Should government cut income taxes? Let’s wait awhile - Eaglewatch by Ranelle Jasmin Asi and Dr. Luis Dumlao

October 16, 2015
Let’s wait awhile before we go too far
(lyrics borrowed from Janet Jackson)
 
From 1994 to 2014, bonuses and other benefits, including the 13th-month pay that were less than P30,000, were exempted from tax; everything over was taxed. With the P30,000  exemption set in 1994, it was deemed outdated. For example, the government estimated that P30,000 in 1994, if adjusted for inflation, has the same purchasing power as P82,000 in 2014. In consideration of this, Republic Act (RA) 10653 was passed, raising the exemption from P30,000 to P82,000, with the President having the authority to adjust the exemption every three years, in accordance with inflation.
 
We agree with Sen. Juan Edgardo M. Angara that there is “injustice” when an exemption is not adjusted for inflation for as long as 20 years. A person receiving P30,000 in 1994 has much more purchasing power than a person receiving P30,000 in 2015. So to correct the injustice, the “justifiable” policy is to cut the tax of the person receiving P30,000 today.
 
But suppose we reword injustice with “price” and justifiable with “costly.” Then, there is “price” when an exemption is not adjusted, and it is costly that people receiving P30,000 in bonuses should be taxed less.
 
The price is easy to explain, because almost all can relate to it. Everyone who earns wage both in the private and government sectors, including these authors, pay for the price every time one receives the 13th-month pay. But reducing the price might be costly financially and developmentally. In finance, while debt was equivalent to 61 percent of the GDP in 1994, it is now less than 40 percent. In development, there was no Conditional Cash Transfer (CCT) in 1994, there are now 4 million recipients of CCT. Indeed, many of us pay the price, but price has been the cost of improving finance and development.
 
Still, there is injustice in that it is not right for certain groups of people to be paying the price. But if certain groups of people should not be responsible for paying the price, it cannot be that nobody is responsible for paying the price. So, if someone’s tax is cut, someone else’s tax should be raised.
 
Consider the position of the Department of Finance (DOF) before RA 10653 was passed. It said that compensating revenue measures must also be enacted into law. But instead, the government did not wait awhile and passed RA 10653. With elections coming in, it is too late for no politician will propose a bill that will compensate for the tax cut.
 
 
Furthermore, bills further cutting taxes have been proposed. For example, the lowest marginal tax bracket of zero tax to those earning less than P10,000 has been proposed to become zero tax to those earning less than P150,000. The highest marginal tax bracket of 32 percent to those earning more than P500,000 has been proposed to become 25 percent to those earning more than P10 million.
 
The debate is on. On one side, the DOF predicts significant decrease in revenue. On the other, legislators argue that cutting the taxes will increase households’ take-home income. With more take-home income to spend, consumption will increase, which then increases business income eventually increasing tax revenue.
 
Fortunately, in just awhile, the impact of RA 10653 will enable the government to produce data that will show whether tax cuts result in government losing or gaining revenue.
 
Before RA 10653 was passed, here were the predictions: Finance Undersecretary Jeremiah Paul told Congress that revenue loss would range from P10.3 billion to P43.6 million. Senators Angara and Ralph Recto debunked the claims of the DOF, and in separate interviews, the senators said that the Philippine Institute for Development Studies and other economists (excluding us) pegged the possible revenue losses between P3.5 billion and P7.3 billion.
 
 
We are now in mid-October, less than two months away from receiving the 13th-month pay and feeling the benefit of RA 10653; less than three months away from closing the book on 2015; and about four months away from the government being able to calculate the effect of tax cuts on economic growth and government revenue.
 
Will the RA 10653 tax cut actually slow economic growth and decrease government revenue? In 1987 pop star Janet Jackson sang the importance of not rushing into actions that might irreversibly damage something young women hold dear. Nostalgic sentimentalism aside, we should not rush into reducing taxes that might irreversibly damage the long run financial stability and developmental goals we hold dear.  Let’s wait awhile.
 
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Ranelle Jasmin Asi is graduate research assistant and Luis Dumlao is former chairman, Department of Economics. First published in Business Mirror