Tax Reform Options to Generate Revenues While Reducing Inequality

• Main Authors: Mendoza, Ronald U, Basilio, Patricia Thea, Lalic, Eunice
• Format: text
• Published: Archīum Ateneo 2017
• Subjects: tax reform; income inequality; earmarking; public finance; Economic Policy; Public Affairs, Public Policy and Public Administration
• Online Access: https://archium.ateneo.edu/asog-pubs/96; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3048166
• Institution: Ateneo De Manila University

The Philippine government’s Comprehensive Tax Reform Program Package 1 (CTRP-1) has sparked considerable discussion on its effects on households at different income levels. This paper focuses on the impact on income inequality of the CTRP-1, discerning gaps that continue to exist in the formulation of the tax reform package. Not only do we find that the overall gains of poorer deciles are less certain, once leakage issues in the delivery of targeted transfers are considered; due to higher increases in disposable income from the reform package that accrue to higher deciles, post-tax income inequality increases significantly. Following from the analysis, we present options for policymakers on how to enhance the reform package’s response to inequality while preserving as much of its efficiency objectives. Lowering the PIT exemption threshold from PHP250,000 to PHP150,000 (as proposed by Senate Bill 1592) appears to regain some of the erosion of the Gini index that occurs with the House version of the bill; we determine, moreover, that effectively transferring PHP7,800 per household per annum, whether through cash transfers or earmarked programs, will serve to lower the Gini index by one full point from pre-tax levels. This outcome can be better guaranteed by increasing the earmarked share of petroleum excise taxes for social spending from 40% to 65%. Should the mobilization of additional resources prove necessary, three revenue-raising option are proposed: bank transactions taxes on demand deposits, a national land windfall tax or betterment levy, and increased sin taxes on tobacco products.