Much thought and study went into the reform program, not just on substance but also on strategy for securing public and legislative support. As I understand, the key elements of the reform program are:

1. The bottom-line goal of tax reform is to raise 3% of GDP (gross domestic product) by 2019 — 2% of GDP from tax policy reform and 1% of GDP from tax administration reform. The bulk of this is intended for ramp up infrastructure spending from past level of 2%, to at least 5% of GDP.

2. Tax policy reform package also addresses equity, efficiency, and simplicity goals. These include the unfair tax burden on low salaried workers due to non-indexation of exemptions to inflation (bracket creep), the lack of competitiveness of our corporate income taxes vs. regional peers, leakages arising from the special treatment and exemptions provided in tax laws as well as the lack of information stemming, for instance, from a strict bank secrecy law.

3. The approach is to present a comprehensive package at the outset but pursue in stages several packages of tax policy measures combining revenue-eroding with revenue enhancing reforms that will yield the 2% of GDP estimate by 2019.

This is a sound and strategic approach.

It explains the full tax reform program as necessary to realize the development vision of the administration. At the same time, it bundles them into discrete bite size packages, each yielding a net gain. This makes for more focused discussion and debate, and forestalls Congress from passing lopsided revenue losing measures without compensatory enhancing ones. This also prevents needing to fight battles in multiple fronts and hostage taking of the entire package by a single interest lobby, a likely scenario with a single comprehensive proposal.

4. The key reform item in the area of tax administration is relaxing the country’s strict bank secrecy law for cases of fraud, proposed to be included under Package 1. Only two other countries aside from us have such tight bank secrecy laws, enabling not just tax evasion, but even more nefarious criminal activity like the recent Bangladesh central bank heist. (See table).

Allow me to talk about the revenue-raising components of Package 1 for passage by early next year.

Higher oil taxes. The case for this was made in my column last Feb. 29 entitled “Yes, New Taxes 2: Low Hanging Fruit.” [To read Mr. Bernardo’s Feb. 29 piece, please visit the linkhttp://goo.gl/9xRBzI]

I noted then that the following argues for an increase in oil taxes: a) the erosion in real value of oil taxes from 1.1 % of GDP in 1997 to only 0.1% currently (see graph); b) the recent sharp decline in global oil prices provides the opportunity to capture some of it for fiscal needs; c) like tobacco and alcohol, it is soundly based on proven negative externalities (n.b. in contrast to the weak case for a proposed tax on sugary products); and d) a good short-term response to the “traffic crisis,” encouraging ride sharing and trip planning, while addressing the problem at its roots by earmarking revenues for mass transport and road systems.

Most importantly, as emphasized by Sec. Dominguez, contrary to popular impression, oil taxes are highly progressive. The richest 2 million households (top 10%) consume almost 60% of petroleum products and commuting costs. The richest 200,000 households (top 1%) consume 20%. To address the impact on the poor riding public, the DoF (Department of Finance) has readied mitigating measures such as targeted subsidy schemes.

The one concern I do have on raising oil taxes is the increased incentive to smuggling it will provide. According to studies by the IMF (International Monetary Fund) and others, at least 20% of Philippine oil imports are smuggled.

My February column pointed to an ADB paper dated October 2015 as providing the answer — “(for) governments to institute sophisticated fuel marking programs as a proven way to increase government revenues, improve fuel quality and combat criminal activity.”A similar problem of increased rewards for cigarette tax evasion with the increase in sin taxes in 2013 was successfully addressed by the BIR (Bureau of Internal Revenue) then with an analogous solution — highly secure tax stamps.

Expand the base for value added tax (VAT). There are just too many exemptions that lead to large leakages, with the result that our VAT collection efficiency is only a fraction of our peers. These include exemptions on cooperatives, low cost and socialized housing, renewable energy, persons with disability, etc. which are cumbersome, poorly monitored, and not consistent with global best practice.

The most egregious example of this is the VAT exemptions for senior citizens, one sees most used when dining out. I wrote against it vehemently in 2010, supporting the recommendation of the DoF for a presidential veto. [To read Mr. Bernardo’s blog entry entitled “The Good, The Bad, and The Somewhat Stupid, please visit the link http://goo.gl/NymY2b]

This is what I said:

“It is somewhat stupid. Why? Because there are so many ways of helping the elderly without reaping the unintended consequences of creating a loophole in the VAT system that creates a compliance and administration nightmare, or be vulnerable to abuse by crooked traders and BIR agents.” Instead of regressive VAT exemptions that subsidizes in direct proportion to one’s purchases and therefore income, I suggested a conditional transfer type program to help the elderly poor.

Incidentally, the “good” in the title of that old column referred to the Arroyo-initiated and Aquino-expanded conditional cash transfer program. The “bad”, referred to NFA (National Food Authority). My colleagues and I at the Foundation for Economic Freedom (fef.org.ph) applaud the resolute decision of the Duterte administration to wind down the NFA, and finally lift this onerous burden on taxpayers and consumers, especially the poor.

Source: www.bworldonline.com