All aboard for the choo choo TRAIN?

A good old classmate of mine from Boston once told me that she’d always wanted to ride the Orient Express, the celebrated train that travelled from London, England to Istanbul, Turkey. The unwitting star of a particularly famous Agatha Christie mystery, the Orient Express was reputedly the last word in luxury train travel—take the Ritz Hotel in Paris, set it on wheels and place it on a track, and you’d have the Orient Express. No wonder my friend was upset when the Orient Express went on its last trip more than eight years ago, before she could finally fulfill her wish and ride arguably the most famous train in history.

TRAIN law

The Orient Express aside, train travel has been one of the most efficient forms of transportation for more than a century, and many of the world’s great cities are crisscrossed by a network of trains.

That trains have ushered in progress for the cities and countries they traverse is a well-documented historical fact. There’s one particular “train,” however, that seems to be the exception to the rule. I refer, sadly enough, to the Tax Reform for Acceleration and Inclusion—or TRAIN—law.

The TRAIN law, as many of us know, came into effect with the dawn of the New Year. Many were looking forward to its implementation, because it was being heralded as the instrument by which income tax rates would be lowered, and give the man-on-the-street a larger amount in his pay envelope. However, life (and taxation!) is never that simple, and the rule of thumb is that if you reduce tax rates—and therefore the amount of revenue to be generated—for one particular type of tax, you have to offset this revenue loss in some way.

One option would be to encourage spending, which was probably the idea behind reducing the income tax rates—give people more disposable income, and they will almost certainly increase their spending (Taxing Ourselves, A Citizen’s Guide to the Great Debate of Tax Reforms by Joel Slemrod and John Bakija).

The problem, however, lies in the fact that while the government did reduce income tax rates—and give millions of salaried employees more disposable income to take home come pay day—it also increased the tax rates for VAT and excise taxes. Both of these taxes, however, are levied on goods and services, thus practically ensuring that prices of many commodities would start climbing inexorably.

Fuel cost

One of the first commodities to see an increase in prices is also the most crucial: fuel.

In a country that’s still very dependent on oil to power our homes, industries and transportation, any increase in fuel prices is sure to be met with no small amount of anxiety by everyone. It is a sad fact that when fuel prices go up, the prices of so many other items quickly follow in their wake. Unfortunately, it is also an even sadder truth that even if fuel prices are rolled back—and often at a figure that’s much lower than the amount to which they were raised—there will not be a corresponding decrease in the prices of commodities, not while there’s a profit to be made.

The impact of the TRAIN law can already be felt just by going to the supermarket.

My sisters Marivi and Joann, and I compared our experiences and we both noticed that the prices for things like canned goods, powdered juices, and yes, even rice, have been steadily heading north. My sister Marivi told me—with no small amount of bewilderment—that her two daughters; Finagene and Alejan were taken aback when they did their groceries several weekends ago and discovered that the price of one sachet of their favorite iced tea mix went up by 100 percent.

That, in a microcosm, is the impact of the increase in VAT rates for sugar-sweetened beverages, one of the integral elements of the TRAIN law. It’s a price hike that my sister can absorb—though she still mutters under her breath about it—but what about the people whose income will surely feel the strain of successive price increases?

While it’s true that the TRAIN law will give the salaried and the self-employed more cash to “take home,’ the same can’t be said for the minimum wage earners, who don’t pay income taxes and therefore, won’t benefit from the TRAIN law’s amended income tax rates. And because there’s no increase in minimum wage rates in the near future, minimum wage earners won’t have more money in their pockets to offset the price increases set into motion by the same TRAIN law.

Last year, the Department of Finance estimated that minimum wage earners—who number approximately two million persons—account for almost 30 percent, or roughly 27.78 percent, of the tax base for individual taxpayers.

Every one of them, and their families, will surely feel the pinch of the impact of the TRAIN law—because they don’t pay income taxes, and they don’t have a wage increase to look forward to, they won’t have more money in their pockets come payday. And if they don’t have more money in their pockets on payday, then they may be faced with only one choice: buy less of what they used to purchase—including what they put on their dining tables.

From where I sit, that is a huge problem waiting to happen.

The salaried employees and self-employed may have a slightly easier time of it, but this isn’t to say that they’ll be spared the impact of the TRAIN law. Ironically, while payday may give them more money to spend, the fact that prices are starting to go up for so many goods and commodities means that these salaried employees will have to pay more for the items they usually place in their supermarket shopping carts. Consumption, therefore, may not increase significantly enough to generate the additional tax revenues that the government hopes the TRAIN law will produce.

When all is said and done, the TRAIN law may yet prove to be an object lesson in what NOT to do when a government tries to offset reductions in the rates for one type of tax by increasing the rates for other tax types.

No one’s going to argue with the need to raise tax revenues, just as no one’s going to argue with the benefits of giving people more purchasing power. But in trying to give the people more purchasing power, the government should be careful that it doesn’t effectively thwart its own efforts by raising certain tax rates to a point where people ultimately end up spending more money to buy the same volume of goods they usually purchase.

Reexamination

Because when that happens, then the TRAIN law that was envisioned as the country’s vehicle to a more prosperous future just might need to be reexamined to see if it’s truly on the right track.

Where the TRAIN is concerned, I think it matters very much where it is headed. And with Phase 1 now in the opening stages of its implementation, and Phase 2 waiting to get off the ground, I guess you could say that the TRAIN is pretty much pulling away from the station that was its promulgation.

Perhaps, before it goes any further, we should take a good, hard look at where the TRAIN may take us… because getting off will be impossible once it’s too late to turn back.