finance Secretary Carlos Dominguez III said that congressional approval of the proposed tax reform program would help the Duterte administration realize its vision of reducing the poverty level to just 14 percent and free six million Filipinos from the shackles of poverty over the next six years.

Dominguez said the Philippines is now at a “critical juncture” where it can either choose the old and easier path of sustaining high growth accompanied by economic exclusion and high poverty rates, or the new and more challenging road towards reforms that will ensure high growth with equity for all Filipinos.

“Our mandate is to take on the more challenging path. Building on solid fundamentals, we must immediately bring relief to all Filipinos burdened with oppressive tax rates,” said Dominguez. “At the same time, we must raise enough revenues to close the infrastructure gap that makes production costlier in our economy than in others in this region, as well as enough revenues to provide the social protection needed by our poor and vulnerable.”

Dominguez said the government must take advantage of “the beneficial point in our country’s economic history,” characterized by the following positive factors: abundant capital, low interest rates, benign inflation, high business confidence, impressive credit ratings and strong regional support.

“This is the time to act boldly,” he said.

Dominguez said that over the next six years, the government intends to reduce poverty rates from the current 21.6 percent to 14 percent to bring the Philippines on the par with Thailand and China in terms of per-capita gross national income by 2022.

“That translates into liberating 6 million Filipinos from the grip of poverty. We intend to transform our country from a lower middle-income to an upper middle-income economy. That will mean raising per-capita gross national income from $3,100 to $4,000 by 2022. That is the level of Thailand and China today after decades of sustained economic expansion in those economies,” he said.

If this momentum is sustained, Dominguez said that by “the end of this administration, the Philippines should be well on its way to eradicating poverty completely by 2040 or a generation hence.”

“By that time, we should have moved into the ranks of the world’s advanced nations with a per-capita income of $12,000. This is where South Korea and Malaysia are at today,” the finance chief said.

To achieve these goals, Dominguez said the Philippines must sustain a growth rate of at least 7 percent annually for a generation, which can be done only if the economy shifts from consumption- to investment-led growth.

He noted that the Philippines currently invests only 20 percent of its Gross Domestic Product (GDP) while its high-growth neighboring economies invest between 30 percent and 40 percent of GDP.

“Studies show that in order to sustain high and inclusive growth, we need P1 trillion more in investment on top of the current P1.3 trillion. Expanded direct investments from our neighbors, a more aggressive public-private partnership program, and deepened social protection and human capital investments will ensure that,” Dominguez said.

These investments, he said, require a series of revenue-enhancing packages, the first of which was submitted to the Congress last September under the Department of Finance ( (DOF)-proposed Tax Reform for Acceleration and Inclusion Act that aims to generate a net gain of P174 billion, equivalent to 1 percent of the GDP in 2018.

“It seeks to lower personal income tax rates to be at par with the region, expand the VAT base by limiting exemptions to necessities such as raw food, education and health care, as well as other items with good economic rationale while increasing excise taxes on oil and automobiles. Taken together, all these will make our tax system more progressive,” Dominguez 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,” he added.

A targeted transfer program benefiting the bottom 50 percent of the population is already built-in under the tax reform package to cushion the impact of the revenue-enhancing measures on the country’s most vulnerable sectors, Dominguez noted.

He said this social protection measure will deliver up to 40 percent of incremental revenues from oil excises to the poorest 50 percent of the population through unconditional cash transfers of up to P6,000 a year and an improved “pantawid pasada” program for public utility vehicles, so that they can offset higher oil prices and reduce pass-on charges to commuters to a minimum.

“This is the clearest illustration of the superior efficacy of shifting from blind subsidies to targeted, transparent and more accountable protection for the poor,” Dominguez said.

He said increasing fuel excise taxes and indexing them to inflation is, contrary to misconceptions, a progressive measure, as the top 200,000 households, comprising 1 percent of the population, consume 20 percent of oil products and the top 10 percent, or 2 million households, account for 60 percent of oil consumption based on the latest estimates.

“The rich will bear the brunt of increased excise for oil products,” Dominguez noted.
Dominguez said that besides adjusting fuel excise taxes, the Duterte administration has also proposed restructuring the excise tax system for automobiles with certain exemptions.

“More expensive cars will be charged higher excise taxes to ensure progressivity. Higher taxes on expensive vehicles will likewise help relieve traffic congestion,” he said.

As for the lifting of VAT exemptions except for vital necessities such as raw food, medicines and education, Dominguez said this measure would channel the tax savings generated to fund social pensions for indigent seniors and better health services for the disabled.

“Our consultations with these vulnerable groups reveal there is support for replacing blind subsidies that mostly benefit the rich with targeted transfers benefiting the poor,” Dominguez said. (DOF)