A statement I often hear from Finance Secretary Carlos Dominguez III is his recognition of the contribution of his predecessors and the previous administrations in providing the building blocks for the current comprehensive tax reform program. Recently, in a thanksgiving lunch he hosted for former finance secretaries, other former senior government officials, and reputable economists and technocrats from the private sector and civil society, including critics of the administration, he again emphasized that the current Department of Finance (DoF) has built on the good work that others have done.
This is very true. To illustrate, the Dominguez tax reform program is a continuation of the tax reform agenda of his predecessor, former Finance Secretary Cesar Purisima. The saga of the tax reform actually started in 2012 when the Benigno S. Aquino administration succeeded in restructuring and increasing the excise taxes on tobacco and alcohol products. It was a bitter struggle that was narrowly won, but it was a big victory. This episode demonstrated that politically influential vested interests could be beaten and that a bad tax law that held sway for 15 years could be overhauled. It likewise created a new and broader tax reform constituency, which now has been a vital cog in the economic reform struggle.
Unfortunately, the Aquino administration was not able to follow through after the 2012 sin tax victory. Its political capital diminished in the second half of the president’s term in the wake of the pork barrel controversy and the fallout from the Mamasapano massacre. Aquino himself was reluctant to endorse the controversial fuel tax despite the recommendation of some of his reformist allies in the Cabinet.
The gargantuan task to put in place a more comprehensive tax reform has become Dominguez’s challenge. It is noteworthy that such reforms are being introduced despite the absence of an economic crisis. Before, policy makers introduced reforms in response to crises. But this is the way to go: Pursue the hard measures when economic times are good. Note that Secretary Dominguez is spearheading not only tax reforms but also other reforms that generate controversy and unpopularity like rice tariffication and investment liberalization. These measures nevertheless are necessary to improve consumer welfare, create the incentives that will boost the productivity and incomes of our farmers, and generate investments that will create quality jobs and enhance the skills of our workers.
It is most kind of Secretary Dominguez to acknowledge the contribution of the former Finance Secretaries in paving the way for the current successful initiatives. Yet, we likewise have to give much credit to Dominguez and his DoF team for initiating and engineering the current tax reform that will certainly have a most profound impact both for the short term and the long term.
This comprehensive tax reform, bold and ambitious, has finally gained momentum and is nearing completion. The reform has provided personal income tax to compensation earners even as it has generated substantial revenue from the other elements of the reform. The first package of reforms that has passed includes the higher excise taxes on tobacco, automobiles, coal, and mining; the introduction of an excise tax on sugar-sweetened beverages; and the elimination of economically unjustified exemptions on the value-added tax on many goods and services.
The biggest generator of additional revenue has been the correction of the specific tax on fuel products, which heretofore were never adjusted to inflation for more than 20 years. The fuel tax burden actually falls mainly on the rich. Compared to the poor, the fuel consumption of the rich and upper classes accounts for a higher percentage of their total spending and total income. And although the poor were still affected by higher fuel products, 60% of the Filipino households — constituting the poor and the near poor, received unconditional cash transfers, which more than offset the higher spending.
Despite the implementation of the increased taxes on consumption at the start of 2018, poverty incidence among families still fell from 22.2% in the first semester 2015 to 16.1% in the first semester of 2018. A decline of six percentage points in a short span of three years is most significant. What accounts for this needs further scrutiny. But surely, the tax reform has not been poverty inducing and is in fact paving the way for providing essential goods, stimulating spending and investments, and creating jobs for the longer term.
What remains to be done to complete the comprehensive tax reform is going full speed ahead. In a span of two months, the House of Representatives has submitted bills on higher taxes on alcohol, electronic cigarettes and heated tobacco products to the Senate. The House has recently approved the rationalization of fiscal incentives together with the lowering of the corporate income tax. Also sailing smoothly are the reforms on passive income, financial taxes, and real property valuation. The remaining measures respond to the objectives of fairness, progressiveness, simplicity, and efficiency at the same time that they generate the sustainable financing for social and economic services.
The pending reforms will likely be completed in record time. But it is not the time to be overconfident. The advocates have to continue exerting utmost effort to defend and advance the progressive reforms. It ain’t over till it’s over.
In conclusion, Dominguez and his team have made it easier for the next administration (as well as succeeding administrations) to pursue a new generation of reforms. In the same way he has given credit to his predecessors for the current successes, we likewise have to thank Dominguez and his DoF team for accomplishing the hardest reforms that will have long-lasting impact on Philippine development.
Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.