The intended and unintended effects of Train

By: Fernando Fajardo February 01,2018 - 11:18 PM

The government has four major functions or objectives in the economy. One is to promote efficiency in the allocation of the nation’s scarce resources to their best and highest use. Second is to promote equity in the way the produce of the nation is distributed among the different sectors in our society.

Third is the maintenance of economic stability such as to prevent high inflation, high unemployment rates, and highly fluctuating exchange rate.

Last is the attainment of rapid and sustainable economic growth that could lead to higher level of development of the nation in the long run.

To achieve these objectives, the government may intervene in the economy by way of macroeconomic policies to influence the level of economic activity to its desired pace and direction.

One of these macroeconomic policies is fiscal policy which involves the use of government power to tax and spend using the money collected from taxes in certain activities that may directly or indirectly encouraged more business activities.

The government, through the central bank may also use monetary policy which involves controlling the money supply and interest rate to influence the level of investment. It may also use trade policies to expand exports.

Government policies when used will always have an effect on the way we live, conduct business, or plan the future.

These effects may be intended, which is usually good, or unintended which generally are not good because they lead to certain undesirable outcomes.

One recent government intervention concerns the use of government power of taxation to raise more revenues for the Build, Build and Build program and other activities of the present administration.

This new intervention is Package 1 of the Tax Reform for Acceleration and Inclusion or the Train Law.

With the additional revenues, the Train will allow the government to invest in the people through infrastructure, education, health, housing, and social protection.

As designed, Package 1 provides for reduction in income tax rates of the taxpayers except for the highest income bracket.

Everyone earning 250,000 pesos annually or less are now exempt from paying taxes while those earning more up to 8 million pesos will pay their taxes at reduced rates than before.

Only that part of the income in excess of 8 million will be levied the highest rate of 35 percent.

As a result, the government will suffer a reduction in income tax collection.

However, this will be more than compensated by the new or additional taxes on consumption — the excise taxes on certain commodities and the removal of a number of exemptions under the existing value added tax system now in operation for many years.

As intended, the first package of the Train will help the economy to grow faster.

The GDP will be boosted as a result of higher household consumption due to lower income tax and the cash transfers.

The increased economic activity is buoyed by increased household consumption and increased investments.

Increased consumption and investment will mean faster economic growth.

This is the acceleration part of the Train.

There is a lot of fear that the Train, because of the new consumption taxes, may raise the prices of many things. However, the government maintains that the increase in prices or inflation is low and within the BSP’s target range.

It believes that the increase in excise taxes will only raise inflation by 0.42% in 2018, but will quickly dissipate in succeeding years.

This may not be true.

No less than Secretary of Economic Planning, Ernesto Pernia, has said that the inflation may increase to more than four percent with the Train this year from the around three percent last year without the Train.

The government also believes the first package of the Train will create about half a million jobs over the next half-decade and could lift up to 250,000 Filipinos out of poverty over the same period.

Package 1 can generate PHP 134 billion.

If at least half of that is invested in infrastructure, 67,000 jobs can be directly generated in construction, and almost 70,000 jobs can be created in the rest of the economy, for a total of 137,000 jobs.

More jobs means more income for many people.

This is the inclusion part of the Train where more people are now benefited by development.

Faster and inclusive economic growth are the intended benefits of the Train which is essential to reducing our high incidence of poverty.

But there are also unintended consequences.

One of this is the redistributive effect of the Train on the welfare of the poor people who, because they are already exempted from income tax payment because of their low income, are not benefited at all from the bonanza that comes with higher level of tax exemptions and lower tax rates of income in excess of the exempted amount.

Meanwhile, rich and poor alike pay the same amount of tax when they buy the things now affected by the excise taxes.

With the negative effect of the Train on the poor, they are actually made poorer relative to the well-off who are greatly benefited by the Train from the reduction in their income taxes.

This is just one of the unintended effects of the Train.

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