TAX GANERN! DOF’s Tax Reforms Tax the Poor and Relieve the Rich (Part 1)

September 2, 2016

by IBON Foundation

by Sonny Africa

(First of Two Parts)

The Department of Finance (DOF) will submit a tax policy reform program to Congress in September. The administration’s economic managers are using Pres. Rodrigo Duterte’s current popularity to push an unpopular pro-rich neoliberal tax agenda. The proposed program lowers the tax burden on the rich and on big corporations and offsets this with greater taxes on the country’s poor majority.

Every government taxes to fund its operations and provide public services. The Philippine national government and local government units do this. Even alternative centers of political power in rural areas such as the National Democratic Front of the Philippines (NDFP) and Moro Islamic Liberation front (MILF) do this. Taxation is central to governance.

The Philippines certainly also badly needs better social and economic services. The public education, health and housing systems are decrepit and grossly insufficient for people’s needs. Current transport, communication, power and water infrastructure cannot support real national development. Worryingly, oligarchic private sector interests have already seized on these public scarcities as opportunities to further amass private monopoly profits.

So tax reform is needed and integral to developing the economy. It is important to make real headway in ending chronic poverty and joblessness for tens of millions of Filipinos. Tax reforms are undoubtedly long overdue.

Wrong direction

But the DOF’s proposed tax program is not what the country needs and on the contrary is a big step in the wrong direction.

The tax reform program seeks to raise an additional Php600 billion by 2019 ostensibly to fund priority investments of the Duterte administration. Most of this will come from taxing the poor to make up for revenue losses from taxing the country’s rich and ultra-rich less. Php400 billion will come from raising taxes and another Php200 billion supposedly from tax administration reforms, spending efficiency, and higher economic growth.

The DOF tax program is still being finalized but its key elements have already been identified. The program consists of four (4) bills each constituting a package of measures. These are targeted to be passed in January 2017, June 2017, June 2018 and January 2019 respectively. Congressional deliberation on the first tax package is seen to start in October or November this year.

Taken altogether, the program includes measures that will lower taxes paid by the rich.

Rich will be paying less

Personal income taxes will be lowered towards an eventual maximum rate of 25 percent. The DOF says that the highest income earners may still be taxed higher than this but does not offer any figures. Around Php139.0 billion in revenues is expected to be foregone from lower personal income taxes.

Lowering personal income taxes starts with coming up with new tax brackets to reflect changes since the existing brackets were drawn up in 1997. Rising incomes have pushed taxpayers into higher income brackets – with correspondingly higher tax rates – even as rising prices have eroded the real value of these incomes. The ultra-rich and wealthiest who were already in the highest tax brackets meanwhile still pay the same tax rate.

The tax brackets and taxes due will be changed so that those earning up to Php250,000 per year – or about Php19,230 monthly (computed at 13 months of pay in a year) – will pay a fixed amount of Php2,500. This is up to Php47,500 less than they are paying today, according to IBON estimates. This is very welcome relief for these low income taxpayers.

But those earning a million pesos a year for instance will also be paying less – around Php92,700 less in the first year of implementation and then Php130,700 less in the second year of implementation. Those earning Php5,000,000 a year will save even more – paying Php112,500 less in the first year of implementation and then Php260,000 less in the second year. The tax these wealthy individuals pay may even fall further after the third year as the DOF continues to adjust personal income tax rates downward. This reduction in income taxes paid by the ultra-rich and wealthiest Filipinos only reduces potential revenues for the government and worsens inequality in the country.

Corporate income taxes will be lowered towards an eventual maximum rate of 25 percent. The DOF says that other corporate income tax provisions will be “simplified” to improve compliance. The details are not clear but the DOF’s logic generally seems to be that “simplifying” means reducing taxes to enjoin tax evaders to start paying properly. Corporations will be paying Php34.8 billion less in income taxes. As with personal income taxes for the rich, this reduction in income taxes paid by corporations reduces potential revenues for the government and worsens inequality in the country.

The rich get further benefits. The tax rate will also be lowered on many property-related transactions involving mainly the wealthy: estate taxes, donor taxes, transaction taxes on land (ex. documentary stamps tax, transfer tax, registration fees). The DOF for instance said that it wants the estate tax of 20% cut to as low as 6% of the value of property being transferred. The rich will pay Php3.5 billion less in estate and donors taxes.

The capital income tax rate will also be lowered. The tax on interest income earned on peso deposits and investments will be lowered from 20% to 10%, mainly benefiting the rich with massive peso deposits. The rich will pay Php1.0 billion less in capital income taxes.

The few rich Filipinos will pay much less taxes so the DOF offsets this by increasing taxes on the majority poor that will raise the prices of goods and services that they consume.

Majority will be paying more

VAT (value-added tax) will start to be charged on previously exempt items. Examples of currently VAT-exempt transactions are raw agricultural and marine products, livestock and poultry, breeding stock, fertilizers, seeds, fingerlings, feeds and ingredients for feeds, and personal and household effects brought into the country by returning overseas Filipinos or by non-residents settling in the country.

Imports of professional instruments, clothes, domestic animals, direct farm inputs, farm machineries and equipment, fuel and goods used for shipping and air transport are also currently VAT-exempt. Likewise with services by agricultural contract growers and millers, sales by agricultural cooperatives, lending by credit cooperatives, and sales by any other cooperatives. Services of banks and non-bank financial intermediaries – which also includes money changers and pawnshops – are VAT-exempt as are various sales of real property. The DOF is also proposing to limit VAT zero-rated transactions only to direct exporters.

It is not yet clear what items will begin to be charged VAT but the DOF has already said that exemptions will be limited to raw food and necessities like education and health. This means that the prices of many non-raw food items and many non-education and non-health services will increase because of the newly-imposed VAT on them. This will be paid for by Filipino consumers, the majority of whom struggle to pay for their basic needs with the little disposable income or savings they have.

This so-called expansion of the VAT base – a euphemism for imposing new VAT on the people – is seen to raise Php163.4 billion in revenues taken from consumers’ pockets. The government has been using the regressive VAT as an easy way to raise revenues since 1988.

The excise tax on all petroleum products will be increased and thereafter indexed to inflation. The petroleum excise tax is a fixed peso amount levied on every litre of particular petroleum products. Indexing this to inflation means that the tax will be periodically adjusted higher which means a perpetually growing tax on petroleum products and correspondingly higher prices.

Fuels with direct effects on consumers such as diesel, LPG and kerosene but also items like bunker oil and asphalt are currently not levied an excise tax. On the other hand, there are excise taxes of up to Php4.50 per litre or kilogram on oil products like gasoline, aviation fuel, lubricating grease and oils, naptha, and others.  The DOF said that it wants to impose a tax of Php6 per litre on diesel, among others, which is commonly used by public utility vehicles and by trucks transporting goods, as well as on LPG and kerosene which are directly consumed by poor households. It may also raise existing excise taxes to up to Php10 per litre or kilogram.

The higher excise tax on oil products will raise Php178.2 billion in revenues. These billions are ultimately taken from consumers’ pockets when they buy oil products directly or when these are passed on in higher prices of goods, services and transport fares.

There will also be a tax on sugary products that will also be indexed to inflation. The sugar excise tax starts at Php5 per kilogram. This will increase the price of raw sugar to Php52 per kilogram (a 10.6% increase from Php47 pesos/kg) and of refined sugar to Php55 per kilogram (a 9.1% increase from Php55/kg). The prices of fruit drinks, sodas, sweetened tea and coffee, sports and energy drinks, and many other non-alcoholic drinks in liquid or powder form will increase. This will mean some Php18.1 billion pesos taken from consumers’ pockets directly when they buy sugar or when food manufacturers pass on the tax to them in the price of the food and drinks they produce.

There is even a proposal for a legislated final tax amnesty, except for criminal cases. The proposed minimum amnesty payment is 40% of the basic deficiency with no further amnesty for 25 years. This is intended to clear all tax dockets in the BIR, BOC and in the courts. But this is too lenient on tax evaders and in effect even rewards them for non-payment. A more determined implementation of tax laws is a better option.

The net result of all these is straightforward: the poor are made to shoulder taxes that the rich will no longer pay.


The DOF will create a smokescreen for its proposed regressive measures.

It will play up how lowering income taxes will benefit middle-income families who suffer tax brackets that are unchanged since 1997. They fully deserve this income tax relief because they really are paying much more than they should. The existing tax brackets have not kept pace with their growing incomes and rising prices of goods and services. This group will be understandably vocal in the mass media and social media.

But IBON estimates that only some 6.7 million deserving wage and salary earners will actually gain from the adjusted tax brackets. There are 23 million wage and salary workers in the country but 16.3 million of these are already exempt from paying income tax because they earn just the minimum wage (4.1 million) or less than this (7.5 million). Yet all of them will have to deal with higher prices from the DOF’s higher taxes on so many goods and services.

The DOF will also claim that the way to fix the tax system’s inefficiency is to simplify it. The argument will be that treating the rich too differently and having too wide a gap between the treatment of the rich and the poor is too “complex”. “Inefficiency” is in effect resolved not by improved enforcement against the wealthy, which is the logical thing to do, but by enjoining them to pay the lower taxes under a “simplified” tax regime. This really means that the poor are made to bear the burden of the government’s inability to tax the rich.

The DOF knows that its tax program will mean higher prices for the goods and services the poor consume and lower real incomes for them. The DOF will divert from this new normal of eroded real incomes of the poor by claiming that this is compensated by targeted cash transfers and other social protection schemes. This includes 4Ps cash transfers, which the poorest are already getting, and the proposed additional rice subsidy. Senior citizens may also be given slightly higher pensions and allowed a larger senior citizen’s discount; but unlike the proposed tax increases these are not yet certain.

There will also supposedly be discounts on public utility vehicles to moderate the cost of commuting a little, more lifeline subsidies for low income consumers, and higher PhilHealth coverage and benefits for persons with disabilities. The problem however with such targeting and selective support is that they do not really address the problem created of higher bus, jeepney and tricycle fares, more expensive electricity, and more expensive privatized health services. This government-funded social protection is also logically going to be less than the taxes the poor are made to pay because if it were the same then the desired net revenue increase would not materialize.- IBON Features