Tax Reform and Energy in the Philippines Economy: A General Equilibrium Computation

Abstract

This paper examines how energy tax cuts, offset with income tax increases, affect production, consumption, and total welfare in the Philippines economy. Our results show that energy tax cuts expand the energy and nonmetal mining sectors, butdecrease output in the manufacturing, agricultural, andmetal mining sectors. Consumption of all goods and services combined increases as the amount of energy tax reduction increases. Our welfare results, however, are mixed. While the welfare of the mid- and high-income levels increases, that of the lowest income level decreases. These results are robust with respect to changes in the elasticity of substitution in energy production as well as the elasticity of substitution in consumer demand. From the standpoint of economic efficiency, a policy such as this would enhance growth and aggregate income. From an equity standpoint, however, this policy is highly regressive in spite of the fact that the richest households pay proportionately more to finance the energy tax reduction.