THE Ways and Means Committee of the House of Representatives approved on May 3, the proposed tax reforms of the Department of Finance.
Taxes are the most important source of revenues of the government, and provide funds for many purposes, including public goods, subsidies, among others.
The main features of the Comprehensive Tax Reform Program are lowering the personal income taxes, expanding the coverage of value-added tax (VAT), imposition of new and higher excise taxes on automobiles (except for buses, trucks, cargo vans, jeeps, jeepney substitutes, and special purpose vehicles) and petroleum products.
The 83 percent of the taxpayers who are earning P0 to P250,000 a year will be exempted from paying any tax, while those earning P250,001 to P400,000 a year, representing eight percent of the taxpayers will pay 20 percent tax of their income exceeding P250,000.
Those earning P400,001 to P800,000 a year or six percent of the taxpayers will pay a tax of P30,000 plus 25 percent of their income exceeding P400,000. The next three groups of taxpayers representing the rest of the taxpayer population will pay much higher taxes.
The 13th month pay (up to P82,000) will also be exempted from being taxed.
This taxation package, when signed into law, will take effect on the second half of the year until year 2019. Lower taxation rates will be implemented in 2020.
This is one move in order for our country to have a more equitable redistribution of income which is one of the macroeconomic goals. Taxation makes redistribution more possible through transfer payments and subsidized provision of merit goods since these are paid from the tax revenues.
Transfer payments made by the government to individuals specifically for the purpose of redistributing income from certain groups towards vulnerable groups. Some types of transfer payments include retirement pensions, disability benefits, maternity benefits, student grants and scholarships, housing benefits, etc.
Merit goods are goods that produce positive effects when consumed. One example of a merit good is education. Public education here in the Philippines is essentially free. Another example is health. Government hospitals charge very low compared to private hospitals.
Aside from transfer payments and subsidies, taxation is an important instrument in redistributing income because it can lower income inequalities because those who earn more will be taxed more and those who earn less will be taxed less. This type of taxation is called Progressive Taxation.
Lower personal taxes will increase the disposable income of the consumer, thus, giving them incentive to consume more because they can now buy more with their income. When consumption increase, assuming all things are held constant, then the GDP will also increase.
This loss in government revenue from lower personal taxes will be addressed by expanding the VAT and the imposition of new and higher excise taxes for automobiles and petroleum products.
The tax reform, especially in the lowering of the personal income tax is good news for all income earners. However, with more products covered by VAT and excise taxes on fuel, prices of goods and service will generally increase as a result.
I believe that even if the disposable income of consumers will be higher, the consumers’ income will not be able to buy as much because of higher prices. Thus, the proposed tax rates may not be as beneficial as expected.
I commend the efforts of the present government in looking after the citizens’ welfare, but I believe they can still ponder some more on their proposed tax reform package before it is signed into law by the President so that they can think of the best tax package that will provide a win-win solution.