IMF: Focus on income tax, not VAT

MANILA, Philippines - Countries in the Association of Southeast Asian Nations (ASEAN) including the Philippines should consider increasing the income tax instead of focusing on consumption tax such as value-added tax (VAT), the deputy managing director of the International Monetary Fund said on Friday at the World Economic Forum (WEF) in Makati City.

"If you look at the countries in this region (Asia) especially in ASEAN countries, you might want to recommend that they should rely more on direct taxation rather than consumption," Naoyuki Shinohara said in a session about rethinking economic growth.

He said countries in Asia should implement a more progressive tax system, where taxpayers who earn more pay bigger compared to those who earn less.

"VAT or consumption tax is regressive, it hits the poor more than the rich," he said. On the other hand, the amount of direct taxes such income tax is based on the amount a worker earns.

In the Philippines, all consumers, rich or poor, pay an additional 12 percent in the purchase of goods and services. 

Shinohara said, however, that VAT can be beneficial to the economy if it is coupled with the appropriate social transfer mechanisms such as conditional cash transfers implemented by Mexico, Brazil and the Philippines. In Japan, the money collected from VAT is spent on the government's social security programs, he added.

"Taxation and income transfer in the area of social programs will reduce income inequality by one-third," he added.

In 2008, the Philippine government launched the conditional cash transfer program, which provides cash grants to the poorest of the poor on the condition that they send their children to school and pregnant women to regular health checks.

The Aquino administration continued the program, and allotted a total of P62 billion in 2014 to cover an estimated 4.3 million households in the Philippines.

Shinohara said that income inequality is rising in countries with big populations such as the Philippines, and fiscal policy such as tax collection can help address the issue.

"High income inequality is associated with short duration of economic growth," he added.