Tax Reform and Demands for Accountability in the Philippines.

• Author: Montinola, Gabriella R.

1. Introduction

   Rodrigo Duterte was elected president of the Philippines in May 2016. While his flamboyant war on drugs gained immediate and extensive international attention, Duterte also put in motion a bill for comprehensive tax reform within his first 100 days in office (Dumlao-Abadilla 2016). Duterte's new government promoted this tax reform as a means to stimulate growth and equity. However, analyses presented conflicting estimates of the reform's consequences (see, for instance, Pasion 2017, Punongbayan 2017), and significant public debate ensued about the bill's expected impact on different segments of the population, particularly the poor. After a great deal of legislative deliberation and media scrutiny, the controversial bill--the first comprehensive tax reform in twenty years--was signed by President Duterte on 19 December 2017; it came into effect on 1 January 2018.

   In this paper, we use a nationwide opinion poll conducted only a few days prior to the enactment of the legislation to investigate how ordinary citizens in the Philippines responded to the government's initiative for major tax reform. (1) The poll was administered by Pulse Asia Research Inc. We incorporated a timely experiment into one of their regularly scheduled surveys on a nationally representative sample. (2) Our aim was to take advantage of the seemingly ambiguous effects of the forthcoming tax reform in order to better understand how the public responds to different types of changes in tax incidence. Today, in many countries, tax reform involves a complex combination of tax rates--some increasing, others decreasing--and the Philippine case was no exception. Does information about potential tax changes influence citizens' demands for government accountability and transparency in budgets and public policy? How do the different segments of society react to the possibility of changes in their future tax burdens? We first show descriptive data on how Filipinos perceive their tax burden and the amount of information that they have available about how the government spends its revenues. We then use a survey experiment to show how manipulating citizens' information about changing tax burdens inspires increased monitoring of government--even when that changed tax burden might be in a more lenient direction. We show that these effects are particularly pronounced among respondents from the lower classes. In addition to shedding light on public perceptions of this major policy reform in the Philippines, the analysis and findings presented in this paper also have implications for understanding taxation-accountability linkages in modern democracies more generally.

2. Duterte's Comprehensive Tax Reform Programme

   Rodrigo Duterte was inaugurated president on 30 June 2016, having won 39 per cent of the popular vote out of a field of five candidates. His closest rival, Manuel Roxas II, secured a distant 23.4 per cent of the vote. Duterte came to control both chambers of Congress by brokering alliances among his political party Partido Demokratiko Pilipino-Lakas ng Bayan (PDP-Laban), which garnered only a minority of seats in the Senate and House of Representatives, and the Nacionalista Party, the Nationalist People's Coalition, and the Lakas-CMD Christian Muslim Democrats. Despite not having won a majority of the presidential vote, the new president's mandate could be clearly observed in public opinion polls conducted shortly after his election. Eighty-six per cent of respondents in a nationally representative poll conducted in September 2016 expressed trust in the president. (3) Another poll found that 76 per cent of respondents expressed satisfaction with his performance as president. (4) While it was his tough stance on law and order that resonated with voters, Duterte also had, among his top domestic policy priorities, an ambitious ten-point socio-economic agenda, which included increasing annual infrastructure spending, promoting rural development, investing in human capital development, and improving social protection programmes. (5) This agenda aimed to help the country achieve upper-middle-income status during his presidency, and high-income status by 2040. (6) It would require substantial increases in investment--public and private--and this was expected to materialize with comprehensive tax reform, the major part of which was submitted to the lower house of the Philippine Congress in September 2016, and ultimately signed into law by the president in December 2017. When the measure came into force on 1 January 2018, it was the first comprehensive tax reform bill passed in the Philippines in twenty years.

   This part of the president's Comprehensive Tax Reform Programme (CTRP) was known as the Tax Reform for Acceleration and Inclusion (TRAIN). It included several revisions to the extant tax code, including a reduction in personal income taxes, changes in coverage of the value-added tax (VAT), increases in excise taxes on petroleum products, automobiles, tobacco and mining, as well as changes in donor and estate taxes (see Appendix Table 1 for highlights of the provisions of the new tax law).

   While Duterte's government promoted these various tax changes as a means to stimulate growth and equity, conflicting estimates of the reform's overall impact were presented and discussed in the media (see, for example, Pasion 2017; Punongbayan 2017). According to the government's official assessments, revenue yield from tax reform in the first year (2018) was estimated to be about 130 billion pesos. Seventy per cent of revenues generated by TRAIN were to be earmarked for the president's infrastructure programme ("Build Build Build"), which, the government argued, would attract new investment. The rest of the revenues generated by TRAIN were to be allotted for social services, especially health, education, and public transportation (Department of Budget and Management 2017). Despite the government's promotion efforts, significant debate persisted about how this new programme would affect different segments of society, particularly the poor, who constitute the majority of the national population. The government tried to ensure support for the reform by claiming that low-income earners would take home more pay without the government sacrificing infrastructure projects (Merez 2017). Ultimately, TRAIN made its way through the legislature, and shortly after signing the measure, Duterte declared the tax reform "the administration's biggest Christmas gift to the Filipino people". (7)

   Given the complexity and wide scope of the tax reform as a package, it was difficult for any individual Filipino to gauge the exact impact of the reform on his/her personal after-tax income and overall welfare. How, then, would ordinary citizens react to the call for the reform itself and decide their attitudes towards Duterte's government?

   In the conventional political economy literature, the notion of the "fiscal contract" implies a clear link between taxation and government accountability (e.g., Bates and Lien 1985; North and Weingast 1989). According to this idea, citizens confronted with the prospect of higher taxes will demand good government or more and better-quality public services. (8) Modern tax systems, like the one in the Philippines, are extremely complex, typically consisting of an assortment of general and specific taxes with varying rates and exemptions. This means that the outcomes of tax reform may be difficult to discern. Moreover, in the modern state, because taxation finances service provision, the net welfare incidence depends not only on changes in tax rates but also on how reform affects the provision of public services (Ross 2004). As compared to the historical episodes around which scholars developed the theory of the fiscal contract, the world today generally involves a status quo where citizens already receive government services. Citizens, particularly those in poorer social strata, may not only dislike tax increases; they may also be concerned that reforms will decrease taxes in a way that destabilizes status quo service delivery. Therefore, whereas the fiscal contract literature thinks of aristocratic elites demanding representative institutions in response to demands for taxation that they found oppressive, when trying to apply the theory broadly to citizens in today's world, we need to imagine individuals who might not think that they are oppressively taxed but who instead may be concerned with making sure that the government maintains its revenue sources in order to ensure continued service delivery. Rather than demanding better representation, these individuals are likely to make use of the representative institutions to which they already have access in order to express their demands for the continuation of, or changes in, public services commensurate with changes in their taxes.

3. Public Opinion on Prior Taxes and Government Transparency

   To assess the public's response to the major tax reform undertaken in the Philippines, we embedded a module of questions into one of the regularly scheduled nationwide surveys conducted by the survey firm Pulse Asia Research Inc. (9) Our aim was to leverage the public's uncertainty about the effects of the forthcoming tax reform in order to understand how individuals react to different changes in tax incidence more generally. The poll was conducted on a nationally representative sample of the population (N=1,200) from 10 to 15 December 2017, as the TRAIN bill was headed towards President Duterte's desk. The module began with a basic description of personal income taxes, the VAT, and the petroleum excise tax so that all respondents would be familiar with the terminology used in the questions that followed. To better understand the way in which Philippine citizens might react to information about changing tax burdens, we solicited respondents' perceptions of their current tax burden relative to the...