POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

PROFILE OF INCOME TAX POLICIES AND ITS

EFFECT TO THE PHILIPPINE ECONOMY

In Partial Fulfilment of the Final Requirements for the Course

Basic Economics with Taxation (ECON 20043)

by

Abellano, Mhere Shane E.

Alicando, Genrev A.
Budy, Ma. Mikaela B.
Cayaban, Denise Bianca G.
Intia, Marjorie A.
Iman, Nicole M.

BSOA 4-3D

January 2025
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TABLE OF CONTENTS

I. Challenges and Issues in Philippine Income Tax Policies and their Economic
Impacts

II. Overview of the Philippine Income Tax Policies

a. Individual Income Tax Under the TRAIN Law

b. Corporate Income Tax Under CREATE Act
c. Tax Incentives Under CREATE Act

III. Statement of the Problem

IV. Presentation of Data

a. Impacts of the TRAIN Law on Income Inequality and Economic Disparity

b. Effects of High Marginal Tax Rates on the Productivity, Investment, and
Entrepreneurial Activity of High-Income Earners
c. The Extent Current Income Tax Policies

V. Descriptive Analysis of Statistical Data

VI. Conclusion, Findings and Recommendations

VII. Implications

VIII. Bibliography
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I. CHALLENGES AND ISSUES IN PHILIPPINE INCOME TAX POLICIES AND

THEIR ECONOMIC IMPACTS

Income tax is a tax imposed by governments on the earnings of individuals and

businesses within their jurisdiction (Kagan, 2024). Like other taxes, income tax revenue is
used by the government to fund programs aimed at improving social services,
infrastructure, and other essential needs (Income Tax Services in the Philippines | Process
and Requirements, 2021). In the Philippines, the structure and implementation of income
tax policies significantly impact both micro and macroeconomic levels. A study by
Vermeer (2022) concludes that income tax policies serve as a powerful fiscal instrument
for job creation and economic growth, emphasizing the strong connection between taxation
and national economic development. However, the effectiveness of these policies in
achieving fiscal goals and promoting economic development remains a subject of debate,
particularly in light of the country's diverse economic conditions and social inequalities.

The Philippine tax system, particularly income tax, has undergone significant
reforms over the years, most notably the Tax Reform for Acceleration and Inclusion
(TRAIN) law, which was implemented in 2018. The TRAIN law seeks to make the
Philippine Tax System simpler, fairer, and more efficient, with the goal of encouraging
investments, generating employment, and reducing poverty (National Tax Research
Center, 2018). It increased the take-home pay of individuals and was promoted as a
progressive approach to lowering income taxes for low-income earners while imposing
higher taxes for high-income earners (Ramas, 2024). However, despite these intentions,
the implementation of the TRAIN Law has raised concerns about its impact on income
inequality and economic disparity. Although income tax rates were reduced for many
individuals, the higher excise taxes on basic goods burdened low-income earners the most
by raising prices, which ultimately reduced their take-home pay, and this has effectively
made the poor poorer, with little benefit from the lower income tax rates.(Sebullen et al.,
2023; Ramas, 2024; Punongbayan, 2019).
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In addition, the TRAIN law retained steep marginal tax rates for high-income
earners, taxing individuals earning over ₱8 million annually at 35%, which is the highest
among Southeast Asian countries (Bureau of Internal Revenue, n.d.; ASEAN Briefing,
2018). These high tax rates have sparked concerns about their potential to discourage
productivity, investment, and entrepreneurial activity, while also increasing the risk of tax
avoidance and evasion (How Do Taxes Affect the Economy in the Long Run, 2024;
Vermeer, 2022). For instance, workers might be less motivated to put in extra effort if a
large portion of their earnings will go toward taxes (Saputra, 2024). Similarly, higher taxes
make businesses less likely to invest and grow because they get smaller returns (McLeish
& Dubay, 2024).

Moreover, high tax rates may also contribute to a rise in tax avoidance and evasion.
A study by Fisman and Wei in 2001 found that a 1 percent increase in tax rates leads to a
3 percent increase in tax evasion. This suggests that higher tax rates can encourage greater
evasion, as the burden of taxes becomes more attractive to avoid when it is higher. These
behaviors not only lower government revenue but also create unfairness, where those who
follow the tax laws end up at a disadvantage compared to those who exploit the system.
While progressive taxation aims to reduce wealth inequality, very high tax rates can lead
to problems and unintended effects on the economy. Finding a balance between fairness
and competitiveness is still a major challenge for the Philippines' income tax policies.

This paper seeks to assess the structure and implications of income tax policies in
the Philippines, specifically on their effects on economic growth and income inequality.
By evaluating the outcomes of recent reforms, such as the TRAIN law, and identifying
both the strengths and weaknesses of the current income tax system, this research aims to
provide insights into how these policies influence various sectors of the economy. By
gaining a deeper understanding of these dynamics, policymakers can refine income tax
policies to better support economic stability, growth, and inclusivity in the Philippines.
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II. OVERVIEW OF THE PHILIPPINE INCOME TAX POLICIES

Income tax is imposed on an individual's earnings, which may include salaries,

emoluments, profits from real estate, income from professional practice, trade, business, or
other gross income items specified in the Tax Code of 1997, as amended. This is calculated
after deducting any allowable expenses or deductions permitted under the amended Tax
Code or other applicable special laws. (Bureau of Internal Revenue, n.d.)

The income tax policies in the Philippines are anchored on the National Internal
Revenue Code (NIRC) of 1997, which serves as the foundation for the country's taxation
system. These policies were significantly reformed through the TRAIN Law (2018) and
the CREATE Act (2021) to address the evolving economic needs of the nation. The TRAIN
Law introduced a more progressive individual income tax structure, exempting those
earning ₱250,000 or less annually (National Tax Research Center, 2018) and raising
government revenue through higher excise taxes on goods like fuel and sugary drinks
(Ramas, 2024), which funded infrastructure and social programs. Meanwhile, the
CREATE Act focused on reducing the corporate income tax rate from 30% to 25% (and
20% for small businesses), rationalizing tax incentives, and promoting investments to drive
economic recovery and job creation (Altura, n.d.). Together, these laws aim to promote
equity, stimulate economic growth, and ensure sufficient government resources for public
services and infrastructure, aligning the country’s tax policies with modern economic
demands.

The design of income tax policy in the Philippines is structured as follows:

Individual Income Tax (Under the TRAIN Law)

The TRAIN Law (Tax Reform for Acceleration and Inclusion), passed in late 2017, aimed
to reduce personal income taxes for most taxpayers, except for those in the highest income
bracket. Under Section 24(A) of the National Internal Revenue Code (NIRC), as amended
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by the TRAIN Law (Republic Act No. 10963), the personal income tax rate for individuals
is scheduled as follows:

Annual Income Tax Rates

Not over P250,000 0%

Over P250,000 but not over P400,000 20% of the excess over P250,000

Over P400,000 but not over P800,000 P30,000 + 25% of the excess over P400,000

Over P800,000 but not over P2,000,000 P130,000 + 30% of the excess over
P800,000

Over P2,000,000 but not over P8,000,000 P130,000 + 32% of the excess over
P2,000,000

Over P8.000,000 P2,410,000 + 32% of the excess over

P8,000,000

Table 1.1 Tax Schedule from January 1, 2018 until December 31, 2022

However, there were adjustments on the schedule. Starting on January 1, 2023,

individuals earning below ₱8 million benefit from a 2-5% tax rate reduction reduce the tax
burden on lower and middle income earners and to simplify the tax calculation for
taxpayers as well;

Annual Income Tax Rates

Not over P250,000 0%

Over P250,000 but not over P400,000 15% of the excess over P250,000
Over P400,000 but not over P800,000 P22,500 + 20% of the excess over
P400,000
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Over P800,000 but not over P2,000,000 P102,500 + 25% of the excess over
P800,000

Over P2,000,000 but not over P8,000,000 P402.500 + 30% of the excess over
P2,000,000

Over P8.000,000 P2,202,500 + 35% of the excess over

P8,000,000

Table 1.2 Tax Schedule Adjustment effective January 1, 2023 onwards

A. Tax Filing for Married Individuals:

Married individuals are required to file the individual income taxes separately. If there is a
difficulty determining a specific income, then it will be split equally between the spouses
when calculating the taxable incomes.

B. Minimum Wage Earners:

MWE should be exempt from the payment of income tax on their taxable income including
their holiday pay.

C. Self-Employed Individuals and Professionals:

Instead of using the policy's graduated income tax rates and percentage tax, professionals
and self-employed people can opt to pay an 8% tax on their gross sales, receipts, and other
non-operating income over ₱250,000.
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Corporate Income Tax (Under CREATE Act)

The corporate income tax (CIT) rate is set at 25%. However, a preferential tax rate
of 20% is available for domestic micro, small, and medium-sized enterprises (MSMEs),
which are defined as businesses with a taxable income of up to PHP 5 million
(approximately US$85,611) and total assets not exceeding PHP 100 million (around
US$1.7 million).

For businesses, net income from all sources is subject to the standard 25% CIT.
However, for non-resident foreign companies, only income earned within the Philippines
is taxed. In contrast, domestic businesses are taxed on their global income, regardless of
where it is earned.

Corporation Type Tax Rates

Corporate Income Tax Rate 25% for most corporations

Small Businesses and Medium Enterprises 20% (if net taxable income ≤ ₱5M and total
(SMEs) assets
≤ ₱100M)

Non-Resident Foreign Corporations 25% (on Philippine-sourced income)

Table 1.3 Tax Rates for Different Types of Corporation

Passive Income

• Interests, Royalties, Prizes and Winnings:

o 20% final tax on interests from bank deposits, substitutes, and trust funds.
o Royalties on books and literary works and musical competition are at 10%
o Prizes over Php 10,000 and other winnings (except from charity,
sweepstakes, and lotto) are taxed
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o Interests from long-term deposits are exempted provided that they’re not
withdrawn before 5 years maturity.

• Cash and Property Dividends:

o 10% final tax on dividends by individuals from domestic corporations or
joint ventures.

Stock Shares, Exchanges, and Trading

A final tax of 15% is applied on net capital gains during the taxable year from sale,
barter, exchange or other disposition of shares of stock in domestic corporations.

Tax Incentives (Under CREATE Act)

Tax holidays, which exempt companies in priority industries from paying taxes for
a predetermined amount of time, can help businesses save money and make growth-
oriented investments. Certain companies may qualify for exemptions from customs duties
on equipment and supplies required for operations, particularly those in the industrial and
technology sectors. Tax breaks can assist some companies in vital industries or special
zones to expand and compete internationally.

Challenges and Impacts

The income tax policies in the Philippines, particularly those introduced by the
TRAIN Law and the CREATE Act, are designed to stimulate economic growth by reducing
the tax burden on businesses and individuals, and by incentivizing investment.
(Congressional Policy and Budget Research Department, 2017) However, these policies
come with several challenges. One major issue is the potential revenue shortfall caused by
tax cuts, which could affect funding for essential public services and infrastructure unless
offset by increased economic activity. Additionally, the tax compliance and administration
required to implement the new rates and incentives can be difficult, especially for small
businesses that may struggle to understand and apply the rules, leading to errors or tax
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evasion. There are also concerns about inequality, as the wealthiest individuals and large
corporations may benefit the most from tax cuts and incentives, while lower-income groups
might not experience immediate relief, especially with the increase in indirect taxes such
as VAT (Boco et al., 2019). Furthermore, the CREATE Act’s incentives depend on
attracting foreign investments, which makes the country vulnerable to external economic
factors, and if investments fail to materialize, it could lead to slower growth.

Contrary to these difficulties, the policies also have a lot of beneficial effects. The
CREATE Act's lower corporation tax rates stimulate the economy by incentivizing
companies to invest, grow, and add jobs. Additionally, the emphasis on small firms
encourages innovation and entrepreneurship. The purpose of the tax incentives is to draw
in foreign direct investment (FDI), especially in important industries like manufacturing,
technology, and renewable energy, which may boost infrastructure, provide employment,
and promote general economic growth. Furthermore, the Philippines' reduced tax rates
increase its appeal to enterprises and boost its competitiveness internationally. However,
the TRAIN Law's hikes in excise taxes on items like fuel, sugar, and tobacco could lead to
price increases and inflationary pressures on the populace, particularly for those with lower
incomes. In conclusion, tax policies encounter issues with revenue generation, inequality,
and dependence on outside investments, even though they provide substantial prospects for
economic growth. For these policies to be successful in the long run, effective management
and oversight are essential. (Ramas, 2024).

In conclusion, the Philippine economy has been significantly impacted by the tax
reforms brought about by the TRAIN Law and the CREATE Act, which have presented
both opportunities and difficulties. These reforms aimed to lower taxes for the majority of
people and businesses, streamline the tax code, and encourage investment to spur economic
expansion. Lower-income households are impacted by inflationary pressures brought on
by the TRAIN Law's hikes in excise taxes, despite the law's success in making the tax
system more fair and exempting low-income people from paying taxes. However, by
lowering corporate tax rates, especially for small and medium-sized businesses, and
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providing incentives for key industries, the CREATE Act has increased the Philippines'
appeal to investors and boosted job creation.

The success of these tax policies will depend on the government's ability to manage
their implementation, attract sustained investment, and address inequality. If effectively
monitored and adjusted, these reforms could pave the way for a more competitive,
innovative, and inclusive Philippine economy.

III. STATEMENT OF THE PROBLEM

Taxation plays a pivotal role in shaping the economic landscape of any country,
serving as a primary tool for funding public services, reducing inequality, and stimulating
economic growth (World Bank Group, n.d.). In the Philippines, income tax policies have
undergone significant reforms over the years, most notably with the implementation of the
Tax Reform for Acceleration and Inclusion (TRAIN) law in 2018. While the TRAIN law
was designed to simplify the tax system, increase take-home pay for low-income earners,
and boost government revenue, its outcomes have sparked widespread debate regarding its
effectiveness and fairness (Philippine Institute for Development Studies, 2019).

The law’s dual impact on income inequality and economic disparity has drawn
attention to the experiences of low-income households, who continue to face challenges
due to increased excise taxes and rising living costs. Similarly, the retention of high
marginal tax rates for top income earners has raised questions about its potential effects on
productivity, entrepreneurial activity, and investment. Moreover, these dynamics highlight
the broader issue of how income tax policies influence national economic growth and
revenue generation, underscoring the need for a balanced and equitable fiscal framework.

This study seeks to address these critical issues by exploring three key questions:

1. How has the implementation of the TRAIN Law impacted income inequality and
economic disparity in the Philippines, particularly among low-income earners?
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2. What are the effects of high marginal tax rates on the productivity, investment, and
entrepreneurial activity of high-income earners in the Philippines?

3. To what extent do current income tax policies contribute to or hinder economic

growth and national revenue generation in the Philippines?

By examining these aspects, this research aims to provide valuable insights into the
strengths, weaknesses, and overall implications of income tax policies in the Philippines,
thereby offering a foundation for evidence-based policy recommendations.

IV. PRESENTATION OF DATA

Impacts of the TRAIN Law on income inequality and economic disparity, particularly
among low-income earner

A study produced by Dr. Philip Tuaño, alongside four other economists, initially
focused on evaluating the effects of the TRAIN law’s specific provisions, particularly the
increased excise taxes on coal and petroleum products. However, as additional data and
insights became available, their research expanded to provide a comprehensive assessment
of the TRAIN law as a whole, encompassing its other significant elements, such as the
reduction in personal income tax rates (Tuaño, et. al, 2018). The study yields numerous
findings, but for this paper, the focus will be on its implications for welfare and poverty.

Figure 1.2 illustrates that the government would need to allocate substantial funds
to ensure that poor households are at least as well-off as they were prior to the
implementation of TRAIN. However, this burden is alleviated when considering the
unconditional cash transfers (UCTs) provided by TRAIN to the poorest 50% of households.
There was also information indicating that some of these cash transfers were distributed
later than expected (Punongbayan, 2019). EV stands for equivalent variation.
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Figure 1.1. Welfare impacts of TRAIN by income group

The study further reveals that the TRAIN law likely worsened poverty in the
Philippines, increasing the poverty rate by 0.26 percentage points even with the cash
transfers in place. Various sectors of the economy were adversely affected, with fisherfolk
being among the most impacted (Figure 1.2).

However, the Pantawid Pasada transfers introduced under TRAIN appear to have
mitigated poverty within the transport sector. Dr. Tuaño explains that many drivers and
operators are situated just below the poverty line, and even modest financial assistance was
sufficient to lift a significant number of them out of poverty. Unfortunately, the same
cannot be said for other sectors, which continued to experience adverse effects despite the
cash transfer programs.
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Figure 1.2. TRAIN’s impact on poverty by sector

Effects of high marginal tax rates on the productivity, investment, and

entrepreneurial activity of high-income earners

Tax Type Effect on Investment Effect on Productivity Affected Sectors

(TFP)
Corporate Increases user cost of Lowers productivity, High-profit
Income Tax capital, reducing especially in high-profit industries
investment (-0.35 to - industries
1.0 elasticity)
Personal Income No direct investment High marginal tax rates Entrepreneurial
Tax effect mentioned discourage entrepreneurship, sectors
reducing productivity
R&D Tax Encourages investment Modest positive effect on R&D-intensive
Incentives in R&D-intensive long-term productivity sectors
industries
Social Security No direct investment Negatively affects labor- Labor-intensive
Contributions effect mentioned intensive industries by industries
increasing labor costs

Table 1.4 Effects of high marginal tax rates on investment, productivity, and
entrepreneurial activity

Vartia (2008) conducted an industry-level analysis across OECD countries to

examine the impact of various tax policies on investment and productivity. The research
revealed that increases in corporate tax rates and reductions in capital depreciation
allowances negatively affect investment by raising the user cost of capital. Specifically, the
long-run elasticity of the investment-to-capital ratio with respect to the user cost of capital
was estimated to range between -0.35 and -1.0, depending on the empirical model
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employed. This indicates that higher corporate taxes can significantly deter investment
activities within industries.

Regarding productivity, the study found that both corporate and top personal
income taxes adversely affect total factor productivity (TFP). Corporate income taxes were
particularly detrimental in highly profitable industries, as these taxes directly reduce the
returns on corporate profits, thereby discouraging efficiency and innovation. High marginal
personal income tax rates were also found to impede long-term productivity by
discouraging entrepreneurial activity, with more pronounced effects in industries
characterized by high levels of entrepreneurship.

Conversely, the research indicated that tax incentives for research and development
(R&D) have a positive, though modest, effect on long-term productivity. This positive
impact was more substantial in R&D-intensive industries, suggesting that well-designed
tax incentives can promote innovation and efficiency. Additionally, the study observed that
social security contributions negatively influence TFP, especially in labor-intensive
industries, as these contributions increase labor costs and may discourage employment and
productivity enhancements.

Figure 2. Total Factor Productivity (TFP)’s contribution to growth

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Qian et al. (2018) provided valuable insights into the role of total factor productivity
(TFP) in economic growth. Their findings highlight that sustaining long-term economic
expansion in the Philippines requires maintaining high levels of productivity growth, which
has been a key driver of economic acceleration since the 2000s. TFP contributed to one-
third of the country’s overall growth during this period and was higher than that of most
regional peers, except for China. This increase in productivity was largely attributed to
structural reforms implemented since the 1990s.

However, high marginal tax rates on both corporate and personal income may
hinder this productivity growth by discouraging investment, entrepreneurship, and
efficiency improvements. According to Vartia (2008), high corporate taxes increase the
user cost of capital, leading to reduced investment in productivity-enhancing activities.
Similarly, high personal income tax rates discourage entrepreneurial activity, which is
crucial for sustaining high TFP growth. Since Qian et al. (2018) emphasize the need for
continued structural reforms to maintain productivity growth, it is essential that tax policies
complement these efforts rather than create disincentives for businesses and high-income
earners.

Thus, while the Philippines has made significant strides in improving productivity
through structural reforms, excessively high marginal tax rates could undermine these
gains by discouraging investment and entrepreneurial activity. To sustain long-term
economic growth, the government must strike a balance between maintaining progressive
taxation and fostering an environment that supports productivity and economic expansion.

The extent current income tax policies, including the TRAIN Law, contribute to or hinder
economic growth and national revenue generation in the Philippines.
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Personal Income Tax

Figure 3.1. Personal Income Tax Revenue, 2010-2020 (in percentage)

With a top marginal tax rate of 35 percent, comparable to Thailand and Vietnam,
the Philippine personal income tax (PIT) system appears to be more efficient, reflecting a
progressive rate structure, a broader tax base, and/or improved compliance and
administration. The PIT base could be further expanded by eliminating various exemptions,
such as (i) specific employee benefits, including bonuses, 13th-month pay, loyalty awards,
and in-kind benefits; (ii) pensions and various social security and health benefits; and (iii)
limiting deductions, such as those for donations and tax credits. Strengthening the
enforcement of the 8-percent flat tax for small and micro businesses would enhance PIT
revenue efficiency by preventing tax avoidance through shifts between different tax
regimes. Additionally, improving capital income taxation by standardizing and reducing
tax rates across all income categories—including dividends, interest, capital gains, rental
income, and royalties—would enhance revenue collection. Further revenue gains could be
achieved by removing unnecessary exemptions, such as those for long-term government
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securities, and eliminating reduced tax rates, such as those applied to dividends from
resident companies.

Corporate Income Tax

Figure 3.2. Corporate Income Tax Revenue, 2010-2020 (in percentage)

In 2020, before the implementation of the CREATE reform package, which

lowered the corporate income tax (CIT) rate to 20 percent for MSMEs and 25 percent for
other businesses, CIT revenues amounted to less than 0.1 percent of GDP per percentage
point of the tax rate. This level of CIT productivity was relatively low compared to some
neighboring countries, suggesting a narrow tax base and the presence of generous tax
incentives. Additionally, the impact of base erosion and profit shifting (BEPS) may have
further contributed to this low revenue productivity. Strengthening anti-avoidance
measures and enhancing enforcement mechanisms could help improve CIT productivity
by reducing tax leakages and ensuring a broader and more effective tax base.
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Excise Taxation

Figure 3.3. Excise Taxation Revenue, 2010-2020 (in percentage)

The Philippines has substantially boosted its excise tax revenue, largely due to the
implementation of the 2018 TRAIN law and the 2020 sin tax reform. These reforms raised
excise tax rates on various products, including petroleum, coal, alcohol, tobacco, and
cigarettes, while also introducing new taxes on sweetened beverages and electronic
cigarettes. As a result, excise tax collections have increased, bringing them in line with the
Asia-Pacific average in recent years.
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V. DESCRIPTIVE ANALYSIS OF STATISTICAL DATA

This section presents the descriptive analysis of the collated statistical data answering the
three questions of this research.

1. How the implementation of TRAIN Law impacted income inequality and economic
disparity in the Philippines, particularly among low-income earners.

a. Impact on poverty

Table 1.5 Poverty incidence, by scenarios

Source: Tuaño et al. [2019]

Table 1.5 illustrates the impact of different policy scenarios on poverty incidence
across various sectors of the population. “Poverty incidence” refers to the percentage of
people living below the poverty line. The baseline scenario represents the starting point,
while the other scenarios introduce policy changes: PCEX (petroleum and coal excise tax),
TRAIN 1 (Tax Reform for Acceleration and Inclusion), and TRAIN 1 combined with an
Unconditional Cash Transfer (UCT).

TRAIN 1 scenario generally leads to an increase in poverty incidence across all

sectors. The introduction of the UCT program partially mitigates the negative effects of
TRAIN 1 for most sectors, reducing the increase in poverty incidence. The impact of
TRAIN 1 varies across sectors. Under TRAIN 1, poverty incidence for households
increases by 1.72 percentage points. This increase is slightly reduced to 0.26 percentage
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points when the UCT is implemented. Poverty incidence increases by 2.03 percentage
points under TRAIN 1, reduced to 0.65 points with UCT. Poverty incidence increases by
1.87 percentage points under TRAIN 1, reduced to 0.57 points with UCT. TRAIN 1 has a
particularly severe impact on fisherfolk, increasing poverty incidence by 3.20 points,
reduced to 1.35 points with UCT. TRAIN 1 increases poverty incidence by 2.06 points for
transport workers, but UCT significantly reduces this to -8.16 points (indicating a decrease
in poverty). TRAIN 1 has a substantial impact on farmers, increasing poverty incidence by
2.33 points, reduced to 0.06 points with UCT. The analysis highlights the potential negative
impact of TRAIN 1 on poverty and the significant role of UCT in mitigating these effects
for various sectors.

b. Welfare impacts of TRAIN by income group

Fig. 1. Welfare impacts of TRAIN by income group. Source: Tuaño et al. [2018]

The graph shows a comparison of changes in Equivalent Variation (EV) for

different income deciles under two scenarios: (1) TRAIN without transfers and (2) TRAIN
with transfers. The key findings show the negative impact of TRAIN without Transfers,
the mitigating effect of transfers, the impact of the reform on poorest deciles, and its impact
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on richest deciles. Generally, the TRAIN reform without transfers has a negative impact
on Equivalent Variation for all income deciles, which means that the reform would lead to
a decrease in welfare for most households if such scenario is realized. Meanwhile, the
inclusion of transfer programs significantly mitigates the negative impact of the TRAIN
reform. The blue bars (TRAIN with transfers) are generally higher than the orange bars
(TRAIN without transfers), indicating an improvement in welfare for most deciles.

The poorest decile experiences the largest negative impact from TRAIN without
transfers. However, the transfer programs are most effective in offsetting this negative
impact for the poorest households. Oppositely, the richest decile experiences the smallest
negative impact from TRAIN without transfers, while the transfer programs have a
minimal effect on their welfare. In summary, the data suggests that the TRAIN reform,
without additional transfer programs, would have a negative impact on the welfare of most
households in the Philippines. However, the implementation of transfer programs can
significantly mitigate these negative effects, particularly for the poorest households.

Fig. 1.2. Welfare impacts on poverty by sector. Source: Tuaño et al. [2018]
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Figure 1.2 assessed the impact of implementing TRAIN Law on: (1) households,
(2) individuals, (3) women, (4) farmers, (5) transport workers, and (6) fisherfolk sectors.
For all sectors shown, the orange bars, representing TRAIN without transfers, extend to
the right of the 0-point on the x-axis. This indicates that, without transfers, the TRAIN
reform leads to an increase in poverty incidence across all these sectors. In all cases, the
blue bars, representing TRAIN with transfers, are either shorter than the corresponding
orange bars or even extend to the left of the 0-point. This shows that the inclusion of
transfer programs significantly mitigates the negative impact of the TRAIN reform on
poverty. The graph clearly demonstrates that the TRAIN reform, without transfers, would
have a negative impact on poverty across the sectors analyzed, with varying degrees of
severity. The implementation of transfer programs significantly mitigates these negative
effects and even leads to a reduction in poverty incidence for some sectors, particularly
transport workers.

The average change in poverty incidence under TRAIN without transfers is a positive
2.05 percentage points, indicating an increase in poverty across the sectors. In contrast, the
mean change with transfers is negative (-0.88 percentage points), suggesting a decrease in
poverty overall. The median value for TRAIN without transfers (1.95) is close to the mean,
suggesting that the data is relatively symmetrical. For TRAIN with transfers, the median
(0.415) is significantly higher than the mean, indicating that the distribution is skewed by
the outlier (-8.16 for transport workers). The standard deviation for TRAIN without
transfers (0.56) is relatively low, suggesting that the changes in poverty incidence across
sectors are not highly variable. In contrast, the standard deviation for TRAIN with transfers
(3.15) is much higher, indicating greater variability in the impact of transfers across sectors.

c. Impact of Implementation of TRAIN Law on low-income households

The implementation of TRAIN Law has been proven to have implications on families
belonging in lower income classes of Baguio City, specifically on themes such as, meeting
basic needs of the family, mental health and well-being of each family member, and family
and community support (Sebullen and Alejandro, 2023). The findings show that poor
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income families are struggling to afford food, utilities, and housing as consumer prices rise,
forcing them to limit meals, skip payments, and seek informal options, respectively. Some
of these families resort to taking high-interest loans to sustain their basic needs, increasing
their debt and financial obligations. It was also revealed that the TRAIN Law significantly
affects the mental health and well-being of the poor income class families. It found that
due to financial insecurity and extreme poverty, these families encounter various mental
health issues such as stress, anxiety, and depression. Additionally, they often suffer from
malnutrition and feel hopeless in their current situation. Overall, the TRAIN Law resulted
in economic suffering and impacted social networks, resulting in a decrease in socializing,
a reluctance to seek financial help, and a diminished ability to engage in important aspects
of social interaction.

d. Impact on employment

Table 2. Change in employment, various scenarios, by number of workers

Source: Tuaño et al. [2019]
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

Table 2 focuses on how different policy scenarios impact employment levels across
various sectors. The numbers represent the change in employment (in thousands of
workers) for each sector under scenarios such as; PCEX, TRAIN 1, and TRAIN 1 + UCT.
The PCEX scenario generally leads to a decline in employment across various sectors,
particularly in agriculture and industry. This is likely due to increased input costs for
businesses. TRAIN 1, while having a negative impact on some industrial sectors, is
associated with an overall increase in employment due to growth in agricultural activities.
This suggests that the tax reform stimulated economic activity in the agricultural sector.
The inclusion of UCT has a minimal impact on employment levels compared to the TRAIN
1 scenario. This indicates that the UCT program, while potentially beneficial for poverty
reduction, may not have a significant impact on employment across different sectors.

The agricultural sector, particularly in areas like paddy rice and other crops,
experiences significant employment growth under TRAIN 1. Several industrial sectors,
including mining, manufacturing, and construction, experience employment declines under
PCEX and to a lesser extent under TRAIN 1. The impact on the services sector is varied,
with some sectors experiencing growth while others experience decline.

2. The effects of high marginal tax rates on the productivity, investment, and
entrepreneurial activity of high-income earners in the Philippines.

a. Productivity

From a literature review of the OECD Economic Department Working Papers

(n.d.), there shows how different types of taxes affect productivity, measured by Total
Factor Productivity (TFP), focusing on three key channels: resources allocation,
entrepreneurial activity, and research and department (R&D) investment. The main
findings were: (1) corporate income taxes reduce TFP, especially in highly profitable
industries, (2) High personal income tax rates hinder long-run productivity by dampening
entrepreneurial activity, particularly in industries with high entrepreneurial intensity, (3)
R&D tax incentives modestly boost long-run productivity through increased R&D
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

intensity, with a strong effect in R&D-intensive industries, and (4) Social security
contributions negatively impact TFP, more significantly in labor-intensive industries.
Essentially, the study concludes that both personal and corporate income taxes negatively
impact productivity.

b. Investment

Table 4. Causation between Investment and Taxation and Incentives, Evidence from the
Philippines. Source: Quimbo et. al., (2016)

This data shows that the average investment in 2010 is 534,285 pesos. It also shows
a standard deviation of 3,010,027, which indicates that investment amounts vary widely;
some firms invest too little, while others invest vast sums. This table illustrates how taxes
and Philippine Economic Zone Authority (PEZA) incentives affect business investment in
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

the Philippines. It shows that higher tax rates generally discourage investment, but this
effect is strongest in industries that already have existing investments. They claim that if a
business is already invested and making profits, a tax hike makes them less likely to
reinvest or expand. The study estimates that a 1% tax increase could lead to a 6.1% drop
in total capital expenditures and a 7.09% decrease in new tangible assets, such as;
equipment or buildings. However, taxes don’t seem to affect the decision to start a new
business in the first place; they mainly influence existing businesses’ decisions.

PEZA incentives, on the other hand, seem to encourage investment. The study
suggests that a PhP 1,000.00 increase in incentives could lead to a PhP 434.00 to PhP
865.00 increase in investments. However, the authors also suggest that these incentives
could be better targeted. They found evidence that manufacturing and information and
communication sectors, for example, seem to benefit most from incentives. While taxes
don't seem to affect whether new businesses start, PEZA incentives do seem to influence
the number of new businesses in certain sectors; wholesale or retail trade,
information/communication, and water or waste management or construction. This is
important because the overall trend was a decline in new firms, but incentives seem to
counteract that in these specific areas. In short, taxes can discourage existing businesses
from investing more, while PEZA incentives can encourage both investment and the
creation of new businesses in specific sectors. The study suggests the government could
improve its approach by targeting incentives more effectively.

c. Entrepreneurial Activity

As per the Philippine News Agency (2018), the Philippine government's revenue in the
first quarter of 2018 reached PHP 619.84 billion, a 16.4% increase year-on-year, partly due
to the Tax Reform for Acceleration and Inclusion (TRAIN) law. Improved tax
administration under TRAIN boosted tax revenues by 18.2%, exceeding nominal GDP
growth. While expenditures also increased significantly (27.1%), driven by a 40% rise in
capital outlays, the resulting budget deficit of PHP 162.2 billion (4.1% of GDP) was within
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

target. Increased tax and expenditure efforts, along with strong macroeconomic
fundamentals and the "Build, Build, Build" program, contributed to the Philippines' 6.8%
Q1 GDP growth, and the government projects continued growth of 7-8%.

According to Vartia (2024), the relationship between taxes and productivity,

particularly concerning risk-taking and entrepreneurship, is theoretically unclear. While
high taxes can reduce entrepreneurial activity by lowering potential returns, they also offer
a form of insurance by decreasing the variance of those returns. Existing research explores
how various tax system characteristics (progressivity, loss offset rules, differences between
corporate and personal income tax rates) influence risk-taking and entrepreneurship, with
some studies suggesting that self-employment becomes more attractive for tax avoidance
under high personal income taxes. Ultimately, the overall effect of personal income taxes
on entrepreneurship remains inconclusive, both theoretically and empirically.
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

3. The extent current income tax policies, including the TRAIN Law, contribute to or
hinder economic growth and national revenue generation in the Philippines.

Table 5. Tax structure in the Philippines

Source: Revenue Statistics in Asia and the Pacific 2024, Philippines

Figure 2 contains data that shows the impact of the Philippine tax policies,
specifically the TRAIN Law, on economic growth and revenue generation. The TRAIN
Law, as mentioned, shifted the tax burden by reducing personal income tax rates while
increasing excise taxes on specific goods, such as fuel, sugary drinks, and vehicles. The
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

changes in revenue from specific goods taxes including excises reflect the targeted
adjustments of the TRAIN Law. It's important to note that while excises increased, customs
duties remained relatively stable. As for the overall revenue growth of the Philippines, the
total tax revenue has increased significantly; PHP 3,505.80 billion in 2021 to PHP 4,049.70
billion in 2022, indicating that the tax system is generating more revenue. The tax-to-GDP
ratio has seen a slight increase from 18.1% in 2021 to 18.4% in 2022, indicating that the
revenue growth is slightly outpacing economic growth. The data suggests that the tax
system, including the changes introduced by the TRAIN Law, is successful in generating
increased revenue for the government.

Furthermore, the data indicates that the Philippine tax system is generating more
revenue, likely due to a combination of economic growth, the TRAIN Law's adjustments,
and improved tax administration. However, a more in-depth analysis is required to
understand the long-term impacts on economic growth, its distributional effects, and the
specific role of the TRAIN Law. Further research should focus on isolating the impact of
tax policy changes from other influencing factors.

VI. CONCLUSION, FINDINGS, AND RECOMMENDATIONS

The study examines the income tax policies in the Philippines and their effects on
economic growth and income distribution, particularly focusing on two major tax reforms:
the Tax Reform for Acceleration and Inclusion (TRAIN) Law and the Corporate Recovery
and Tax Incentives for Enterprises (CREATE) Act. The TRAIN Law, implemented in
2018, aims to simplify taxation and provide income tax cuts, especially for low- and
middle-income earners. However, it increased taxes on essential goods like fuel, sugary
drinks, etc., which resulted in disproportionately affecting low-income households by
raising the cost of living. The CREATE Act (2021), on the other hand, focused on corporate
taxation. With the aim of attracting more investment, CREATE Act lowers the corporate
income tax (CIT) rate from 30% to 25% (or 20% for small businesses) and rationalizes tax
incentives. While this is aimed to enhance business growth and economic recovery,
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

possible insufficiency in government revenue is a concern. The study assesses these tax
policies' impact on economic growth, income inequality, and national revenue.

Summary of Findings

The following findings of this study highlight the significant effects of the TRAIN Law
and CREATE Act on the Philippine economy:

a. Impact of TRAIN Law on Low-Income Households

• Reduced income tax burden for many individuals, but higher excise taxes on
essential items led to increased prices of basic goods, resulted to an increase of the
cost of living, disproportionately affecting the low-income earners.
• Cash transfer programs provided short-term relief but were insufficient to
compensate for the rising expenses.
• TRAIN Law slightly increased poverty incidence, especially among farmers,
fisherfolk, and transport workers.

b. Effects of CREATE Act on Business Investment

• Lowered corporate tax rates helped small and medium-sized enterprises (SMEs)
businesses recover.
• Tax incentive rationalization reduced benefits (tax breaks) for some industries,
leading to concerns that foreign investors might look for better options in other
Southeast Asian countries like Vietnam and Indonesia, which offer more generous
and predictable tax incentives.
• Under CREATE, the rules became stricter, limiting tax perks to specific industries
aligned with national priorities (e.g., manufacturing, IT, renewable energy) which
businesses in non-priority sectors (such as retail and traditional services) had their
tax privileges reduced, which could lead to slower expansion or relocation.
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

• Due to reduced corporate taxes, there is a potential government revenue loss which
could affect the budget on public spending on infrastructure and social services.

c. Overall Economic Growth and Revenue Generation

• The TRAIN Law increased government revenues due to higher excise taxes, but
this came at the cost of rising prices due to higher excise taxes on basic goods,
resulting in a higher cost of living, especially affecting the lower-income
consumers.
• The CREATE Act helped businesses grow but resulted in lower corporate tax
collections, creating concerns about long-term fiscal sustainability and concerns on
the possible negative effect on the attraction of foreign investors in the country.
• High marginal tax rates on individuals and businesses discouraged investment and
productivity, with some companies resorting to tax avoidance strategies.

o High corporate and personal income taxes reduce the profitability of businesses which
may result in discouragement of reinvestment in expansion, research, and workforce
development.

o Business owners and professionals may opt for tax avoidance strategies or opt to invest
abroad where tax rates are lower and/or better.

o Businesses and individuals may resort to underreporting income, shifting profits to tax
havens (secrecy jurisdiction or hiding wealth and financial affairs from the rule of law) or
using accounting strategies to minimize tax obligations which may result in reducing
overall government revenue.
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

Recommendations

1. For the TRAIN Law: Reduce Reliance on Excise Taxes

• Shift tax burdens away from basic goods and shift towards higher corporate and
wealth taxes, lowering indirect taxation and resulting in a stronger social safety net
as seen in Germany's taxation system, easing the financial burden on low-income
earners.
• Adapt the targeted tax relief programs such as the Earned Income Tax Credit
(EITC) model used in the U.S. where in tax credits are implemented for those low-
income earners, providing tax relief.

2. For the CREATE Act: Improve Investment Incentives While Ensuring Revenue
Stability

• Consider a tiered tax incentive system like in Singapore, wherein, lower corporate
tax rates are implemented, along with a strict compliance and broad tax bases to
avoid insufficiency in government revenue.
• Strengthen anti-tax evasion measures to counterbalance revenue losses from lower
corporate tax rates.

3. For Overall Tax Policy: Find a Balance Between Economic Growth and Tax
Fairness

• Lower high-income tax rates slightly to encourage work productivity and

investment in entrepreneurship.
• Adapt a Nordic-style targeted public benefit. Whereas Nordic Countries have
higher income taxes but compensates with improved public transportation, free
healthcare, education subsidies, and social security benefits, ensuring tax revenues
benefit citizens directly while maintaining a fairly structured tax system ensuring
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

both high-income earners and corporations contribute to government revenue

significantly.

VII. IMPLICATIONS

The study’s examination of the TRAIN Law and CREATE Act highlights their impact
on income distribution, business investment, and national revenue generation. These
findings are particularly relevant to Office Administration, as professionals in this field
play a crucial role in financial management, payroll processing, tax compliance, and
general business operations. Understanding these tax reforms enables administrative
professionals to navigate regulatory requirements, support financial planning, and ensure
organizational compliance.

Enhancing Compliance and Regulatory Awareness

• Office administrators must stay informed about income tax policies, excise tax
changes, and corporate taxation to ensure accurate record-keeping, payroll
processing, and financial documentation. Tax reforms such as the TRAIN Law,
which affects employee take-home pay, require administrators to adjust salary
computations, tax withholdings, and benefits accordingly. Additionally, stricter tax
incentive rules under the CREATE Act necessitate meticulous documentation and
audit preparedness to ensure compliance with government regulations and
minimize legal risks.

Strategic Payroll and Compensation Management

• With the TRAIN Law affecting both low- and high-income earners, office
administrators play a key role in helping management establish fair and competitive
salary structures that align with tax policies. The CREATE Act’s reduction in
corporate taxes allows businesses to allocate more resources for expansion. In this
context, office administrators assist HR and finance teams in managing
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

compensation structures, employee tax benefits, and office budgets to ensure tax-
related expenses are recorded accurately.

Upholding Business Compliance and Ethical Responsibility

• The TRAIN Law’s impact on economic disparity raises concerns about fairness and
equity in taxation, emphasizing the need for ethical business practices. Office
administrators contribute to corporate governance and ethical compliance by
ensuring their organization follows taxation laws, mitigates legal risks, and fulfills
corporate social responsibility (CSR) obligations.

Continuous Professional Development and Policy Adaptation

• As tax laws continue to evolve, office administrators must engage in ongoing

learning and training to stay informed about regulatory updates and their
implications for business operations. A strong understanding of taxation policies
enables administrators to provide informed recommendations to management and
assist in decision-making for financial planning and compliance.

Strengthening Tax Compliance and Ethical Practices

• High tax rates and complex regulations may lead to tax avoidance or
underreporting. Office administrators play a critical role in maintaining accurate
financial records and ensuring proper tax filings to prevent compliance risks. The
TRAIN Law’s impact on economic disparity reinforces the need for transparent
payroll practices and corporate social responsibility. By implementing anti-tax
evasion measures, businesses can minimize legal risks, and office administrators
can support these efforts by ensuring accurate documentation and adherence to tax
obligations.
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

The findings of this study emphasize the essential role of Office Administration in
managing tax compliance, payroll adjustments, and financial strategies in response to tax
reforms. By staying informed about policies like the TRAIN Law and CREATE Act, office
administrators contribute to organizational compliance, financial stability, and ethical
business operations. A well-informed administrative team is crucial for balancing
regulatory compliance, employee financial well-being, and sustainable business growth.
 POLYTECHNIC UN IVERSITY OF THE PHILIPPINES

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