Introspective, Business World
The Tax Reform for
Acceleration and Inclusion (TRAIN) has been billed as the administration’s
flagship legislation for achieving sustainable seven percent growth, generating
investments and jobs,and reducing poverty. If TRAIN is derailed — kiss Build,
Build, Build, bye bye.
There is some concern that
the Senate version of TRAIN passed two weeks ago, heavily diluted the original tax
reform package proposed by the DoF. According to press reports citing the
Legislative-Executive Development Advisory Council (LEDAC),the likely
incremental revenue yield of the Senate bill is only around P55B, around 0.3%
of GDP. Compare this to the target revenue yield of the original proposal of
the DoF of P157B, (1% of GDP), or even the House version of P134B (0.8% of
GDP). Or what the Philippine Development Plan aims: for infrastructure spending
to ramp up to 7% of GDP by 2022 from last year’s 3.4%.
Moreover, as stressed by
Foundation for Economic Freedom last Sept. 14, “Tax reform is particularly
important in the face of new spending mandated by Congress — free irrigation,
free tuition in SUCS (state universities and colleges), escalating pension
benefits of uniformed personnel, and increases in SSS (Social Security System)
pensions unmatched by increases in contribution.” The incremental yield of the
Senate bill barely covers the estimated first year cost of the free tuition
law. And with inordinate amount of earmarks to boot.
If government pursues its
programmed five-year infrastructure spending on top of all these
Congress-mandated new ones without the matching new revenues, the country
courts an explosive public debt buildup.More immediately, we put at risk
another “BBB” — the Philippines “investment grade” credit rating. Keeping an
investment grade rating is essential. It makes the country attractive to
investors and keeps borrowing cost low for both government and the private
sector, including small businesses and first time homebuyers.
The major sources of
dilution in the Senate version according to experts are —
1. Plugging VAT exemption
loopholes. The Senate version only lifted 36 VAT exemptions from the 70 lines
in the DoF bill. Moreover the Senate bill gives new exemptions to ecozones.
2. Fuel taxes, auto excise
taxes were watered down and made more complicated.
3. The option to pay 8% on
gross for all self-employed, in lieu of income taxes at the top marginal rate
of 35%.
On the VAT exemption
loopholes, the consequence of having too many holes is a VAT yield of only 4.3%
of GDP, around the same as Thailand’s, even when their VAT rate is only 7%.
My favorite example of a
bad tax exemption — seniors citizens’ VAT exemption on top of a legally
mandated 20% discount. This is exceedingly regressive as government subsidizes
in direct proportion to amount of spending, and gives minimal benefits to the
needy elderly poor. Its other objectionable feature from a tax policy
standpoint is the high administration cost, and its window for abuse by
opportunistic taxpayers/establishments and crooked tax collectors. The DoF
originally proposed to limit this exemption to medicines, and to instead
provide annual cash transfers similar to the Pantawid Pamilya for the elderly
poor.
There are dozens of
similarly unmeritorious exemptions like this that the DoF tried to wholesale
correct in their version of the bill. (At the same time, the DoF has shown
flexibility in recognizing truly deserving cases. For example, with the BPO
industry, one of two key drivers of the economy in terms of direct and indirect
employment, foreign exchange, and economic activity. Both House and Senate
versions provide for a formula that allows the industry to continue to
significantly contribute to the economy in the face of anti-outsourcing
rhetoric in the US, concerns of foreign clients over security concerns like
Marawi/ISIS, and the accelerating negative impact of technological disruption/Artificial
Intelligence.)
On the oil taxes,while the
three versions converge to same rate after year 3, the Action for Economic
Reforms has argued that the back loading, especially in the Senate version
impacts on the ability of government to fund the compensating cash transfers
needed in the early years.(Though one can also argue that timing actually
dovetails with the J curve ramp up in infra spending, given government’s
absorptive capacity/execution limitations.) There is also the risk to the
planned revenue increase for the outer years due to the 2019 election.
Finally, on item 3 — the
revenue losses from the overly generous eight percent gross option for the
self-employed (initially only for smaller establishments), has been estimated
by the DoF/AER to be upwards of P20 billion. While its Senate sponsors have
argued that there will be more taxpayers who will pay with the much lower rate,
I doubt that tax evaders now paying zero will find virtue just because the tax
rate is lower. Especially since, surfacing previously hidden income stream may
expose them to charges of evasion on past income.
Moreover, this measure
severely fails the test of horizontal equity — as salaried people, especially
at the higher tax brackets, will be subject to three to four times the burden
of the self-employed.
In order to make up for the
huge gap in revenue yield, the Senate version introduced new items that were
originally programmed for future packages by the DoF. They have thus not been
subject to full consultations. Some quick notes on these new items:
1) Increase in taxes on
dividends and on FCDU dollar interest income to 20%.
Premature and piece meal in
light of a comprehensive review being undertaken by a team of experts
commissioned by the DoF/ADB for reform of capital income taxation (interest,
dividends, capital gains) across institutions and financial instruments. The
objectives of this capital income tax reform (package 4) include greater
neutrality, fairness, simplicity, and efficiency — to be supportive of
government’s capital market development efforts.
2) Coal tax dubbed a carbon
tax.
The Senate bill proposed
doubling the coal tax from the current P10 per ton. While even this higher
level seems modest compared to what is being pushed by alternative fuel
interests,this tax should have been left for fuller study under the DoF’s
package 5, taxation of products with negative social externalities (which also
includes tobacco and alcohol).
Advocates have argued for a
much heavier tax on coal based on coal’s higher per unit contribution to global
Co2 vs. alternative fuels. They fail to consider that the Philippine
Co2 footprint is just 1% of world total,the lowest in ASEAN.
Moreover, the renewable energy component of our power mix at 35%, is way above
global average — thanks to forward looking investments done over decades in
efficient hydro and geothermal plants.
The question we need to ask
in levying higher taxes on coal is — given the country’s aim to promote
manufacturing investments and job creation, can we afford to further add to our
high electricity costs? Such have been made higher recently by compounding feed
in tariffs subsidies for wind and solar.
3) Cosmetic surgery (or
cosmetic products) tax. This and other similar small yielding tax measures are
just administrative burdens.
One is tempted to say,
purely cosmetic. But nonetheless valid considerations in Philippine politics,
especially bearing in mind 2019 midterm elections. I trust that the bicam and
Congress as a whole will find the right balance between short term politics and
our country’s long term development imperatives.
http://bworldonline.com/bye-bye-build-build-build/