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Tax reform, the Vice-President, and impeachment

BusinessWorld logo BusinessWorld 3/20/2017

The comprehensive tax reform package requires multi-stakeholder and multi-partisan effort. The comprehensiveness of the reforms manifests itself in its having several packages, which cover, among other things:

a) the exemption from income tax or the lowering of personal income tax rates for 99% of the population;

b) the increase in the excise taxes on petroleum products, automobiles, tobacco, alcohol, and sugary beverages;

c) the expansion of the value-added tax (VAT) base by rationalizing and limiting the number of exempted items;

d) the lowering of the corporate income tax to recover regional competitiveness combined with the rationalization of fiscal incentives;

e) other practical adjustments on taxes on capital and wealth; and,

f) the tax administration reforms, including the lifting of bank secrecy.

Some of the reforms are popular and thus easy to pass, like the lowering of the personal and corporate income tax rates. But they lead to significant revenue losses. Thus, the need for offsetting measures such as the consumption taxes enumerated above. Moreover, some of the tax policies like the excise tax on petroleum products and the VAT suffer from basic weaknesses. They need to be corrected. In the case of petroleum, the rates are artificially low. The taxes on regular and premium gasoline have not been adjusted to inflation since 1997. With regard to diesel, it has been exempted from the excise tax. On the VAT, too many exemptions have resulted in massive leakage. A good VAT system only exempts the most basic items such as essential medicine and primary agriculture goods (e.g., food in its raw state).

The bottom line is that the package of reforms must provide income tax relief to the many but at the same time generate more resources to fund programs for infrastructure, education, health and other public goods. Increasing tax revenue is critical towards wiping out poverty, expanding the middle class, and transforming our economy into a high income emerging economy.

It is most heartening that despite the breadth complexity of the issue, a wide segment of society has issued statements and initiated actions for the tax reform bill.

Local and foreign business chambers, tax managers and practitioners, former Cabinet secretaries from different administrations as well as former senior officials from the Department of Finance have declared support for the tax reform. Policy advocacy groups like Action for Economic Reforms and Foundation for Economic Freedom as well as economists and other academics have actively campaigned for the tax reform in its entirety.

Among basic sectors, labor groups such as the Sentro ng mga Nagkakaisa at Progresibong Manngaggawa and the National Federation of Labor Unions, an alliance of farmers called Alyansa Agrikultura, people’s organizations like Rural-Urban People’s Linkages, and senior citizens belonging the Coalition of Services of the Elderly have endorsed the reform.

Sadly, many politicians are myopic and ride on what is popular. They only push for the measures that attract votes like lower taxes and abandon those that will increase taxes, even if the latter promotes fairness, equity, and efficiency and leads to long-term gains.

By good fortune, dedicated reformers from the Executive, especially from the Department of Finance, and Congress have painstakingly shepherded the bill, despite “the slow unwilling wind (a quote from Shelley).”

One of these tried and true reformers is Vice-President Leni Robredo. It is not surprising that she is committed to the tax reforms. She has a grasp of tax issues. Not many are aware that Vice-President Robredo, then as a novice legislator, was the most instrumental in securing the Tax Incentives Management and Transparency Act in 2015.

Further, the Vice President has time and again said that she will support the good reforms of this administration, despite her being relentlessly attacked by Rodrigo Duterte’s loyalists.

At least twice, the Office of the Vice-President, with Robredo herself present in the last meeting, formally met with the Department of Finance (DoF) to discuss how the tax reform can be refined and advanced. The Vice-President provided insights into how aspects of the reform package can be designed and carried out. She emphasized, for example, the unconditional cash transfers toward offsetting the moderate inflationary impact of the increase in consumption taxes. She suggested innovative ways on how to implement the cash transfers that will benefit 50% of the Filipino households.

Moreover, she invited the tax reform advocates to hold a forum and consultation in Naga City, her hometown. She organized the forum, which drew an overflow crowd, consisting of businessmen or entrepreneurs, professionals, market vendors, and representatives of cooperatives and sectoral or people’s organizations.

BusinessWorld Photo © Copyright 2016, BusinessWorld Publishing Corporation BusinessWorld Photo

In this forum, the Vice-President said (and I quote her in full): “It’s important for us to have this discussion, especially among this mix of business groups and civil society. I’m very thankful that we have DoF here to discuss this reform. We have invited them here to address any questions that you may have on their proposal. I believe that it is essential for the people to better understand the tax reform package because once we do, it will be easier to give one hundred percent support both for the passage of the bill and its implementation. Rest assured you can depend on our support.”

The Vice-President has spoken. Very constructive and cooperative. Showing clear and deep understanding of the issue.

Meantime, the tax reform bill languishes in Congress. The DoF led by Secretary Sonny Dominguez III hit the ground running. Sadly, the leadership of the House of Representatives is not that cooperative. The Ways and Means Committee is slow in approving the first package of the comprehensive tax reform program. The best it has done is to approve a motion that the package is approved in principle. The bill still has to go through further amendments by a technical working group.

Contrast this to the lightning speed that the Ways and Means Committee and the House leadership forced the approval of a weak tobacco tax bill in December 2016. The Executive, particularly the Department of Finance and the Department of Health, and many stakeholders from business and civil society objected to this bill.

Now, the Speaker wants the Vice-President impeached for speaking out to an international audience on extrajudicial killing. This is most upsetting not just because my colleagues and I want to protect the Vice-President and the institution. The intent to impeach the Vice-President is also most destabilizing.

Impeachment procedures will distract Congress from passing the key reforms. Impeachment will throw in disarray the whole reform agenda. The tax reform program is in fact the most crucial piece of legislation that Congress must pass. The delay in passing the tax reform or a dilution of its content is most destabilizing for the country. A number of analysts have already observed that it is the tax reform that can make or break the administration.

Impeachment will likewise polarize the different stakeholders, which in turn will obstruct dialogue and change, the catchword of the Duterte administration. It creates political uncertainty and instability, which will have negative economic consequences in terms of investments and credit.

That is the supreme irony: The Vice-President, supportive of a crucial reform benefitting the people and the Duterte administration, is threatened with impeachment. The threats come from the Speaker, who has delayed the reform and has done other bad things on tax policy like leading the passage of a bad tobacco tax bill in the House, a bill that serves a corporation that is now charged with tax evasion and accused by no less than President Duterte of bribing politicians.

It make me wonder: Who is the destabilizer?

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

www.aer.ph

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