Zarina Luz R.

Bartolay January 16, 2018

ABM12-A (AM) Dr. Noel B. Hernandez

AN ECONOMIC IMPACT ANALYSIS ON TAX REFORM FOR

ACCELERATION AND INCLUSION OR TRAIN

The Tax Reform for Acceleration and Inclusion also known as TRAIN which is a
comprehensive tax reform program had its first package officially signed into law by President
Rodrigo Duterte on December 19, 2017 and was fully implemented on January 1, 2018. This
program decreases the taxes on the personal income, donation, estate as well as the value-added
tax. However, there is a consequence for this action which resulted to higher taxes on passive
incomes, sale of shares of stocks, increase in excise taxes on manufactured oils, cigarettes, mineral
products and even automobiles. Not to mention an addition of new taxes on sweetened beverages,
non-essential services like invasive cosmetic procedures, and also PCSO winnings.

Such that with this law’s implementation as well as respect to the income tax, the
previous laws or provision of laws were nullified. The following are the “Magna Carta for
Persons with Disability”, “Foster Care Act of 2012”, “An Act Providing for Charity
Sweepstakes”, “Horse Races and Lotteries”, Section 5 of R.A. 8756, Section 2 of P.D. 1354, s.
1978, and lastly Section 7 of P.D. 1034, s. 1976.
As a matter of fact, other details were modified for these new program. Under the
new law, it would lessen the amount of all the taxpayers’ personal income tax (PIT) except for
those who are considered to be the richest. Wherein those whose annual taxable income is not
over Two hundred fifty thousand pesos (₱ 250,000.00) would get a zero percent (0%) tax rate or
in other terms, would be exempted in paying the PIT until 2023. While the rest of the taxpayers
would get a twenty percent (20%) to thirty percent (30%) income tax rate by 2023 except for
those whose annual taxable income exceed Eight million pesos (₱ 8,000,000.00) will now have a
thirty-five percent (35%) tax rate by 2023. Aside from the fact that the minimum wage earners
would be exempted from paying the income tax on their taxable income as well as their holiday
pay, overtime pay, night shift differential pay, and hazard pay would be also exempted from the
income tax. Self-employed and/or Professionals who ought to have gross sales or gross receipts
below the VAT threshold ,which is now increased to Three million pesos (₱ 3,000,000.00), would
now have the option to avail eight percent (8%) flat tax, while those who exceed the VAT
threshold would still be following the new tax schedule.

The “Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines” implies that with the lowering of personal income taxes on the taxpayers result to a
much higher take home pay for these workers. For example, a full time employee whose monthly
income is Eighteen thousand pesos (₱ 18,000.00); had a 13th month pay and other benefits
amounting to Eighteen thousand pesos (₱ 18,000.00) as well as a mandatory contribution of
Twenty-one thousand and ninety-nine pesos and sixty centavos (₱ 21,099.60); a personal
exemption of Fifty thousand pesos (₱ 50,000.00) and allowance for dependents amounting to
Fifty thousand pesos (₱ 50,000.00) would now be having a tax due of ₱ 0 instead of Ninety-four
thousand nine hundred pesos and forty centavos (₱ 94,900.40).
 The policy makers might wanted to help the individuals in any way they can by
putting reduction in the income tax rates. For which this could affect the behaviors of not only
individuals but also businessmen in a positive way, thus resulting to a more after-tax reward and
a change in the growth of the economy. Wherein this after-tax reward may now encourage these
individuals to work more and save more. Yet, this action of simplifying the income tax brackets
into a decrease by six (6) brackets and reducing the tax rate per annual income bracket would be
the cause for a substitution effect which would be discussed later on. For those who are high
income earners would still be facing high income tax rates in order to maintain progressivity like
before.
When it comes to tax rates on certain passive income such as interests, royalties, and
other winnings, there was an effect caused by the TRAIN. Such that interests from any currency
bank deposits, royalties except on books, prizes and other winnings from different sources within
the Philippines maintained the same percentages. However, interest incomes from depository
banks that were under the expanded foreign currency deposit system experience a change in its
final tax rate. To illustrate, before it was 7 ½ % but now it was changed to fifteen percent (15%)
under the TRAIN Law. Therefore, it increased by twice as much as before yet would might be
bearing the same outcome due to other changes in the tax rates.

With regards to the 13th month pay and other benefits, these are now considered tax-
free if it did not exceed Ninety thousand pesos (₱ 90,000.00). Which might as well result to a
substitution effect on other goods to be sold.

The government had also imposed a tax on the grossed-up monetary value of fringe
benefits that are granted to the employee by the employer. Whereas these fringe benefits are
special form of benefits that are received by an employee apart from their stated wage or salary.
These could be in a form of medical insurance, housing allowance, and etc. With these additional
benefits, it could encourage the productivity of the employees. Yet, there could be a question as
to how it can benefit the economy. Imposing an additional fringe benefit tax rate would increase
the fringe benefit tax paid by the employer thus having more taxable income for the government
projects. Furthermore, because of its increase from thirty-two percent (32%) to thirty-five percent
(35%) it would be a great factor in gaining more public funds. In other words, these could be a
positive effect in helping to improve economic status.

In like manner, the Value-added Tax, which is equivalent to twelve percent (12%)
is still levied and collected on sales of goods or properties, importation of goods, and sale of
services and use or lease of properties. However with some exemptions or a subject to zero percent
(0%) rate on the following sales and transactions such as: export sales, sales and delivery of goods
to registered enterprises within a separate customs territory and tourism enterprise zones and the
like. And for transactions which include services rendered to persons who are engaged in
international shipping operations, transporting of passengers and cargo through domestic air and
sea vessels from the Philippines to another country, and many more. Moreover, another set of
transactions were exempted from the value-added tax namely, educational services rendered by
some private educational institutions and government educational institutions, sales by different
cooperatives, lease of a residential unit below Fifteen thousand pesos (₱ 15,000.00) per month,
sales or lease of goods and services rendered to both senior citizens and persons with disability,
medicines for hypertension, high cholesterol and diabetes, those with sales or lease of goods or
properties and services whose annual gross sales do not exceed Three million pesos (₱
3,000,000.00) and many more.
 Value-added tax may be considered as a source of revenues in the Philippines which
is why goods and services have higher prices (for those who are VAT-registered). However, due
to certain conditions, the government have imposed exemptions on various categories of
economic activities which means there would be no tax payable on sales while those with a zero
rate are entitled to a tax refund paid on purchases. Having VAT exemptions could result to more
money in their pockets however there would be lack of public funds which are intended for
economic development and government projects such as infrastructures and more. Taxes are
known to be public funds that the government could use in improving or developing local and
national projects for the benefit of the country, however if the government imposed lots of
exemptions just like what is listed in the TRAIN Law, where will they be able to get funds for
their proposed projects? Furthermore, this might be the cause for an economic problem if there
would not be enough taxes to cover up for these exemptions and income tax rate reductions.

This is why the government also included in the TRAIN Law some additional taxes
which are known as excise tax to be applied on goods manufactured and produced inside the
Philippines. This is where the idea of substitution effect may involve in. Due to additional taxes
inputted in every product, the consumers might look for a much cheaper or alternative option.
After all those exemptions and reductions, the government imposed excise taxes on products such
as cigars and cigarettes, manufactured oils and other fuels, miscellaneous articles like
automobiles, non-essential services, sweetened beverage, and mineral products. These excise
taxes will be considered as consumption tax on products that have negative effects not only in
health but also to the environment. With these excise taxes, it could promote healthcare as well
as prevention and protection of the natural resources and environment.

On cigarettes packed by hand and machine, there would be an excise tax collected
based on a schedule. Wherein for the year 2018 and 2020, there will be a twice increase in the
price per pack of cigarettes while on January 1, 2024, the price per pack will gradually increase
by four percent (4%) every year. The government also added an excise tax on sweetened
beverages specifically an additional Six pesos (₱ 6.00) per liter on beverages that uses caloric and
non-caloric sweeteners while Twelve pesos (₱ 12.00) for high-fructose corn syrup.

They may have thought of this as a better idea in covering up those taxes that were
missed out due to the exemptions and reductions. As a matter of fact, it could be considered as
one because most individuals frequently uses cigarettes every day despite of the smoking ban
being implemented in the country. However, it could be a disadvantage right now to
manufacturers and sellers as it could result to low revenues- higher prices, lower sales. Also,
another disadvantage that could affect this is by the implementation of the smoking ban by the
Duterte administration. There has been reports about a recent decline on the number of smokers
in the Philippines which were acknowledged by Global Adult Tobacco Survey (GATS) which
would be a factor in having lesser taxes for the government public funds.

Consequently, another set of products are being affected by this TRAIN Law due to
the ultimate consumption of Filipinos of sweetened beverages. If cigarettes would be at a little
disadvantage, on the other hand, these sweetened beverages would be considered as an advantage.
Even though the increase in price would promote health to consumers just as how they promote
the increase in prices in cigarettes before, still no one can stop people from buying goods that
they like and desire. However, there could also be a little disadvantage due to the fact that these
excise taxes were imposed in order to promote healthcare by means of aiming to reduce sugar
consumption for them to avoid diseases like diabetes and other more. But still, consumers would
not be able to notice anymore the excise tax as if it was always part of their expenses. They will
just continue to buy sweetened juice drinks, all carbonated beverages, energy and sports drink,
and the like. In other words, the excise tax would be like an invisible tax to consumers when it
comes to sweetened beverages which could be a factor for successfully covering up the missed
out taxes on the reductions.

On the other hand, just like as usual, the price of petroleum will increase every year
by the start of January 1, 2018. While the other manufactured oils such as lubricating oils and
greases, denatured alcohol, naphtha, kerosene, asphalts, diesel fuel oil and etc. would also
increase its excise tax for the period 2018 to 2020 unless there would be a reason for this to be
suspended based on the Mean of Platts Singapore (MOPS). There are also excise taxes on mineral
products effective starting January 1, 2018 wherein these excise taxes that would be further added
every year could help in increasing a gain in public funds thus receiving a much higher gain from
these activities. Wherein the tax rates are doubled in order to pay for the loss of natural resources
within the country’s territory.

Aside from the goods with excise tax, the government had also imposed one on
services which non-essential services. These services include cosmetic procedures, surgeries and
body enhancements wherein it’s directed only towards improving or enhancing one’s appearance
without any connection about treating or preventing illnesses or diseases. Thus this could maybe
help in improving the economic status of the country due to a large interest in improving a
person’s appearance which makes them more engaged into such activities even simple surgeries
without the need to worry on the excise taxes. While on the other procedures that are deemed
necessary to ameliorate some developmental defect or personal injuries or disfiguring diseases
and other necessary reasons will be having a zero percent (0%) tax.

In addition, there are also changes on the document stamp tax on almost all of the
taxable documents in the country. Wherein these changes made are all in the increase side. Based
on the information stated in the new law, there will be higher taxes that could promote economic
development.

This TRAIN Law could have various effects on local and national level in the
Philippines. Wherein these effects could be on the positive side or in worst case would be a
negative impact towards the economy.

First off, is all about the tax cuts or reduction of income taxes. This reduction could
be of a happy moment to taxpayers given that there will be a much higher after-tax income that
they will be receiving with these law however, this can also cause negative supply effects given
that it could cause to work less and instead spend more time for their own leisure and interests.
After much realization, these tax cuts and more VAT exemptions could slow the long-run
economic growth of the country by an increase in the deficits. These deficits could hinder the
continuation or implementation of projects made by the government. Also the issue on excise
taxes that were imposed on products caused various reactions from the citizens knowing the fact
that what they normally consume will be increasing in prices therefore the result for the year of
this implementation could be questionable. Most importantly the issue on Sugar-sweetened
beverages tax wherein this can also put on a negative impact due to the fact that aside from the
Department of Health (DOH), the Department of Finance (DOF) also supports this
comprehensive health measure aimed at directly lessening the consumption of SSB for the
avoidance of diseases and the promotion of health care. With this, it could somewhat lower the
chances of gaining taxes.

However, despite the reductions and tax cuts implemented by the government,
luckily, there are taxes that could cover up the insufficiency and deficits. These taxes are the
fringe benefit taxes, document stamp taxes, and might as well include the excise taxes. The excise
taxes on automobiles, cigarettes, sweetened beverages, invasive cosmetic procedures, mineral
products, and manufactured oils like petroleum would be considered as a definite advantage in
outweighing the potential drag of the deficits. Moreover, there is a higher chance for revenues
than loss due to a number of people who are interested in the consumption of goods and the
services as well. Likewise, the excise would raise the revenues in automobiles as those who are
well-off could afford and buy expensive and luxurious cars than those who own less. In simpler
understanding, due to additional taxes made by the government, there would not be any problem
in balancing the deficits from the reductions and the additional gains on the excise taxes.
By considering the first package of TRAIN, it can be concluded that with the
increases in the take home pay of workers after all these income tax reductions will be considered
more than enough to offset the price caused by the changes and adjustments in the excise taxes.