TAX LAWS SHOULD BE REFORMED
TO ENCOURAGE SAVINGS
(Affirmative side)
In Partial Fulfilment of the
Final Requirement for the course
IE 114
By
Group 5
Nasing, Gwyneth Anne D.
Ramos, Claudine L.
Ferrer, Juvieann C.
Cabugza, Alissa
Revantad, Imman Laurent P.
Diaz, Anton John
(BSIE 1B)
Engr. Ivy L. Francisco
(IE 114 Principles of Economics Professor)
April 2022
SHOULD THE TAX LAWS BE REFORMED TO ENCOURAGE SAVING?
(Pro: The Tax Laws Should Be Reformed to Encourage Saving)
INTRODUCTION
Savings is the money that people set aside for future use to achieve financial goals or manage
emergencies. Saving a money is a stepping stone indeed in achieving financial security. Household
savings are also important indicators of family welfare, not only in terms of a household's investment and
income generation prospects, but also—and perhaps more importantly—in terms of its ability to secure
protection from income shortfalls, given widespread borrowing constraints and limited social security
coverage. For most Filipinos, financial freedom simply means two things: being debt-free and having a
decent amount of savings. But considering that this definition is as basic as it gets, most Filipinos still
have a problem saving percentage of their income due to the tax system of the Philippines.
From the year 1994 to 2006, the average household saving rate in the Philippines declined by 5.2
percentage points to about a mere 5% of disposable income. Recently, according to a study conducted
by Bangko Sentral ng Pilipinas from December 2017 to February 2018, majority of Filipinos (52%) still do
not have savings, and only 29% of Filipino adults have bank deposits in 2019. Though this is already a
6% increase from 2017 data, it’s still one of the lowest savings rates in Southeast Asia. The reasons
behind Filipinos’ low savings rates are a logical response to policies that impose high marginal tax rates
on savings and otherwise reduce the incentive to defer consumption. Thus, current issues and challenges
due to Philippine’s tax system affects the incentives for economic decisions like saving. Especially, the
low-income households are having a difficulty more than high-income households in terms of providing
incentives to save for their daily living because of the recent strike on taxation. Economic hardship truly
appears to be higher for families with low-income compared to other household types. Hence, Filipino
households’ saving rates have been surely declining for the past few years.
The Philippine tax system currently is complex, inefficient, and highly inequitable. For instance,
many large corporations’ benefits from tax incentives, such as income tax holidays or reduced tax rates,
when they don’t really need, while the majority of small and micro enterprises, where the poor are, have
to pay much higher taxes relative to their income. Taxes that are not adjusted for inflation also worsen
the equity of the tax system, as the rich pays less and less as their income rises. The complexity of the
tax system, where small and micro enterprises have to file and pay a multitude of taxes almost every
month means that they spend a considerable amount of time and money falling in line and complying
with tax rules, instead of doing more productive things and earning more for savings.
By attempting to understand and investigate the reasons behind the stylized fact in terms of saving
of Filipinos, whether reforms in tax code could influenced the saving behavior of every Filipino and could
provide incentive to save or at least reduce the disincentive that households (especially the poor ones)
now face, the affirmative side thus believe that tax laws should be reformed to encourage saving.
CLAIMS/ARGUMENTS
Philippines has one of the lowest savings rates in Southeast Asia, based on Bangko Sentral ng
Pilipinas survey in 2014, only 1 in 4 Filipino households has savings. This is indeed worrying, as it means
that in the event of an emergency or sickness, majority of Filipinos have no means to fund their needs.
This also implies that they could fall into debt or worse, not be able to cover their emergency needs. But
when wondering, what truly keeps most Filipinos from saving? There are many factors influence the rate
of savings of a country, and many researchers have over the years attempted to identify these factors
and assess their empirical importance. Much of this literature has been applied to the data of the
Philippine. Unfortunately, it has been argued that among the factors that may influence the saving rate,
taxes have often been assumed to be important and most studies on the subject have focused on how
different taxes could have affected the saving rate differently. Thus, the impact of the tax system of the
Philippines prevents and discourages many from getting into the savings habit.
Not enough money left to save due to high taxes rates which further discourages saving, was
always the primary reason cited by most Filipinos without and with less savings. If the formula to be used
is Income - Expense = Savings, then chances are nothing will really be left for savings, as there is no
ending to what the Filipinos can spend on. For years, Filipinos have complained about the country’s high
tax rates while getting what they perceive as low-quality public services. Figure 1 below shows the
Philippine tax system currently has some of the highest tax rates in this region. Compared to our major
ASEAN counterparts, our corporate income tax is the highest at 30%, a rate that “turns off” foreign
investors who prefer to do business in our low-tax neighbors.
Figure 1. Highest Tax Rates in Asean
Indeed, the tax system in the Philippines is complex, confusing, inefficient, and, some would say,
unfair because of high taxes rates that were imposed to some goods and services that keep them from
saving and investing for life’s expected and unexpected events. An internationally acclaimed economist
has opined that the country’s tax system was a “complicated mess,” suggesting that the government
should adopt a simplified and flat taxation scheme to shore up revenues and fund more development
initiatives (Remo, 2011). According to Aizcorbe, Kennickell, & Moore (2003), economic hardship, in
addition, appears to be higher for households with low-income compared to other household types.
Empirical evidence suggests that low-income families face more difficulties in trying to save than other
households.
Because savings are generally assumed to be one of the key sources of income growth, and that
one of the factors that determine the saving rate ̶ the level and structure of taxes ̶ has greatly impacted
the incentives of every Filipino to save, the public takes into consideration the foregoing that maybe it is
about time that the present tax laws of the Philippines should be reformed to make savings happen and
attractive that no one will be disincentive to save. Additionally, many economists believe that tax reforms
would help the economy and to make the code more efficient, reduce the deficit, and decrease the tax
burden on those who can least afford it. Likewise, tax reforms done right would promote economic growth,
make our fiscal outlook more sustainable, reduce the complexity and burden of compliance, and increase
the system’s transparency and fairness by treating individuals and businesses in similar circumstances
more equally, thus will encourage them to save. Professor John Nye of economics at George Mason
University in the United States and who has had several articles published in international journals, said
in a lecture in Manila Tuesday that the country could benefit from higher revenue collection, lower taxes
rates, and thus will provide incentives to save if the tax system were simplified. He also stated that the
country’s existing tax structure, where different tax rates are imposed on different income levels and on
different industries, could be one of the reasons hampering the full potentials of the nation’s savings. So,
he suggested that policymakers should focus on boosting the productive capacity of the economy by
reforming the tax code to prioritize economic growth and opportunity.
However, the Philippines has implemented already a comprehensive tax reform package—
include the Tax Reform for Acceleration and Inclusion (TRAIN) law, Corporate Recovery and Tax
Incentives for Enterprises (CREATE) law, Retail Trade Liberalization Act, Foreign Investment Act, and
Public Service Act— that was enacted in 2017 by the Duterte administration. TRAIN was made up of five
packages that together would make the tax system simpler, fairer, and more efficient—while also raising
funds to eradicate extreme poverty by 2040.
Hence, the affirmative team provided some relevant evidence based on the impact and current
state of the country after the tax law was reformed in order to prove the case of the pro side, and these
are the following:

Tax reforms allow more foreign investors to do business in the country.
The statistics presented in Figure 1; the state of the Philippine tax system currently has
some of the highest income tax rates in the region. Compared to the country’s major ASEAN
counterparts, the country’s corporate income tax is the highest at 30%, a rate that “turns off”
foreign investors who prefer to do business in our low-tax neighbors. Meanwhile, the maximum
personal income tax rate of 32% is not the highest (it’s 35% in Vietnam and Thailand), but Filipinos
certainly don’t want the government to eat away P32 for every P100 earned by ordinary workers.
Economic professor Nye suggested that the policymakers should pursue reforming the
tax laws that would open the economy to foreign investors and trade. He emphasized opening up
to foreigners, particularly by easing the tax rule that limits the equity participation of foreign
investors in the country and controls the participation of foreigners in the domestic labor market,
would help generate more jobs and boost incomes. The point is, if income goes up, then
incentives to save will go up as well (Remo, 2011).
Since the Philippine tax system is currently deficient in both respects. Not only do our
taxes disproportionately burden the poor and benefit the rich, but they also yield too little revenue
given the distortions they create in the past few years. Needless to say, both problems need to
be resolved soon. It so happens that the early days of the Duterte administration offer a crucial
window of opportunity to pursue tax reform. That is why the filing of the Comprehensive Tax
Reform Program (CTRP) was implemented to accelerate poverty reduction and to sustainably
address inequality, in order to attain the President’s promise of tunay na pagbabago. By making
the tax system simpler, fairer, and more efficient, additional – and a more sustainable stream of
– revenues will be generated to make meaningful investments in our people and infrastructure
and to create jobs opportunities and promote savings, could not have been timed better.
According to Carlos Dominguez, the Finance Secretary of the Philippine Government, the
nation is targeting foreign investment with Singapore style tax law. Thus, the so-called CREATE
(law), wherein one of the packages in Comprehensive Tax Reform Program, grants financial relief
to companies in need while increasing the country’s competitiveness, Carlos Dominguez told
CNBC. The law reduces the corporate income tax rate — formerly the highest among Southeast
Asian nations at 30% — to 25% for large companies and 20% for small businesses. With the
implementation of this law, it does attract more investments, save and create jobs based on the
data of total approved foreign investments from year 2012 (before CTRP) to 2017 (after CTRP).
Figure 2. Total approved foreign direct investments (FDI), Q1 2012 (before CTRP was
implemented)
Total foreign direct investments (FDI)1 approved in the first quarter of 2012 by
five investment promotion agencies (IPAs), namely: Board of Investments (BOI), Clark
Development Corporation (CDC), Philippine Economic Zone Authority (PEZA), Subic Bay
Metropolitan Authority (SBMA), and Authority of the Freeport Area of Bataan (AFAB) amounted
to PhP 18.4 billion, 16.3 percent lower than the PhP 22.0 billion approved in the same period of
the previous year.
Figure 3. Total Approved Foreign Investments up by 61.1 percent in Q3 2017 (after CTRP was
implemented)
Total foreign investments (FI) approved in the third quarter of 2017 by the seven
investment promotion agencies (IPAs), amounted to PhP 43.0 billion. This was 61.1 percent
higher compared with PhP 26.7 billion last year. Meanwhile, total approved FI for the first nine
months of the year reached PhP 84.1 billion, a decline of 9.9 percent from PhP 93.3 billion in the
previous year. The top three prospective investing countries for the third quarter of 2017 include
Japan, Taiwan and Australia. Japan committed PhP 21.4 billion or 49.7 percent share of the total
investments during the quarter. Taiwan and Australia pledged PhP 8.9 billion and PhP 2.8 billion,
or 20.6 percent and 6.4 percent of the total approved FI, respectively. Thus, the comparison
shows that due to reformed tax on corporate income tax, it attracted more investments and
savings.

More income and savings if the amount of tax incurred on the franchise is low.
Figure 4. Tax Issues Make Doing Business in The Philippines Problematic
Likewise, our tax system is overly complicated and burdensome, especially for small
taxpayers. A 2015 study found that the Philippines ranked 127th out of 189 economies in terms
of ease of paying taxes (we ranked below Iraq and Afghanistan). Another study revealed that the
“complexity of tax regulations” and our “high tax rates” are some of the most problematic factors
for doing business in the country, same case with the first claim.

Tax reforms create more job opportunities.
An official of the National Economic and Development Authority (NEDA) said the Duterte
administration’s implementation of Comprehensive Tax Reform Program (CTRP) 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. “We say that in terms of employment, the tax reforms could generate about
half a million additional jobs over the next six years. With respect to poverty, our analysis is that
it could lift about 200,000 to 250,000 Filipinos out of poverty. So that’s out of the six million that’s
been targeted over the next six years,” said Cancio at one of the earlier public hearings conducted
by the Senate ways and means committee chaired by Sen. Juan Edgardo Angara on the first
package of President Duterte’s CTRP. Furthermore, the Tax Reform for Acceleration and
Inclusion (TRAIN) under the Comprehensive Tax Reform Program specifically corrects the
longstanding inequity of the tax system by reducing income taxes for 99 percent of income
taxpayers, thereby giving them much-needed relief after 20 years of non-adjustment. It also raises
significant revenues to fund the President’s priority infrastructure programs to reduce poverty
incidence from 21.6 percent in 2015 to 14 percent by 2022.
Based on the study of Business World (2020), the implemented reduction in corporate
income tax, coupled with the overhaul of the fiscal incentive system, not only will help reduce
poverty by at least 4.9 percentage points, and aside from attracting foreign investors, according
to a study commissioned by the Labor department showed, reforms can also create jobs. In a
statement, the Finance department said lower corporate income tax and the modernization of
fiscal incentives will boost the employment rate across all sectors and reduce poverty incidence,
citing the study “The Potential Economic Effects of Reducing Philippine Corporate Income Tax
and Reforming Sectoral Incentives.” Moreover, Labor Secretary Silvestre H. Bello III said the
reduction in corporate income tax and the rationalization of fiscal incentives would create over a
million jobs in the next decade. He clarified that the potentially decrease in corporate tax will yield
some 1.4 million jobs in 10 years and will rationalize any corporate incentive to performing
corporations only and cannot be accessed perpetually. Also, the decrease in tax will allow
companies to allocate that money to hiring more workers. So, the study showed if the corporate
tax rate was lowered to 20% without rationalizing the incentive system, the deficit would rise to
4.3% by 2029. It also noted employment and real wages would drop, while poverty incidence
would increase.
If the savings from a lower corporate tax rate will be fully reinvested in the country, the
study estimated up to P1.08 trillion of new investments will be generated by 2029 when the rate
is lowered to 20% as originally proposed. Under this scenario, 212,000 more jobs will be created
this year or up to 2.3 million by 2029. It said GDP growth could also reach 8.2% in 2029. The
study also showed inflow of foreign direct investments (FDI) could reach P1.75 trillion by 2029,
noting that the “reduction in prices is higher under this scenario as the inflows of FDI expand the
aggregate supply in the economy.” It also assumed that the government would cap its budget
deficit at 3.2% of gross domestic product and fully implement the “Build, Build, Build” program.
That was the reason Chua stated that under the TRAIN, the government would be giving back
about P140 billion to salaried workers as a result of the cuts in personal income tax (PIT) rates.
Of this amount, 90 percent would be spent, creating jobs and opportunities down the value chain.
He stated an instance where, how many more people will buy food in the market, ride the taxi,
the Uber, go the 7-Eleven, and so on. Even the non-income taxpayers, minimum wage and below
will benefit immediately. According to Ferdinand Patinio (2021), the implemented BBB program,
based on Department of Public Works and Highways (DPWH) Secretary Mark Villar, has provided
over 6 million jobs to Filipinos through the government’s ‘Build, Build, Build’ (BBB) projects in the
last four years. He added that the jobs offered are for engineers, construction workers, among
others. Because of the reforms, it provided employment opportunities to million workers, thus will
give those workers incentives to save percentage of their income.

More savings if consumption tax and/or the tax imposed on certain goods or
commodities is low.
Experts argues that by reforming consumption tax such as value-added tax (VAT), goods
and services tax (GST), and sales taxes on businesses, will encourage saving and investment
(Remo, 2011). The reformed consumption taxes, according to the Department of Finance (DOF),
affect rich the most, not poor households, so it is a “fallacy” to believe that the proposed expansion
of the value-added tax (VAT) base and adjustments to the excise tax on petroleum products under
the proposed comprehensive tax reform program are anti-poor because being consumption taxes,
these will impact the most on affluent Filipinos who make use of more goods and services, rather
than the poor, low-income and even the middle-class households. DOF Undersecretary Karl
Kendrick Chua said the Duterte administration’s proposed Tax Reform for Acceleration and
Inclusion Act, which contains these VAT and fuel excise tariff proposals, would even shield poor
and low-income consumers from the effects of these tax adjustment proposals because the new
government is committed to providing highly targeted direct transfer programs and indirect
subsidies to them. Chua added that rather than being anti-poor, the tax reform will actually correct
the injustice of only a few enjoying the benefits of growth. And that their primary goal here is to
give everyone a better chance of building a more stable future by equalizing opportunities for all
through the adoption of a simpler, fairer and more efficient tax system that would also provide
them incentives to save or at least reduce the disincentive that households now face.
Finance Secretary, as for the expansion of the VAT base, assured the public that there
would be no increase at all in the tax rate and that all seniors and persons with disabilities would
continue to enjoy their VAT exemptions on essentials such as raw food, education and health
services, including medicine. With that, even those of low-income households could be encourage
to save without worrying the burden of taxes.
CONCLUSION
The Philippines’ macroeconomic fundamentals are now good, thanks to prudent macroeconomic
fiscal management by the current and previous administrations. With the instances of current states
caused by the reforms made by the Duterte administration, which elevated the country's position in the
region ̶ among the leaders in Asia and allowed it to have the financial capacity to weather also the virusinduced pandemic nowadays, Filipinos can now further strengthen their macroeconomic position to
create an environment more conducive to high growth, savings and investment, strong job creation, and
faster poverty reduction. Thus, based on the good current state of the Philippines when the tax laws were
reformed during Duterte’s admin, the affirmative side had proven enough why savings is significant in
one’s life and that the tax laws need to be reformed in order to promote, rather than hinders, saving. It
needs to be reformed so that Filipinos (despite of socioeconomic status) will be able to have the
incentives to save without worrying the burden of paying taxes, unlike with the past system of taxation in
the country that really discourages every Filipino to save.
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