TAX GANERN! DOF’s Tax Reforms Tax the Poor and Relieve the Rich (Part 2)

September 2, 2016

by IBON Foundation

by Sonny Africa

(Second of Two Parts)

Read Part 1

Significant additional revenues can be raised with some basic reforms in the country’s regressive and pro-elite tax system. This is the most rational and sustainable way of ensuring that there are resources for social and economic spending biased for the needs of the poor majority of Filipinos.

Changing direction

What does a progressive tax system look like? Some elements of the proposed tax reforms can be useful as part of a genuinely progressive tax reform program.

It is useful to remove redundant fiscal incentives on corporations and to make these more transparent, targeted, performance-based, and time-bound. The DOF estimates up to Php50 billion in foregone tax revenues from special rates given to large firms; some Php33.8 billion is expected to be gained from rationalizing fiscal incentives. It would however be even better if more of these incentives were given to Filipino industrial firms rather than to the foreign and commercial or service enterprises that dominate the local economy.

It is also useful to adjust the valuations of properties to earn more from real property taxes. The DOF has for instance reported that the assessed LGU market value on Ayala Avenue is just Php40,000 per square meter even if actual market value is at least Php400,000 per square meter. This has helped make land developers among the richest oligarchs in the country. Up to Php43.5 billion can be raised from more accurate valuations on real properties.

Tax administration reforms in the Bureau of Internal Revenue (BIR) and Bureau of Customs (BOC) are sorely needed. The government’s tax efficiency is among the lowest in the region – meaning that it is not collecting as much as it should at current tax rates. The government’s tax effort, or total tax revenue as a share of gross domestic product (GDP), is around 12.4% which is slightly higher than Indonesia’s (11.8%) but much lower than in Vietnam (24.3%), Thailand (17.1%), Malaysia (15.3%), and the average for East Asia and the Pacific (16.3%). This is despite the Philippine’s VAT (12%), corporate income tax (30%), and highest personal income tax rate (32%) being mostly higher than in these countries. This is also an indicator of how much corruption has to be resolved in the BIR and BOC.

Likewise with budget reforms to reduce leakages from corruption and inefficiencies. But then claims at budget reforms are undermined by allegations that the 2017 budget retains pork barrel for legislators and still gives the executive branch undue discretion over trillions of pesos of special purpose funds.

Relaxing bank secrecy for fraud cases potentially allows the BIR to more fully audit people who do not pay the right taxes. The DOF explains that 40% of income comes from professionals and the self-employed but they pay only 20% of income taxes, indicating high tax evasion. Including tax evasion as a predicate crime to money laundering is also potentially useful against tax evaders. However the danger in the Philippine context of severe inequity is that these just end up being used against middle class taxpayers rather than the very rich and well-connected. These expanded powers may also be abused for self-serving political purposes, such as how the previous Aquino government apparently used anti-money laundering powers against former chief justice Renato Corona and other political opposition.

Right direction

But the most important tax reform is really to come up with a genuinely progressive program that taxes those few but with a huge ability to pay more while relieving the overwhelming majority who are struggling with such low incomes. The country’s tax system should be designed according to the country’s concrete condition of severe inequality and widespread poverty – not from what is seen as ‘doable’ for being unopposed and supported by the rich and by big corporations.

Some 17 million Filipino families (80% of all families) earn at most around Php20,000 a month; the poorest half (53%) try to live off less than Php13,000 a month and the poorest fifth (20%) on an average of less than Php5,600 a month. These poor and low income families should be taxed as lightly as possible while being given as much publicly-provided social and economic services as they need.

On the other hand the country’s richest 326,000 families (1.5% of all families) earn an average of Php106,000-191,000 a month. The CEOs of San Miguel Corporation (SMC), First Philippine Holdings (FPH) and Meralco earn Php5.0-5.9 million a month. The country’s 50 richest oligarchs have a combined net worth of US$79.5 billion or Php3.8 trillion at current exchange rates. There are also at least 690 “ultra high net worth” Filipinos with at least Php1.4 billion in assets each. The country’s top 1,000 corporations meanwhile made over Php1.1 trillion in combined annual profits and the 265 Philippine Stock Exchange (PSE)-listed firms some Php581 billion.

These rich families and large corporations are the biggest beneficiaries of the Philippine economy, natural resources, government, and the labours of the Filipino working people. They can and should pay more taxes to fund social and economic services for the majority.

Taxes on income, wealth, property, investments and the biggest corporations have to be increased rather than decreased. Paying taxes are the most systematic expression of social responsibility and far superior to individual charity or even so-called corporate social responsibility (CSR). The worsening inequality in the country indicates how such voluntarism is not really effective in distributing gains from the economy.

For instance raising income taxes on just the richest 1.5% of Filipino families will not only reduce the extreme inequality in the country but also raise some Php91 billion. The richest 156,000 or 0.7% of families had a cumulative income of  Php356.9 billion in 2012 with an average annual income of Php2,287,836. Taxing just an additional 20% of this income will raise Php71 billion. The next richest 170,000 or 0.8% of families had a cumulative income of  Php198.4 billion with an average annual income of Php1,271,484. Taxing just an additional 10% of this income will raise Php20 billion.

Higher top personal income tax rates are needed. It will be recalled that these reached as much as 70% in 1973 and 60% in 1982 before being cut to 35% in 1986, 33% in 1999, and finally to 32% in 2000.

Higher corporate income tax rates on large corporations are also needed. For instance, restoring the corporate income tax to its 35% rate before 2009 would also immediately raise at least Php20-30 billion. Micro, small and medium enterprises should meanwhile be supported with lower income taxes than charged to large corporations. This is aside from how as much as Php409 billion more can be raised from aggressive collection of corporate income taxes especially from large corporations. IBON estimates up to Php780 billion in potential tax revenues from firms in 2012 yet only Php371 billion was actually collected by the BIR.

Wealth should be taxed when it is accumulated or transacted such as through higher wealth, capital gains and inheritance taxes. Actually more effective collection of estate taxes on super-rich families could already raise hundreds of billions more in revenues. The BIR’s average annual collection of estate taxes of less than Php600 million in the decade 2000-2009 compares poorly with the Php3.8 trillion in wealth accumulated today by the 50 richest Filipino oligarchs and their families.

The distractions and indulgences of the rich should also be taxed more. It is possible to design a tax regime of excises taxes or higher VAT on luxury spending such as on high-end automobiles, yachts, jewellery, five-star hotel bars and restaurants, casinos and others. The DOF has estimated at least Php7.7 billion in revenues from taxing luxuries but it is not clear how this will be raised.

Taxation for development

Progressive tax reforms raises government resources for directly providing free or affordable education and health, financing public utilities in water, electricity and transportation, subsidizing pensions and other social security benefits, and providing for other socioeconomic investments. It also lessens inequality and may contribute, even if only slightly, to eroding the economic base that oligarchic elites wield to dominate Philippine economic and political life.

But such tax reforms are of course just part of an overall development policy offensive. Complementary economic reforms are crucial including real asset redistribution, fair distribution of gains from growth, and the general direction of national industrialization for the economy. The solid and equitable economic growth from these will also make government revenues increase even more.

The administration’s economic team sees a window of opportunity to push this regressive neoliberal tax program. The team senses the public clamor for changes in the traffic situation, bad public health and education, government red tape and bureaucracy, poor government services, and others. They are also aware that the public perception is of real change happening under the Duterte administration – coming from his unorthodox manner, open criticism of the country’s oligarchs and even the United States (US) government, the appointment of Leftists in his cabinet, the determined push for peace talks with armed revolutionary groups, enabling freedom of information by executive order, coming down hard on illegal drugs, and others.

The economic team will exploit this desire for change with the argument that its tax program will give more and better public services. But while it is true that the people need vastly improved public services this should be financed by those who have already accumulated so much and not by those who have so little as it is. The Duterte administration proclaims a pro-poor bias and is challenged to muster the political will to tax the rich. — IBON Features