Riding the TRAIN: The Income Tax
The House of Representatives passed House Bill (HB) 5636, also known as the Duterte administration’s first package of Tax Reform for Acceleration and Inclusion (TRAIN), back on the last day of May. It is a bill that intends to update the various tax rates of the country that have stayed generally static for at least two decades. The bill means to change the current income and consumption tax schedules and add new tax mandates as well.

Currently, the Senate will now deliberate over the house bill and the senators might just tamper it to the dismay of the Department of Finance (DOF) Secretary Carlos Dominguez III and Undersecretary Karl Kendrick Chua. They have not only planned and designed the new tax structure but they have also been explaining to lawmakers its complicated mechanisms and persuading them of the projected benefits. The House was difficult enough given its hundreds of members but a Senate with potent second intentions of its own might just derail the TRAIN by dissolving the original essence of the proposed tax reform bill.
The discussions and negotiations in the Senate might just take a while but most likely they would not be as long as the ones in the House. Regardless, we must analyze the bill, make sensible predictions, propose alternatives, and financially prepare for the continued taxation by the government. Although, it is not the only autonomous entity in the country that can come up with solutions.
Taxation of Earnings and Value

HB 5636 designs the new income tax system to be progressive — as income increases, effective tax rate increases. The radical aspect of the law is the total elimination of the income tax for the lowest income bracket and reduced income taxes for the higher income brackets of the current system of taxation. We should welcome the marginal tax rate reductions but we should worry about the marginal increase of tax rates for the country’s very wealthy. Such a measure has the potential to push financially successful individuals to either leave or underreport their earnings since it punishes those who create more wealth for themselves.

If ever these affluent individuals would leave, then they would take not only their personal selves away but also their property and that may also include their businesses and capital investments. These projects ensure and generate employment for individuals who need work for income. Taking them away would deprive them of not just work and income but also a considerable aspect of their lives’ meaning.
It is understandable that the government must generate revenue through income taxes in order to fund and implement its projects, especially the public works projects of the Duterte administration, but punishing society’s wealthy with relatively high tax rates might not extract more revenue but maybe even less. Economist Arthur Laffer highlighted this possibility if not reality: holding everything constant, there is a certain point as the rate of taxation increases wherein tax revenue reaches its peak then gradually decreases as the tax rate goes beyond that point. We need to find that point and most likely we have passed that point.

Decreasing the rate of taxation for all people will make the tax base broader: less people will commit tax fraud or move out and more people will have the interest to move in (or back), to start businesses, and to start working and earning. This environment of relatively low taxes actually fosters people to exercise their creativity and diligence that creates value. In addition, if taxes are low then people are more likely to pay knowing that the government will not take so much.
Instead of relying on high income taxes to fund the government, perhaps consumption or excise taxes are more preferable. Their punitive effects would not be as large and the revenue would still be significant even if it does not closely match the revenue collected by high income taxes. This will be the subject of the next article.
