02 Untitled - Dr. Benjamin E. Diokno

8/14/2019 02 Untitled - Dr. Benjamin E. Diokno

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U.P. Academic CongressBenjamin E. Diokno, Professor, School of Economics, U. of thePhlippines (Diliman)


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Political Economy of Tax Reform

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Whats the fiscal outlook?


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Weaker, low-yielding tax systemTax-to-GDP ratio risks reverting to low levels seen during the Marcos final years

Diokno I Economic Briefing 102709

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Fiscal House in DisarrayGMA run large deficits from 2001-04; huge deficits have reemerged in recent years

Fis


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High and Rising Public DebtAs the world economy recovers, interest rates would rise, leading to higher debt service


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Statistics on Natl Govt Debt

Service2007 2008 2009 2010Total, Debt Service 614,069 612,682 702,600 746,175Domestic 441,237 430,425 478,588 492,716

Foreign 172,832 182,257 224,012 253,459

Distribution, %

Domestic 71.9 70.3 68.1 66.0

Foreign 28.1 29.7 31.9 34.0In percent of GDP

Domestic 6.6 5.8 6.1 5.8

Foreign 2.6 2.5 2.9 3.0

Total 9.2 8.3 9.0 8.8

In percent of NG revenues

Domestic 38.8 35.8 42.7 42.5Foreign 15.2 15.2 20.0 21.9

Total 54.0 50.9 62.7 64.4

In percent of Tax Revenues

Domestic 47.3 41.0 49.6 48.3

Foreign 18.5 17.4 23.2 24.9

Total 65.8 58.4 72.9 73.2


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What will the

next Presidentinherit?A huge public debt andnarrow fiscal space. Fiscalflexibility, defined as recurrent

revenues less personalservices, interest payments,internal revenue allotment(IRA) and net lending woulddisappear in 2010

But what if the nextadministration needs a secondfiscal stimulus program?


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Basic Goals of the Tax Reform

Broaden the tax base and generatemore revenue to reduce the budgetdeficit and finance public goods and

social protection programs

Reduce the tax burden of corporationsand fixed-income earners

Simplify and make more neutral andefficient the tax structure of thefinancial sector

CDMIPhilippine Economic Roadmap

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Revenue Measures: Hard

ChoicesReforming fiscal incentives

Reforming excise taxes oncigarettes and liquor (e.g.two-part excise for

tobacco)


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Revenue Measures:

Harder Increase VAT to 15%. Lower personal incometax rates and the corporate income tax rateto 25%

Reform the tax structure of the financialsector by making it neutral 10% tax on all passive income Remove tax on insurance premium

Adopt variable tax rates on fuel products Earmark revenue for improving the transport

system (e.g. for mass transit)

Fix the Internal Revenue Allotment (IRA);impose presumptive national real propertytax (RPT).


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National Real Property Taxes CollectedThrough LGUs

National government to piggyback on realproperty tax (RPT) imposed by localgovernment units (LGUs)

Administratively, LGUs dont have to remitthe presumptive RPT to the national treasury.Instead, the national government will deductthe said amount from each LGUs IRA(whether or not the additional RPT is actually

imposed by the LGU)


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Arguments for raising the VAT

rate Based on the experience in Europe and other countries, there

is still room for raising the VAT rate. In the EU community, theunweighted average VAT rate is 19.3%

It is more efficient (in terms of lower deadweight loss) than thepersonal income tax or other forms of taxes.

VAT is highly responsive to changes in economic activity sinceit is ad valorem in nature. Occasional tinkering is not needed.

The VAT is mildly progressive.

DioknoI VAT or Income


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VAT is slightly more responsive

than PIT VAT has been more

responsive to changesin economic activity

(GDP) since it is advalorem in nature andsince agriculture whileVAT exempt is roughlyless than one-fifth of

the economy. PIT is also responsive

since wages adjustwith inflation

Tax Elasticity(1998-2008)

Adj R2 t- value

VAT 1.29 0.9740 26.0

PIT 1.21 0.9529 20.1

DioknoI VAT or Income Tax


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VAT is mildly progressiveVAT paid by expenditure percentiles

Percentile Share (%) of totalspending

Percentilespendingliable toVAT(%)

Share (%) intotal VATdue

Poorest 1% 0.1 44.2 0.1

1-10% 1.9 45.9 1.4

10-25% 5.2 48.4 4.1

25-50% 13.2 53.0 11.5

50-75% 22.1 58.4 21.2

75-90% 22.3 61.9 22.7

90-99 25.0 63.8 26.3

Richest 1% 10.1 75.8 12.6



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Some concluding remarks With a looming fiscal crisis, increasing the VAT rate

from 12 to 15 percent appears to be warranted.The current rate is low by international standard.While the VAT is responsive to changes in

economic activity, its productivity may be furtherenhanced by improvement in its administration.

Given the seriousness of its fiscal problems, anyproposed cut in the personal income tax rates mayhave to be reviewed, especially in the face of the

personal income taxs most recent reform (e.g.exemption of minimum wage earners andincreasing deductible deductions; PERA)



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Concluding remarks

But with a bold, reform-oriented new administration,personal income taxation may be further simplifiedand rates reduced sharply say to a flat rate of 18percent. However, it may require raising the VAT rate

from 12 to 18 percent.

Managing the reform:The new President should getthe authority from Congress to shift from directtaxation to value added taxation within the first 100days of his Presidency. But the implementation should

be calibrated with the speed of economic recovery.Postponing the tax reform to a latter date istantamount to status quo then fiscal collapsebecomes inevitable.



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Fiscal Picture in Recent Philippine

History


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Social Expenditures, 4

PresidentsAquino Ramos Estrada ArroyoEducation+SBP 21,873 55,855 90,997 123,158

Dept of Health 6,187 8,586 11,835 12,952

Per capita spending

Education+SBP 362 797 1,201 1,434

Health 102 123 156 150

Per capita real spending

Education+SBP 855 1,023 1,224 1,101Health 240 160 160 115

Sources: Government authorities, 2000=100

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02 Untitled - Dr. Benjamin E. Diokno