Tax cuts may impact revenue, growth

MANILA, Philippines — The scheduled tax reduction at the onset of the new year is expected to boost consumption, but economists are concerned that the government may generate lower revenues in the absence of strong economic growth.

By Jan. 1, taxpayers with annual income of less than P250,000 will still be exempt from paying personal income tax.

The rest of the taxpayers, except those with over P8 million income, will have lower tax rates of 15 to 30 percent.

Taxpayers earning more than P8 million will be slapped a 35 percent tax, up from the current 32 percent, in line with efforts to maintain progressivity.

The tax reduction schedule is part of the Tax Reform for Acceleration and Inclusion (TRAIN) Law,  implemented in 2018, which gradually reduced personal income taxes over the years.

With the tax cuts by next year, economists told The STAR that they are expecting a slowdown in revenue collections, although this may be partially offset by higher consumption among Filipinos.

ING Bank senior economist Nicholas Mapa said tax reduction could hamper fiscal consolidation efforts given the pullback in revenue growth.

But on the upside, an increase in disposable income can also lead to higher consumption taxes, which is another source of government revenue.

“It could partially offset, perhaps, but not likely to fully compensate,” Mapa said.

“It might also explain why the government projects a long decline below 60 percent for the debt-to-GDP,” he said.

Based on the revised medium-term fiscal program as approved by the Cabinet-level Development Budget Coordination Committee (DBCC), total revenues will increase by only 5.4 percent to P3.7 trillion in 2023.

This is significantly slower than the expected 17 percent growth in revenues this year.

Revenues as a percentage of gross domestic product will also decline to 15.4 percent in 2023 from this year’s assumption of 16.1 percent.

Union Bank of the Philippines chief economist Ruben Carlo Asuncion, for his part, said that there would not be much problem for government revenues moving forward if and when economic growth and recovery outperforms.

Aside from higher consumption, Filipinos are also seen putting their additional take-home pay into savings amid the potential impact of recession abroad, which could eventually help investments that can later translate to higher consumption.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said extra income would be channeled to savings and investments, as well as increased spending via the value-added tax.

The Duterte administration’s proposed fiscal consolidation plan had called for the deferment of the tax cuts amid the need to secure revenues to pay off the country’s massive debt.

However, the Marcos government is pushing through with the tax cuts, which economists said is a way of giving Filipino consumers a break from rising costs and elevated interest rates.

“This would help ease the adverse impact of inflation through higher take-home pay for most income brackets and to also help boost consumer spending, which accounts for at least 73 percent of GDP and also as a de facto stimulus for the economy,” Ricafort said.

“It may also be because of the potential seven percent economic growth expectation for 2022,” Asuncion said.