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ATENEO SENIOR HIGH SCHOOL TALK ON TRAIN LAW


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January 24, 2018| Ateneo de Manila University


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Before anything else, let me thank the students and teachers who made this
information session possible. It gives me hope that high school students are keen on
understanding policies that have implications on the country’s development. I think
that not enough young Filipinos concern themselves with the affairs of the nation,
which is quite unfortunate.

After all, it’s you guys who will inherit the country we are trying to build. It is you
who might steer its path as future leaders. Having said this, I commend your efforts
in trying to bridge the information gap between the government and the general
public.

The participation of young students, armed with fresh ideas and contagious
enthusiasm, will only brighten the country’s development outlook.

Preliminaries on Taxation: Why We Pay Taxes


As an Economics professor, I think it’s important to establish some concepts on
taxation before we go into the details of the Tax Reform for Acceleration and
Inclusion (TRAIN) Law. This will give you the tools to better appreciate tax reform, 
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now or even in the future. Think of this as a crash course on tax policy. So let’s start
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with a central question: why do we pay taxes?
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The most obvious reason for paying taxes is to fund the provision of public
goods and services. For the purposes of this discussion, let us just define “public
goods and services” as goods and services that benefit the general welfare of the
people.

In our case, “public goods” would include national defense, administration of


justice, internal security, conduct of foreign policy, some types of infrastructure, and
all sorts of programs implemented by the government. The point is without taxpayer
money, the government will not be able to provide its citizens with such “public
goods and services”.

Another reason for taxation, which may not be too obvious to you at this point,
is to approach a more equal society. One of the ways to redistribute wealth is with
tax policy. Once you start working and filing for taxes, you will find out that those who
earn more also pay more taxes - this is called progressive taxation. And as
discussed earlier, the revenues collected from taxation will be channeled to poverty-
alleviation and development interventions.

You can see this principle applied to the TRAIN Law. As your income bracket
goes up, you give up a larger share of your income as taxes. All those earning
P250,000 and below pay zero income tax, while those earning more than P8 million
pay as much as 35 percent. I will discuss this more in detail later.

The third reason for paying taxes is to correct for harmful behaviors that affect
many people (the technical term for this is negative externalities). For instance, a
strong argument can be made that factories spewing toxic chemicals should be
asked to pay taxes.

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These chemicals do not only pollute the environment but also pose health
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for negative effects of some economic activities.


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In short, we pay taxes to finance projects for the common welfare, to approach
a fairer society, and to correct for harmful activities. Keep these things in mind as we
move along.

Preliminaries on Taxation: Desirable Characteristics of a Tax System


Next, let’s outline some characteristics of a good tax system. This will explain
to you why we need to reform the Philippine tax system to begin with.

The first characteristic we are looking for is a buzzword for economists -


efficiency. When we say a tax system is efficient, it means that it allows resources to
flow into their most productive uses.

Next, we want the tax system to be administratively simple. A tax regime that is
difficult to administer will lead to loopholes and leakages on the part of government.

For taxpayers, it will also mean unnecessary costs like complicated paperwork
and even wasted time. We want to reduce these complications to a minimum.

The third characteristic we look for in a tax system is flexibility. Ideally, the
taxes imposed should adjust to the changing economic conditions like the prices of
goods and services.

Fixed taxes have the tendency to be outdated once they no longer reflect
prevailing economic conditions.

Fourth is fairness. When we say fairness, we think of equity rather than strict 
equality. This means that those who have a higher capacity to pay should pay more.
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In the same manner, similarly-situated individuals should be treated similarly.

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With these basic concepts you students now have a simple framework by
which to evaluate any tax system. Our discussion on the TRAIN Law will serve as a
case study of sorts given the framework we have established.

The importance and effects of TRAIN


When we speak of TRAIN, we are actually talking about a series of packages to
be proposed by the Department of Finance (DOF). Ultimately, however, it is
Congress that passes these laws because it is their job according to our
Constitution.

Today, we will only discuss Package 1A. But keep in mind that there is a
Package 1B and three (3) more tax reform packages before the term of the
President ends.

The essential features of Package 1A include: (1) lowering the personal


income tax rates, (2) reducing exemptions in the Value-Added Tax base, (3)
increasing taxes on petroleum products and automobiles, and (4) introducing taxes
for sugar-sweetened beverages.

The ultimate goal is to raise revenues to finance the government’s priorities,


namely upgrading infrastructure and reducing poverty. Taking Package 1A and 1B
together, about P1 trillion will be raised between 2018 and 2022. TRAIN will also
enforce a simpler, fairer, and more efficient tax system. So let us dissect Package 1A
with the tools I explained earlier.

First is the lowering of personal income tax rates. Prior to TRAIN, the personal
income tax rates of the Philippines were last adjusted in 1997. Can you imagine that
the maximum tax bracket before was just P500,000? On a monthly basis, it means 
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that someone who earns P41,666 a month will already belong to the highest tax
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Such heavy taxes squeezed the pockets of a lot of workers. Maybe the tax
bracket was appropriate in 1997, but accounting for inflation over the past two
decades, then this doesn’t make sense anymore.

With TRAIN, the income tax payment of 99 percent of wage earners will be
lower. In contrast, those earning more than P8 million annually will pay higher taxes
at 35 percent, whereas the highest tax bracket before was 32 percent. I think it’s fair
enough to say that those earning almost P700,000 per month should pay higher
taxes.

Another argument is that lowering taxes will incentivize people to work harder.
A high tax rate is like punishing people for working – imagine a 90 percent tax rate,
perhaps everyone will stop working.

Here are some sample calculations for you to better appreciate the reduced
income tax rates with TRAIN. A call center agent with an annual salary of P252,000,
or a monthly salary of P21,000, used to pay taxes amounting to P21,867. With
TRAIN, he/she will be tax exempt as his annual taxable income falls below
P250,000.

We applied the same calculations with a clerk whose annual salary is


P184,416, or a monthly salary of P15,368. With TRAIN, the said clerk will save up
P7,282 in reduced tax payments.

Next, TRAIN also reduces the exemptions in the Value-Added Tax (VAT)
system. When you buy food or clothes or whatnot, you will notice a 12 percent VAT
amount in your receipts.

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For simplicity’s sake, this means that you pay about 12 percent on top of the
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actual price of a product you bought. Again, such revenues are collected
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The problem with our VAT system is that too many exemptions have been
granted. Ideally, VAT exemptions should be limited to necessities like raw agricultural
food, education, and healthcare.

Unfortunately, our legislators have allowed them to spillover to other sectors


who otherwise should not enjoy VAT exemptions. TRAIN alleviates this situation as it
repeals 54 out of 61 exemptions.

The first advantage is that it will improve efficiency in our tax system. We have
a 12 percent VAT rate, yet our collections from VAT is only equal to 4 percent of
Gross Domestic Product (GDP). Think of GDP as the size of the entire economy.

In comparison, Thailand has a 7 percent VAT rate but also collects VAT-
revenues amounting to 4 percent of GDP.

The takeaway here is that our VAT system had too many loopholes because a
higher rate should result to higher collections. With TRAIN we try to keep
exemptions to a minimum like low-cost housing, purchases of senior citizens and
persons with disabilities, among other things.

Here, you can see the VAT rates across different countries as well as their
respective VAT collections as share of GDP. With a higher VAT rate, it should be
normal that collections should also go higher. Evidently, the Philippine VAT tax base
has many exemptions and loopholes.


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Besides Thailand, some countries have lower VAT rates but still collect a higher
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percent VAT), and other East Asia and Pacific countries (with an average VAT rate of
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yet collects revenues of 5.2 percent of GDP). 

Now you understand the revenue argument: less exemptions and loopholes
will result to more collections for the government. Now, let’s look at the equity
argument.

A tax system is said to be fair if similarly-situated individuals are treated the


same way. Do you know that boy and girl scouts used to enjoy some VAT
exemptions?

Is there any good reason to exempt a boy or girl scout, but not exempt
students like you? So the expanded VAT system also responds to our equity
objective.

We will move on to the most controversial provisions, which are the taxes on
petroleum products, automobiles, and sugar-sweetened beverages.

But before I explain, let me tell you that TRAIN should be evaluated as a
package. One can always nitpick a negative feature with TRAIN, but don’t miss the
big picture.

The government gave up P150 billion in 2018 alone in order to ease the
income tax burden on our workers. But we have to recover this monumental loss
from other sources.

This is the wisdom behind the other features of Package 1A. But it will also be
foolish to say that the government recklessly imposed higher taxes on other goods
and services just to raise additional funds like any monarchy in the Middle Ages. This 
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is definitely not the case.
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Let’s analyze the controversial features one step at a time.
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The taxes on petroleum products, like personal income tax rates, were also
last set in 1997. This has led to foregone revenues of about P140 billion a year for
the government.

Obviously, the old petroleum taxes do not anymore reflect the current
economic conditions and prices.

Here is the schedule of taxes for the petroleum products. First, you will notice
that the taxes will be imposed gradually rather than in one swoop. Compared to their
current rates, the taxes on some products have even doubled compared to their
previous rates. These petroleum taxes may seem burdensome at first glance, but let
me explain why it is fair.

Critics say that this reform is anti-poor because it will adversely affect jeepney
drivers and poor farmers who are the heavy users of petroleum.False. In fact, official
government statistics do not confirm this.

The Family and Income Expenditure Survey (FIES) in 2015 shows that the top
10 percent of households account for 51 percent of total fuel consumption. At the
same time, the richest 1 percent of households consume as much fuel as the
poorest 50 percent of households.

Again, the takeaway is crystal clear: it is the rich who consume more fuel with
their numerous cars and so forth. This is the fairness argument.


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Another point that we take for granted is that petroleum products impose a cost
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costs to correct for such behaviors.


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Raising taxes on petroleum products is one way of protecting the environment.

All these arguments justify the increased taxes on petroleum, such that diesel
taxes will go up to P6 per liter and P10 per liter on gasoline by 2020.

The argument for higher taxes on automobiles is similar to petroleum products.


It is the rich who have more cars.

The taxes for automobiles will also follow a progressive scale such that luxury
cars will be taxed more than regular cars. Here you can see that cars priced P4
million and above will be taxed at 50 percent. On the other hand, cars that cost
below P600,000 will be taxed at only 4 percent.

Besides revenue and redistribution gains, it will also correct for the traffic
congestion costs that car-owners impose on the general public. The traffic situation
in Metro Manila is so bad, but we have to acknowledge that car owners oftentimes
aggravate the situation.

You may have one car for one person, which is not very space-efficient
compared to say a bus or a train.

Last on the list are the taxes for sugar-sweetened beverages. It is primarily a
health measure which doubles as a revenue measure. It aims to curb the
consumption of sugar-sweetened beverages which contributes to the diabetes and
obesity cases in the Philippines while also raising ample revenues.


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Under TRAIN, an excise rate of P6 per liter will be taxed on drinks containing
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To shield most Filipinos, 3-in-1 coffee and milk are exempt from this tax.

Now that I have explained the particular features, let me discuss the objective
of the whole package. As mentioned, Package 1 will raise about P1 trillion in
revenues for the next five years and improve our tax system.

Here you see the breakdown of each feature, as well as the aggregates for the
entire package. It is noteworthy that the personal income tax cuts will lead to losses
as much as P150 billion in 2018. And as mentioned, this will be made up by the
revenue-generating features with the expansion of the VAT base, the oil excise
taxes, the sugar-sweetened beverage taxes, and tax administration improvements.

The revenues generated, which equate to almost 1 percent of GDP, will be key
to modernizing our public infrastructure and sustaining our social services programs.

From the revenues of TRAIN, 70 percent will go to infrastructure projects. This


means roads, bridges, airports, seaports, and even school buildings and hospitals
for all Filipinos.

It means spending more time with our families, rather than spending more time
on the road with the horrible traffic.

It means expanding economic opportunities to the poor with improved mobility


and a more comfortable public transport system.

It also means better accessibility of services, particularly schools and hospitals,


for the poor. 
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For the next six years, it also means providing jobs, especially in construction,
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On the other hand, the other 30 percent of TRAIN revenues will go to social
services programs. It will help fund free college education in State Universities and
Colleges, the National Health Insurance Program, the Conditional Cash Transfer
Program, among other poverty-alleviating interventions.

For a young and developing country like the Philippines, whose median age is
23 years old, we must prioritize developing our youth. This means giving them the
best education and healthcare public money can buy.

At the end of the day, a country’s greatest resource is its people. Without
TRAIN, the government will lack the funds to finance these development priorities.

Addressing the Misconception on TRAIN


Before I open the floor for questions, allow me to address the main criticism on
TRAIN: that it is anti-poor. They say that TRAIN will ease the lives of the middle and
upper-classes while imposing a heavy burden on the informal workers and
minimum-wage earners who are tax-exempt even before TRAIN.

We, in the government, have already thought of mitigating measures to protect


the poor from potential price increases.

In 2018, a cash transfer of P200 per month will be given to the poorest 50
percent of households in the Philippines, or the poorest 10 million households in the
country.

In 2019 and 2020, the cash transfer will go higher at P300 per month per
household.

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The Bangko Sentral ng Pilipinas and other government institutions have also
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projected the rate of increase in prices given TRAIN. Despite the higher
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inflation (or the rise in prices) is still pegged to remain at 2 – 4 percent from 2018 to
2022.
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Here is a sample of products and their projected price increases with TRAIN. It
will be noted that such price increases are very moderate, whether in food or non-
food products. The biggest price increase is really just with the petroleum products.
Nevertheless, the cash transfers to be provided by the government should be more
than enough to make up for the slight upward adjustment in consumer prices.

In total, the personal income tax cuts and/or the cash transfers will more than
offset the costs to households with the higher prices. This is not mere speculation,
but backed by formal studies by government institutions.

More so, the budget for these cash transfers is already included in the National
Budget.

The appropriate way of assessing the TRAIN is to look at its “net incidence”: by
looking at the additional burden on the tax side versus the additional benefit on the
expenditure side.

The tax revenues to be collected will not be stashed by the government as if it


was stolen from the people. Rather, it will be spent on the pressing needs of the
country, which will benefit the poor the most.

After all, it’s the poor who send their children to public schools, public hospitals,
and avail of government-provided services.

It’s the poor and working class who will benefit the most from an improved 
public transport system, and so forth.
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Final Remarks
In closing,
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the TRAIN Law is
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a reform initiative
that is crucial to
the poverty-
reduction and
economic
development
goals of the country.

It amends an outdated, inefficient, and unfair tax system while raising enough
funds to enable the country to reach its potential.

For perspective, here are some of the things that the TRAIN Law can fund in
the next five years:
- 629,120 public school classrooms, or
- 2,685,101 public school teachers, or
- 60,483 rural health units, or
- 484,326 barangay health stations, or
- 1,324 provincial hospitals, or
- 35,745 kms of paved roads, or
- 786,400 kms of temporary bridge upgrades, or
- 2,665,763 hectares of irrigated land.

Imagine being able to accomplish any of these things.

Still, tax reform is not a walk in the park. There will be winners and losers.


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What is important is that the gains outweigh the losses, while simultaneously
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protecting the welfare of those who will be negatively affected.
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Thank you and I am now ready to take your questions.

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Last Updated: 25 January 2018


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