Philippine GDP growth deceleration has continued from 5.7 percent in 2024 to 4.4 percent in 2025, 2.8 percent in the first quarter (Q1) 2026, 2.4 percent in Q2 and 2.1 percent in Q3.
Household consumption that constitutes 73 percent of GDP grew only by 2.4 percent in Q3, government consumption which is 16 percent of GDP grew by 6.8 percent and investments or capital formation that constitutes 21 percent of GDP has contracted with -0.2 percent. Investments have been contracting for five consecutive quarters since Q3 of 2025.
These are not good numbers. Business confidence is low, consumer confidence is also low, households and the people are not spending enough. There is a need to improve consumer confidence by raising consumer spending capacity. I can think of three measures to achieve this.
First, raise the annual personal income tax (PIT) exemption from the current P250,000 under the TRAIN law of 2017 to P500,000. The Department of Finance (DOF) through its Promoting Growth, Revenue and Equity towards Socio-economic Sustainability (ProGRESS) is proposing an increase to P350,000.
The P250,000 annual income looked “big” in 2017 when the TRAIN law was enacted. Adjusting it to inflation via the implicit price index of household consumption, the proposed adjustment to P350,000 in 2026 would be equivalent to only P248,000 in 2017. If Congress will enact the ProGRESS bill into law in 2027 and implemented in 2028, the P350,000 in 2028 would be equivalent to only about P236,000 in 2017. Lugi pa.
So the more realistic figure is an annual PIT exemption of P500,000 to allow further erosion of income value with rising inflation yearly.
I also think that keeping the 35 percent top marginal tax rate for income above P8 million yearly is high, it should be reduced to only 25 percent since government also goes after the disposal income or after-tax income via various consumption-based taxes like VAT and excise tax.
The top marginal income tax rate in Malaysia is 30 percent, Singapore is 24 percent, Hong Kong is 16 percent. So keeping that 35 percent top rate plus high VAT, high excise tax is not just and looked too confiscatory on people’s income.
And to make the PIT simpler, the number of brackets should be reduced from the current six to only five or lower. These are zero for annual income of P500,000, 10 percent, 15 percent, 20 percent and 25 percent top marginal tax rate for annual income above P8 million.
Second, abolish diesel excise tax. It was zero until 2017 then the TRAIN law imposed a P6/liter excise tax. Diesel is used by tractors, harvesters, threshers, irrigation pumps, trucks, buses, boats, etc. Higher diesel price via diesel tax leads to higher cost of farming and fishing, higher food inflation, higher cost of transporting people and goods.
There would be revenue losses with higher PIT exemption and abolition of diesel tax, but there will also be higher compliance and less tax dodging and under-declaration of personal income, which will help raise revenues. An income tax cut and consumption tax cut are equivalent to big salary increase and bigger take home pay, household consumption is captured by other taxes like VAT and excise tax.
ProGRESS bill has added another bracket for luxury vehicles, a 75 percent tax for vehicles above P8 million value. Instead of doing this, ProGRESS should have reversed an earlier DOF mistake of giving zero excise tax for full EVs and 50 percent discount on excise tax of hybrid EVs. A small gasoline sedan worth P600,000 is taxed 20 percent while a Tesla or Denza or other expensive EVs worth P1.5 million and up are not taxed. This is wrong, EVs or not should pay the same tax rate as gasoline vehicles.
Third, have single rate for excise tax of vapes and e-cigarette products, stop the annual increase in alcohol tax. ProGRESS is proposing to retain the dual rate but raising the tax rate, Freebase from P6.95/ml to P36.45/ml on first year of implementation, and nicotine salt from P60.20/ml to P72.90.
From the collection by the BIR for vape products of P2.54 billion in 2025, the implication is that 94.2 percent of vapes were declared as freebase and paid only P6.95/ml and only 5.8 percent were declared as nicotine salt which paid P60.20/ml. This is clear tax dodging and misdeclaration of products to avoid paying the higher tax rate. Technical smuggling (lower tax payment) on top of outright smuggling or zero tax payment.
The appropriate tax is a unitary or single tax rate of P10/ml, an increase from the current P6.95/ml where 94 percent of all vape products were declared.
Congress and DOF should go for an optimal tax rate, not maximum tax rate, to get higher revenues, lower the leakage and smuggling, and avoid a Laffer curve situation where overall revenues decline after some point as the tax rate increases. One DTI survey says that up to 93 percent of all local e-cigarettes are illicit. Comparing also China exports to the Philippines vs tax paid for vapes implied an 84 percent illicit incidence.
ProGRESS can regress government revenues when it prioritizes health goal over revenue goal while unintentionally aiding more smuggling.
Beyond ProGRESS tax package, government should cut some spending to manage the rising budget deficit and annual borrowings. The main problem in public finance is largely on the spending side and less on revenue side.
Consider the Expanded VAT law of 2005. When the various agencies, departments and the legislators saw the higher revenues from higher VAT (10 to 12 percent), they invented new spending in 2006 and beyond.
National government disbursements average increase from 2002 to 2005 was only three percent a year. After EVAT implementation, government spending increased 16.5 percent in 2006 and 18.2 percent in 2007.