I HAVE already written about this new tax reform package that is in the process of being passed into law in Congress a few issues back. However, I feel that there should be more in depth discussion on this especially that this new tax reform package is thought to be anti-poor.
We cannot blame the poor for feeling this way because one of the most salient provisions of this new tax package is the lowering of the income tax. This would mean that the take home pay would be much higher, and this would be felt by the common employee. However, the poor who do not pay tax would not be able to feel this change in the income. They would not benefit from the lowering of the income tax.
Therefore, with the other provisions of increasing taxes on fuel, expanding the coverage of value-added taxes on consumer goods and imposing excise taxes on sugary beverages, the prices of most goods and services in the economy will generally increase. The poor whose main expense is on food would be severely affected.
In the short run, I believe the poor, and most consumers will be affected by the tax reform package. However, if we look at the long run effects of this new taxation scheme, I believe it would definitely benefit most, if not all citizens of this country.
How can this new tax reform package benefit us in the long run?
First, the increase in fuel (diesel) excise taxes. It is not just collecting government revenues. The purpose is also to correct market failures or externalities from consuming these goods. With the imposition of this tax, this could result to lesser pollution. Health-wise, there will be lesser number of people who will have respiratory ailments that are caused by pollution.
The collection of revenues, according to the proposed bill, will have to be siphoned back to the citizenry, particularly to the poorest of the poor and the vulnerable. There are three ways that this will be done: one is targeted cash transfers, to offset the sudden increase in inflation; another is the revival of the “Pantawid Pasada Program” where subsidy will be given to public utility providers to cover the additional costs incurred without a necessary increase in fare; and lastly, the modernization of our public transport system.
Second, the imposition of excise taxes on sweetened beverages. This would consequently increase the prices of sugary drinks, but as much as P10. The behavior of a rational economic agent here is that since this drink is basically addictive in nature, the consumption of this good would not greatly change in the short run. The consumers will definitely feel the increase in price.
However, the change in behavior happens as this high price is sustained over time. The consumer will now feel the burden of higher prices, and would now decrease his/her consumption of this good.
A much emphasized effect of this would be more on the health of the consumers. If people are consuming less of these sweetened beverages, they will not develop diseases like obesity, diabetes, etc. The poorest of the poor who initially felt the effect of the price increase would not be burdened with high medical costs because they are now consuming less.
Next week, the discussion on the expansion of the coverage of the value-added tax.
