On the TRAIN Law: How the poor will be hurt?

The TRAIN law lowers income taxes but to compensate for the reduction in tax revenue, it
imposes higher excise taxes which is an example of a consumption tax.
Violation of the fairness principle
This move creates a serious ethical issue. One principle of taxation is the fairness principle.
This says that those with more income should contribute a larger share of their income in
taxes. A practical reason behind this principle is the fact that the poor spend 90% of their
income on basic commodities compared to only 30% for the rich.
The fairness principle is addressed through a progressive form of taxation. This is reflected
in the way income taxes are computed wherein tax rates increase progressively for each
successive step in income brackets. This means that higher incomes are taxed with higher
rates. For example, under the previous tax system, the marginal tax rate for someone
earning Php30,000 is just 10% while it is 25% for someone earning Php150,000.
On the contrary, consumption tax like excise taxes on fuel products is a uniform tax system.
The tax rate is the same regardless of the income. For example, under the TRAIN law, the
excise tax on diesel is Php2.50 per liter for this year. Suppose that the price of diesel is
Php40 per liter, the excise tax is equivalent to 6.25%. This tax rate is the same regardless of
the income of the buyer of diesel. This violates the fairness principle.
To see how lower income individuals are adversely affected by excise tax, consider this
example. Suppose two individuals have monthly consumption of 200 liters of diesel. With an
excise tax of Php2.50 per liter, both of them will pay Php500 per month in excise taxes. One
of them is a jeepney driver earning Php10,000 per month, while the other one is a company
executive earning Php200,000 per month. For the jeepney driver, the excise tax is equivalent
to 5% of his income while it is just a miniscule 0.25% for the company executive. This makes
the excise tax regressive instead of being progressive. In effect, the jeepney driver whose
income is 20 times lower than the company executive is being unfairly taxed 20 times higher.
Worsens income distribution
One purpose of taxation is to address the imbalance of income distribution in the society.
This is achieved by a redistribution of income from the rich to the poor. One way to pursue
this is through progressive taxation. Unfortunately, as outlined above, the TRAIN law just
does the opposite. The following are additional arguments on why TRAIN will worsen the
income distribution.
A reduction in income tax envisioned under TRAIN will not benefit the people in the informal
sector since this sector is beyond the income tax mechanism of the government. It is in the
informal sector where around 90% of the poor is located such as the farmers, fishermen,
jeepney and tricycle drivers, ambulant vendors, etc.
The higher take home pay brought about by the reduction in income tax will also not benefit
the minimum wage earner even in the formal sector since they are exempted from paying
income taxes in the first place. In the same manner, the non-income earners like,
dependents of OFW remittances and pensioners, will gain nothing from a reduction in
income tax.
However, the informal sector, the minimum wage earners and the non-income earners will
be hurt by the increase in prices brought about by higher excise taxes. These people who
constitute the bottom 60% of the income stratum in the society will find themselves spending
a greater share of their expenditures in taxes.
While those who have regular employment in the formal sector may enjoy higher take home
pay and lower taxes, the bulk of the poor will not enjoy the higher take home pay but pay
higher taxes. This is not just a violation of the fairness principle but also contrary to the
redistributive purpose of taxation.
One million more poor people
With excise taxes come the fear of higher prices. The Bangko Sentral ng Pilipinas tries to
downplay the effect of TRAIN on inflation by saying that it will increase the inflation rate by
only 1%. However, they admit that this is just the first round of increase, meaning to say, just
the direct effect of excise taxes on commodity prices. The secondary effects which would
include higher transport fares, cooking expenses, electricity bills and production cost
amounts to another 1%.
This is just the cost side. Inflation may also be caused by demand side movements. As the
richer households receive higher take home pay, they have more money to spend with.
These may increase aggregate demand.
A reduction in the supply side due to higher fuel prices and production cost coupled with
higher demand side movements due to higher take home pay, will create more price
inflation. This will add another 1% at the very least. That is a total of 3% already.
Roughly speaking, inflation rate is computed based on the increase in the cost of the typical
consumption pattern of a Filipino household. However, a study by the Asian Development
Bank found that the consumption pattern used in the computation of official inflation rate in
the Philippines is different than the typical consumption pattern of poor Filipinos. Moreover,
the study revealed that the inflation rate as felt by the poor is higher by around 2% than the
official inflation rate. This implies that the impact of TRAIN on the poor’s inflation rate is
around 5%. Based on the study, a 5% additional inflation rate will put one million more
Filipinos in poverty.
Can double the salary of public school teachers
The Bangko Sentral, through its control of money supply and interest rate, can control
inflation to be within its target of less than 4%. This can be done by increasing the interest
rate. Many studies estimated that to mitigate the impact of TRAIN law on inflation, the
interest rate has to go up by 0.5%. With the country’s national debt at around Php6.5 trillion,
a 0.5% increase in interest rate means that interest payment will increase by Php32.5 billion.
An amount already sufficient to double the entry-level salary of public school teachers.
Summary
To wrap up, the TRAIN law is a tax reform that violates the fairness principle of a tax system.
The shift from income to consumption taxation makes the bottom 60% such as the people in
the informal sector, the minimum wage earners and the non-income earners like OFW
dependents and pensioners, more adversely affected.
With the rich paying less taxes and the poor paying more taxes, this is also contrary to the
redistribution principle of a tax system and will worsen income inequality.
The inflationary impact of TRAIN brought about by excise taxes will add another one million
Filipinos living in poverty. Mitigating higher inflation by increasing the interest rate will result
in higher debt servicing by an amount adequate enough to double the salary of public school
teachers.
For more info please pm Prof. Harvey Malmis Niere