To Cut or Not:

The Cause and Possible Impact of Dutertes Planned Tax Reforms

By: Jordan B. Jalbuna, CPA

It was sweet melody to the ears of the Filipinos hearing about plans of
personal and corporate tax cuts during President Rodrigo Dutertes first
State of the Nation Address, July 25, 2016. Lower income tax means
increase in taxpayers discretionary income or disposable after-tax income.
With lower income tax rates, workers would keep more of their gross
income, so effectively, they have more money to spend.1

Although the planned reforms have not yet reached specificity, it is a

promise by Duterte to bring down income tax rates. The Duterte
administration plans to adopt a revenue-positive comprehensive tax
reform package that will still allow the government to generate more
revenues to be spent on public goods and services even if income taxes are
lowered.2

As taxes are considered the lifeblood of the government and their prompt
and certain availability are an imperious need3, every move to change
existing tax rates and adopt new revenue measures could pose effects to the
States economy and the nation as a whole. This is probably the reason why
former BIR Commissioner Kim Henares mentioned in an interview, we
cannot take a reductionist or simplistic approach to tax reform.4

1 Tejvan Pettinger, The Effects of Tax Cuts, Economicshelp.org, April 22, 2015. Available from
<http://www.economicshelp.org/blog/13566/economics/the-effect-of-tax-cuts/>, Accessed on August 10,
2016.

2 Ben O. De Vera, Higher Soft drinks, fuel taxes part of reforms, Inquirer.net, July 21, 2016. Available
from <http://business.inquirer.net/212180/higher-soft-drink-fuel-taxes-part-of-reforms>. Accessed on
August 10, 2016.

3 Commissioner v. Pineda, 21 SCRA 105

4 David Cagahastian, DOF lashes back at solons pushing for tax reforms, Businessmirror.com.ph,
November 9, 2015. Available from <http://www.businessmirror.com.ph/2015/11/09/dof-lashes-back-at-
solons-pushing-for-tax-reforms/>. Accessed on August 20, 2016.
The Need for Tax Reform

Recent income tax reform proposals in the Philippines have been partly
motivated by the need to adjust the tax brackets in order to better reflect
changes in incomes that have been taken place since 1997, when National
Internal Revenue Code was enacted.5 A study at the AIM Policy Center has
provided that according to tax literature, most income tax systems in the
world are not automatically inflation-adjusted. Over time, and if left
uncorrected, this has the likely result that rising nominal incomes may push
a growing number of income taxpayers into much higher tax brackets, even
as their real incomes have not increased. This is a situation known as
bracket creep.6 This bracket creep could contribute to fiscal draga
weakening of aggregate demand due to excess taxation of a growing
number of taxpayers. This could diminish the progressivity of the income
tax regime, as more individual taxpayersnotably on the higher end of the
income spectrumare pushed to the same bracket as the richest taxpayers
in the country.7

Withal, the progressivity of the Philippine income tax system is put in

question. Congress, with its absolute prerogative to design the personal
income tax structure, is enjoined to evolve a progressive system of
taxation".8 This requirement is corollary to Theoretical Justice, one of the
principles of a sound tax system, mandating that a tax system should be fair
to the average taxpayer and based upon his ability to pay.9 Thus, a
progressive system of taxation uses higher tax rates at the tax base

5 Enrico V. Gloria, et.al., An Analysis of Philippine Income Tax Reforms. Ssrn.com, October 1, 2014.
Available from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2466989 . Accessed on August 12,
2016.

6 Ibid.

7 Supra Note 4.

8 Article VI, Section 28 (1) of the 1987 Philippine Constitution

9 Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence, (Quezon City: Rex Printing
Company, Inc., 2000) p. 2.
increases.10 In a progressive tax system, the high-income earners are made
to pay a higher amount of taxes for the welfare of the low-income earners.
Hence, the progressivity of the tax system is determined not only by its
formal structure as it appears in the statute but also, and perhaps more so,
by its efficacy in carrying out its goal, that is, social justice.11

On its face, the countrys individual income tax structure appears to

be progressive12 as seen in the tax rates ranging from 5% to 32%,
depending on the amount of net taxable income.13 However, because of
failure to account for inflation and bracket creep, the structure is effectively
regressive and has become flatter.14

A casual analysis of tax policies in the ASEAN suggests that the

Philippines has the second highest average personal and corporate income
tax system among its ASEAN-6 peers15. And as the ASEAN region moves
toward a borderless economic community, the Philippines will have the most
uninviting tax systems among its ASEAN-6 peers should the government not
implement a tax cut.16

Indubitably, these rates, which have been effective for almost two
decades, are outdated and have to be revised, lest we remain uncompetitive
and unresponsive to the needs of the Filipinos. Failure to account for the
distorting effects of inflation and the inequality brought about by the
effective regression of tax rates call for these reforms.
10 Ibid, p. 28.

11 Francis Paolo Tiopianco and Danjun Lucas, Structural and Contextual Progressivity of the Philippine
Individual Income Tax System, 87 Phil. L.J, (2013) p. 585

12 Ibid.

13 Section 24,National Internal Revenue Code of 1997

14 Tiopianco and Danjun, op.cit. p.618

15 ASEAN 6: Philippines, Malaysia, Indonesia, Vietnam, Singapore, Thailand

16 Chrisee Dela Paz, Why Ph has 2nd highest income tax in ASEAN, Rappler.com, October 1, 2015.
Available from <http://www.rappler.com/business/211-governance/107617-philippines-highest-income-
tax-asean>. Accessed on August 15, 2016.
Effects of Possible Tax Cuts

Adjusting the structure would be to lower taxes for everyone except the
rich, which will adversely affect the governments internal revenue
collection because of a tax base. For example, if the present threshold of
P500,000 is increased to P1,000,000, the government will end up collecting
less because the individuals falling within the range will pay less taxes than
they originally would have.17 Obviously, corporate tax collections will be
lower if tax cuts will be approved equating for diminished government
revenue.

Economics-wise, it is easy to say that the tax reform plans would adversely
affect the government. However, this is more apparent than real. There is
evidence to suggest that the long-term benefits may offset the temporary
shortfall.18 It is found that the long-run benefits of a carefully designed tax
structure offset the disadvantage of temporary budget deficits, by providing
the developing country with the necessary and perhaps sufficient
environment to stimulate economic growth.19

More so, the financing of tax cuts significantly affects its impact on long-
term growth. Tax cuts financed by immediate cuts in unproductive
government spending could raise output, but tax cuts financed by
reductions in government investment could reduce output. If they are not
financed by spending cuts, tax cuts will lead to an increase in government
borrowing, which in turn, will reduce long-term growth. The historical
evidence and simulation analyses suggest that tax cuts that are financed by
debt for an extended period of time will have little positive impact on long-
term growth and could reduce growth.20

17 Supra Note 11

18 Supra Note 11

19 Jonathan S. Skinner, Taxation and Output Growth: Evidence from Asian Countries, Nber.org.
Available from <http://www.nber.org/papers/w2335>. Accessed on August 15, 2016.

20 William G. Gale and Andrew A. Samwick, Effects of Income Tax Changes on Economic Growth,
Brookings.edu, September 2014. Available from <https://www.brookings.edu/wp-
content/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Samwick.pdf>,
Accessed on August 20, 2016.
Financing tax cuts is the real challenge. Currently, the administration is
eyeing the removal of the exemption granted to senior citizens and persons
with disabilities from VAT to cover for revenue losses from cutting
individuals and corporate income taxes.21 This move has already drawn flak;
at least two senators have rejected this proposal to take away the
exemption granted to senior citizens and PWDs.22 An editorial published in
the Philippine Star described this as like trying to correct one defect by
creating another.23

But amid these probable perils of the proposed tax reforms, the move, if
carefully outlined, will be a win-win situation for the government and the
Filipino taxpayers.24

For obvious reasons, the picture will be a rejoicing nation of taxpayers. It

will free taxpayers a large portion of gross income, which will become
either disposable income or additional savings. With more disposable
income, people can get to buy more of their necessities, and the amount
spent will end up feeding in the economy just the same.25 Second, there
would be an expected increase in domestic and foreign business entrants,
equating tax collections. Third, lower tax rates would come across to
taxpayers as fair and encourage more people to be dutiful and honest about
paying their taxes, instead of the existing system of widespread tax evasion

21 Marvin Sy, Seniors, PWD may lose VAT exemption, Philstar.com, August 17, 2016. Available from
<http://www.philstar.com/headlines/2016/08/17/1614367/seniors-pwd-may-lose-vat-exemption>,
Accessed on August 19, 2016.

22 Ibid.

23 Seniors, PWDs cannot carry tax reform burden, Philstar.com, August 18, 2016. Available from
http://www.philstar.com/freeman-opinion/2016/08/18/1614669/editorial-seniors-pwds-cannot-carry-tax-
reform-burden, Accessed on August 20, 2016.

24 Wilson Lee Flores, Pass lower tax bill to boost economic growth and gain higher tax collections!,
Philstar.com, September 14, 2015. Available from <http://www.philstar.com/business-
life/2015/09/14/1498826/pass-lower-tax-bill-boost-economic-growth-gain-higher-tax >, Accessed on
August 19, 2016.

25 Claire Jiao, Income tax reform to benefit poor, middle-class the most Cnnphilippine.com, July 12,
2016. Available from <http://cnnphilippines.com/news/2016/07/12/income-tax-reform.html >, Accessed
on August 10, 2016.
and underpayment. More so, lowering our individual income tax rate and
corporate tax rate would make the Philippines more competitive compared
to our ASEAN and Asian neighbors.26 All these, are parts and parcels of
promoting social justice as a goal of the requirement of progressivity of
taxes.

There is no gainsaying that a need to revisit the current tax system exists.
And if the reforms, after careful studies, are implemented, the news will be
one of the sweetest melodies to be heard by the Filipino people after such a
long time.

26 Flores, loc.cit.