Eight former Finance Secretaries support TRAIN 2

May 27, 2018 | 9:25 pm

Business World Introspective By Romeo L. Bernardo

In a remarkable show of support for the public good, eight former finance secretaries signed a statement of support for TRAIN package 2.

They are in chronological order of their years in service: Former Prime Minister Cesar Virata, former Finance Secretaries Roberto de Ocampo, Salvador Enriquez, Jose Pardo, former Senator Alberto Romulo, Former Secretaries Jose Isidro Camacho, Margarito Teves, and Cesar Purisima, who served both in President Arroyo and President Aquino III administrations. Some of us former Undersecretaries are also co-signatories.

This is noteworthy not only in that these gentlemen served across several Presidencies, most succeeding each other in less than cordial political circumstances, but also in that there is no fiscal crisis now that compels either the current reform program, or this kind of show of national unity.
Typically, tax reform legislations everywhere are driven by crises. Or at least some kind of financial pressure coming from multilateral institutions like the IMF, international credit rating agencies or financial markets. This time around, reform is being pursued at a time when our fiscal situation has never been better.

Record low public and external debt to GDP ratios, low and manageable fiscal deficits, prices, interest rates and borrowing spreads, and record high international reserves.

The Philippines has also received continuing credit rating upgrades to above investment grade — the product of reforms done by his predecessors, as Sec. Dominguez graciously acknowledges.

It is a tribute to the current economic team that it has taken a long view, and is moving boldly to achieve an ambitious medium- term program that would lift our GDP growth to 7% and higher, and improve the lives of most of the quarter of our people who are jobless and living below the poverty line.

It is also a recognition of the quality of the technical work done by Finance Usec Karl Chua and his team that such wide support for a complex piece of legislation is forthcoming. Not just from these highly respected men of probity and integrity, but also from esteemed organizations like the Foundation for Economic Freedom (fef.org.ph) and the Management Association of the Philippines (www.map.org.ph).

Quoted at the end of this column is the statement of support.

TRAIN 1 is getting unfair flack for the recent spike in inflation.

Recall that this package, addresses the inequity in the personal income taxes, widens the tax net by plugging loopholes in VAT, and imposes additional taxes on goods with negative economic externalities like oil and sugary products. It also raises additional resources for government’s “Build Build Build” program and social investments in health and education.

Let me repeat here what Sec. Dominguez said in Congress on inflation since there continues to be gross misunderstanding, most disappointingly even by our better respected senators.

They are asking for a TRAIN 1 suspension, or worse a suspension of the collection of excise taxes on oil. This will undo the good the TRAIN 1 law that they passed will do, including the equitable reduction in personal income taxes for the lowly salaried. This will not do a whit for inflation — as inflation did not primarily emanate from TRAIN 1.

“TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two thirds of last April’s 4.5% inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.

TRAIN contributes only four tenths of a percent to the inflation rate. This means that for every additional peso our people have to spend because of inflation, only 9 centavos can be attributed to TRAIN.

It is also important to note that TRAIN’s biggest price impact is on tobacco and sugary beverages.
But in the case of these “sin” products, the tax rate is intentionally punitive to improve the health of Filipinos. At any rate, the inflationary impact of TRAIN is expected to diminish over the next few months.”

On his last point, we are already observing a slowing in the momentum of inflation on a month on month basis. This will only improve as government rice imports come in, and with the liberalization of rice import policy.

STATEMENT OF SUPPORT FOR THE COMPREHENSIVE TAX REFORM PROGRAM — PACKAGE 2 OF THE DEPARTMENT OF FINANCE

We, former Secretaries and Undersecretaries of the Department of Finance, reiterate our support for the administration’s comprehensive tax reform program (CTRP) and strongly encourage the government to urgently pursue the tax reform’s second package, aimed to modernizing the fiscal incentives regime and lowering corporate income tax rates.

We continue to share the country’s goal of becoming a prosperous, predominantly middle-class society. Achieving this will require an equitable tax system and robust public investment, which the first package of reform began to address.

Alongside strong and strategic public spending, tax policy must enable a fair, competitive, and growing business sector. Standard corporate rates must be reasonable, to encourage compliance, broaden the tax base, unburden small and medium enterprises, and create strong domestic value chains. At the same time, fiscal incentives must be treated as public investment: the economic benefits must outweigh the cost in foregone revenue; and the tax incentive regime must align with the country’s socioeconomic priorities.

We therefore believe that the fiscal incentives regime, made complex and costly by years of neglect and abuse, needs modernization, so that incentives are more transparent, performance-based, targeted, and time-bound. Modernizing the fiscal incentives regime will spur country development and public investment by incentivizing investment in less development areas and releasing local governments from a system that allowed registered enterprises to pay preferential rates in lieu of all taxes, including local taxes.

We likewise support effort to expand the TIMTA, consolidate tax incentives into a single menu, and harmonize the granting of incentives through the fiscal Incentives Review Board (FIRB) to be chaired by the Secretary of Finance.

We also believe that the corporate income tax (CIT) regime, burdened by the highest standard rate among ASEAN countries, at 30%, is in urgent need of reform. We strongly support the reduction of corporate income tax alongside the rationalization of tax incentives. Coupled with measures to simplify the tax system and improve tax compliance, reforms in the CIT regime will make the system simpler, fairer, and more efficient.

We see that the proposal of the Department of Finance is fair and well-crafted as it encourages equitable and inclusive growth, a competitive business environment, and strong countryside development. We therefore express our strong support for package 2 and urge members of Congress to ensure its timely passage.

Romeo L. Bernardo was Finance Undersecretary during the Cory Aquino and Ramos administrations and board director of Institute for Development and Econometric Analysis, Inc. (IDEA)

romeo.lopez.bernardo@gmail.com

TRAIN, inflation, and competitiveness

Business World Introspective
By Romeo Bernardo
March 11, 2018


The government’s Tax Reform for Acceleration and Inclusion (TRAIN) began to make an impact on inflation this January and February, with a spike of 3.9% under the revised series. In line with international practice, the consumer price index (CPI) series is rebased periodically by the Philippine Statistics Authority to ensure that the prices in the basket of goods being measured stay relevant and representative.

Though this was not unexpected, Finance Undersecretary Karl Chua explained that other factors were the bigger contributors to inflation than TRAIN. These include higher corn, fish, tobacco, and personal transport prices, all of which grew double digits. Interestingly, the spike in tobacco prices are driven by the success of the government in compelling Mighty,now under Japan Tobacco, Inc. (JTI), to pay the right taxes. The larger part of the increase in oil prices are due to the increase in global crude prices and the peso depreciation.

Allow me to excerpt from a statement presented by the Foundation for Economic Freedom (FEF) at a Senate Hearing in February that puts this price hike in perspective.

“FEF believes that TRAIN has safeguards in place to mitigate any inflationary effects which as estimated by the Department of Finance to result to 0.7 percentage point increase in inflation for 2018 with food prices rising by .03 percentage points and transportation by 0.1 percentage points.
These include:

1. Built-in cash transfer programs in TRAIN which have to be implemented effectively by the Government to benefit the poor;

2. The TRAIN has provisions for reaching informal sectors which currently do not pay income taxes. This broadens the tax base which helps reduce the fiscal deficit and inflationary pressures. Many in the informal sector are not poor, but are exempted by self-election from any income taxation. It is only fair that they pay their share of taxes;

3. It is not accurate to look at TRAIN’s impact solely from the tax side without reference to expected increase in public expenditures for education and health, which are very progressive; and

4. The higher infrastructure spending will likewise have a positive impact on the country’s medium to long term growth path and will lift the poor out of poverty.

Further, over the past long years of significant economic reforms which achieved fiscal consolidation, the restructuring of the central bank, and the creation of an independent central monetary authority, foreign exchange liberalization, and flexible exchange rates, the Philippines today benefits from a monetary policy framework that gives monetary authorities effective tools to pursue inflation targeting to ensure that inflation and inflation expectations are properly anchored.

The Bangko Sentral ng Pilipinas (BSP) has the instruments to anticipate any possible build-up of inflationary pressures from TRAIN beyond what is warranted from current inter-industry structure of the economy.”

Speaking before the Management Association of the Philippines (MAP), BSP Governor Nestor A. Espenilla, Jr., reinforced this message. Correcting the misimpression of some market players that the reduction in the reserve requirements represented an untimely easing in monetary policy, he stressed that the BSP is just executing an operational adjustment, part of phased reduction in our ultra-high reserve requirements with ensuing liquidity to be replaced by open market operations, with neutral effect on monetary policy.

Moreover, he reassured that the inflation impact of TRAIN is expected to be transitory, and that government has enough tools to properly anchor inflationary expectations. I made the observation as the forum moderator that liberalization of the rice trade can do much to lower rice prices, and lessen price volatility induced by government’s monopoly, an advocacy of the FEF. He said that the BSP strongly supports this reform effort.

Moving now to TRAIN 2, allow me to excerpt from a forthcoming letter to the Secretary of Finance from the leadership of MAP.

“The Management Association of the Philippines (MAP) respectfully submits this expression of support for the government’s TRAIN 2 program.

“We agree with the Department of Finance that TRAIN 2, as a package, will help the country become more competitive with the rest of the world by lowering the corporate income taxes from the current 30%, the highest among our ASEAN peers.

“We agree with the need to rationalize and modernize the tax incentive system to make incentives time-bound, performance based, and not excessively complex with far too many different, even overlapping laws, rules, and regulations.

“It is necessary to widen the tax base and enforce better compliance. The relaxation of our bank secrecy laws, coupled with proper safeguards against abuse, is an essential tool in doing that. It will also encourage more to avail of a general tax amnesty, which we support.

“We think that lowering the optional standard deduction (OSD) of 40% to 20% will only make taxpayers revert to the itemized deduction and to avoid paying correct taxes. The 40% should be retained.

“We believe it is important to commit to a definite timeline for the reduction of income tax rates to have predictability that can help decision making on investments and business plans. But we suggest starting in 2019 rather than 2020. Our ASEAN neighbors are contemplating even further reductions in their income tax rates — making this an important step. And, raising the need to go beyond 25% to 20%, even 15% as soon as it can be afforded.”

Romeo L. Bernardo is a Fellow of the Foundation for Economic Freedom and a Governor of the Management Association of the Philippines. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

Wishes for the economy in 2018

Business World Introspective

By Romeo L. Bernardo

January 8, 2018

Happy New Year, dear readers!

We start 2018 on a positive note: My wishes for the economy in January 2017 were largely realized. (To read my wishes last year, please visit http://bit.ly/2017wishes).

1 Passage of Package 1 of TRAIN. Check, after a hard slog.

2 Appointment of a qualified, credible governor for the Bangko Sentral ng Pilipinas, preferably an insider. Check, and with an excellent outcome.

3 Efforts to change the Constitution and shift to federalism would be pursued responsibly, giving time for deeper study, informed debates, and awareness activities. The third, however, is a work in progress. Hopefully, future efforts to pursue extra-constitutionally (via a “revolutionary government” initiative or similar railroad variations) have been shelved for good. (See FEF Press Statement on Talks for a Revolutionary Government: http://bit.ly/FEFRev)
Allow me now to share our wishes for 2018, as posted on Global Source Partners, a subscriber-based network of independent analysts (globalsourcepartners.com). My colleague Christine Tang and I are its Philippine advisors.

Here are my three wishes for the economy in 2018:

1. MUCH MORE ACTIVITY UNDER BUILD-BUILD-BUILD.

The government’s massive P8.1- trillion medium-term infrastructure program has been likened to a battleship that will be hard to stop once it has gathered momentum. The passage of the Tax Reform for Acceleration and Inclusion (TRAIN) Act puts some P80 to P90 billion in new money in the hands of government in 2018 that people expect will largely be used for upgrading and expanding the country’s networks of water, power, road, rail and air/seaports. Government is targeting to increase its investments in infrastructure from 5.4% in 2017 to 7.3% of GDP by 2022, to help ease supply bottlenecks and allow the economy to scale a higher growth path.

However, despite assurances from the Department of Budget and Management of improving disbursement rates overall, the 50% disbursement ratio as of November 2017 of the Department of Transportation leaves much room for improvement.

2. PASSAGE OF PACKAGE 2 OF THE DUTERTE ADMINISTRATION’S COMPREHENSIVE TAX REFORM PROGRAM.

Package 2 seeks to lower the corporate income tax rate (CIT), currently at 30% and higher than the statutory tax rates in most ASEAN economies. To compensate for expected revenue losses, the Finance Department wants to remove a plethora of fiscal incentives that costs government about 1% of GDP annually. The plan is to calibrate CIT cuts so that revenue losses will be roughly offset by revenue gains from removing fiscal incentives. While Package 2 will not be a revenue measure, it is expected to (a) make the economy more competitive and attractive to foreign investments with a lower CIT and (b) widen the tax base with fewer activities given tax incentives.


3. MODERATE INFLATION PRESSURES THAT WILL GIVE THE BSP MORE FREEDOM TO MANAGE DOMESTIC AND EXTERNAL RISKS.


This includes tightening global financial conditions expected to accompany a wider current account deficit. Local prices are expected to rise in 2018 due to higher consumption taxes from the TRAIN Act, adding roughly one percentage point to the headline rate per BSP estimate. One policy response to tame inflation that local economists have long pushed for is freer importation of rice, which account for close to 9% of the CPI basket. Local rice prices have remained elevated in recent years despite softer world prices, an oddity tied to the fact that rice imports are subject to quantitative restrictions (QR). While removing the QR would require a change in law, experts think that with enough political will, government can administratively ease up on imports, e.g., by setting a high, non-binding import volume, and improving the handling of import permits.

Given that wishes are free, I would add two more:

4. FAVORABLE RESOLUTION OF DISPUTES ARISING FROM FAILURES OF THE LAST ADMINISTRATION TO COMPLY WITH LONG-STANDING PPP OBLIGATIONS.

These include:

a) the arbitrary interpretation of MWSS concession agreements with Manila Water and Maynilad. We need to restore a working two-decade old concession model that was broken by the last administration.

b) non-adjustment of toll road tariffs of NLEX, Cavitex, and Star Tollways, and

c) the contractual tax issue with the Malampaya consortium.
If these fester much longer in one venue or another, the current administration’s no-nonsense image will suffer, dampening private investments in needed public goods and services, not to mention wasting public funds to pay for costly international litigation.

5. IMMEDIATE IMPLEMENTATION OF A COMPREHENSIVE PROGRAM TO REHABILITATE MARAWI CITY.

The plan will incorporate the cultural aspects important to the Maranaos such as preservation of heritage and Islamic sites. While reconstruction of infrastructure is critical, such a program should prioritize the provision of services to allow over 200,000 refugees to return to normal life such as education, particularly literacy for the adults and technical training for livelihood and employment as well as loans and capital infusion for the business sector.

Marawi City has become a fertile ground for violent extremism, a justification used for Martial law extension.

Addressing the needs of the population, majority of whom have been displaced for over six months and brought to new lows of poverty, is critical if government is to prevent the spread of extremist sentiment. Business progress in Mindanao and the nation requires peace and stability. Armed conflict is the major roadblock on the road to development. To remove this barrier, not only is the rehabilitation of Marawi essential but the passage of the long-awaited Bangsamoro Basic Law as well.

Devoting government resources and political capital to address this political problem soonest to preserve our economic momentum is non-elective. In contrast, headline news for a change in government to one version or another seems like needless distractions from the economic managers’ agenda of improving our people’s lives.

Finally, allow me to echo a New Year’s toast from Benjamin Franklin. “Be at war with your vice, at peace with your neighbors, and let every new year find you a better man.”


Romeo L. Bernardo is a board director of the Institute for Development and Econometric Analysis. He was undersecretary of Finance during the Corazon Aquino and Fidel Ramos administrations.

The Gravy TRAIN is leaving and common sense isn’t in it

Business World Introspective

Dec 04,2017

By Romeo L. Bernardo

Otto von Bismarck once said that “laws are like sausages. Better not to see them being made.” No one would agree more than observers of the ongoing TRAIN legislation.

The just released Senate version illustrates the point. New ingredients surreptitiously found their way into the mix, diluting the DoF’s otherwise carefully thought-out recipe.

Package 1 of the reforms was intended to address the oppressive effects of inflation on taxable income — a phenomenon known as “bracket creep.”

To pay for the consequent revenue losses from raising taxable income thresholds and help fund the government’s ambitious Build, Build, Build Infrastructure program, oil and auto excise taxes were supposed to be raised to reflect current price levels, combined with the scrapping of VAT exemptions for 144 product categories that made our VAT system both unfair and low-yielding.

What has come out instead is a bit of a chop suey, due to the blatant accommodation of narrow-vested interests aiming to avoid paying their share of the tax effort or tilt the playing field against competitors.

Below are some of the more glaring examples.

EXPANDED TAX BREAKS FOR ECONOMIC ZONES, PEZA

Mind you, not just exemptions for the zones themselves but an expanded list for VAT zero rating for locators in the zones, including their suppliers, and tourism sites. Recall that some of these economic zones have been mired in controversy from birth, with reports of rampant smuggling of oil, automobiles etc.

LOWER TAX RATES ON LUXURY VEHICLES

The Senate version establishes two tax brackets for vehicles, 10% for those costing a million pesos or less and 20% for those costing more. Given where tax rates are today, this will have the effect of shifting the tax burden from buyers of high-end luxury vehicles to those of cheaper, everyday cars.
As one investor newsletter put it, “this new proposal looks like it was crafted specifically by and for luxury car dealers.” To illustrate, a Toyota Wigo (retail price of around P500,000) could see a price increase of around 8%. But a Toyota Land Cruiser (retail price over P5 million) could see a price decrease of over 20%.”

How does the Senate version hope to cover the revenue losses from these proposals? Some illustrations —

DOUBLING DOCUMENTARY STAMP TAXES

Taxing financial transactions is a last resort of the poorest African countries that possess few alternatives and weak collection agencies. This is not apt for our country — a supposedly dynamic emerging market economy trying to develop and promote its capital markets in a highly competitive region.

Such a tax raises the already high friction costs of transacting legitimate business in our country and diminishes our image as a center for investment. More fundamentally and over the long term, such costs impose a tax on savings and investment, on economic competitiveness, and on job-creation.
There has been no consultation on this and other measures, which were not meant for consideration until Package 4 of the DoF’s proposal covering capital income taxation. That the Documentary Stamp tax was brought forward way ahead of schedule reflects the size of the hole that will be created by the Senate’s generous exemptions and tax cuts.

COSMETIC SURGERY TAX

Purely cosmetic. A nuisance tax that will yield peanuts and burden revenue authorities and legitimate patients. Imagine every patient having to wait for his or her procedure to be certified as medically required before being allowed to undergo surgery free of tax? Inconveniences aside, this gives birth to new opportunities for rent-seeking and extortion, new income sources for less-than-scrupulous practitioners.

COAL EXCISE TAXES

From the current P10 per metric ton (MT) to P300 per MT — that’s a whopping three thousand percent increase. This measure comes out of nowhere, as it was neither in the DoF or Lower House version of Package 1.

Let me make the case against it.

First, a disclosure. I am an independent director of Aboitiz Power and Phinma, Inc., both of which have investments in coal power plants as well as in renewables. I am also the Private Sector representative in the Steering Committee of the University of the Philippines based Energy Policy Development Program (EPDP), co-chaired by the secretaries of NEDA and the Department of Energy.

The arguments of the proponents:

a) Coal needs to be taxed more due to the negative effect of its carbon emissions on the environment.
Whether this is true or not, the Philippines contributes less than 1% of world total CO₂ emissions. At the same time, 35% of all the power we produce comes from renewable sources — a mix that is much more favorable than that of most countries, indeed better than almost all countries at a similar stage of development in the ASEAN and globally. (See “Carbon Footprint, Inclusive Growth and the Fuel Mix Debate in the Philippines,” by Raul Fabella et al, EPDP, PHL Economic Society Conference, Sept 22). We are doing more than our fair share to arrest global warming, even at the expense of cheaper electricity (renewables like solar and wind enjoy tax-payer-funded government subsidies).

b) Gasoline, diesel, and natural gas are taxed more than coal.
My friend, esteemed economist, and columnist, Ciel Habito, estimates that the tax on motor fuels is 10%, on Malampaya gas, 43%. He advocates that coal be taxed at P600 per MT, arguing that at an effective 15%, this will still be lower than the tax on Malampaya gas and the proposed 18% for diesel in the Senate version.

Ciel seems to overlook two considerations. The tax on motor fuels has never been about CO₂ emissions and climate change, a recent notion. It is about the “user pay” principle — motorists should pay for the roads that the government builds and maintains. And there is the second reason — to discourage the excessive use of private cars that contributes to traffic and air pollution. In economics-speak, “negative externalities” from urban congestion.

As for the taxes on Malampaya gas, this too has nothing to do with CO₂ mitigation. These are royalty payments for the exploitation of the country’s natural resources. The government collects the same 60% share of profits from oil and, yes, coal producers.

Given this, why single out coal for a carbon tax? Why not a carbon tax on every fuel based on its impact on the ozone layer (which incidentally should also include LNG)? And why not throw in cattle-breeding, as cows emit ozone destroying methane with an aggregate impact similar to coal plants?

Regardless, using widely accepted global norms, EPDP Senior Adviser Prof. Jim Roumasset calculated the appropriate carbon tax for coal in the Philippines, given its contribution of 1% of the world’s CO₂ emissions — P60 per metric ton. Not P100. And certainly not P300.

The P300 per metric ton tax on coal will add P0.14 per kWh to our cost of generating electricity. This is on top of another measure climate change advocates and renewable energy developers pushed for — feed-in tariffs, a fancy term for what are just subsidies from the taxpayer. Combined, they will add P0.43 per KWh to our electricity bills or, at current consumption levels, a total of P40 billion for 2018.

This resulting 10% hike in generation cost comes at a time when our DoE is working hard to bring down power costs to attract investments and create jobs in manufacturing. Note that power costs represent the bulk of cement production costs, causing our local champions to struggle against foreign competition. High cement prices make it more difficult to provide low-cost housing for the poor.

But all is not lost.

There is still a bicameral committee that can hopefully inject some sense into the tax package. We implore the committee members: Pass the TRAIN but hold the gravy, please.

Romeo L. Bernardo is a Trustee of the Institute for Development and Econometric Analysis. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.
romeo.lopez.bernardo@gmail.com

On Globalization, Inequality, and Inclusive Growth

Introspective

Since Thomas Piketty came out with his book, Capital in the Twentieth Century (2013), it has become fashionable to blame globalization, open trade regimes, privatization, and other elements of “neo-liberalism” for inequality and many of the recent troubling political developments such as the rise of populist regimes like Donald Trump, even violent extremism.

Earlier this year, widely followed columnist Efren S. Cruz wrote “that the eight richest individuals own more wealth than the poorest 50% of the world’s population. Globalization and modern technology have increased global wealth which has been exploited by the rich to become richer; but the rest of the world has not benefitted from these two phenomena.”

Locally, calculations on the rise in net worth of the ten richest men/families (estimated by Forbes) against the country’s GDP growth — led to the glaringly wrong conclusion that the ten richest families own three quarter of the country’s wealth, i.e. inequality leads to poverty. And the culprit? Globalization and liberal economic policies.

Two weeks ago, UN Rapporteur Calamard blamed neo-liberalism and private sector (“Neoliberalism kills, says UN rapporteur,” PDI, Oct. 20) — “the restructuring of economies and the liberal vision for development is trickling down to every community and is a killer in many ways… creating much instability and much conflict.”

Writings of National Scientist and Economics Professor Raul Fabella (also my fellow Introspective columnist) and author Edward Luce help provide proper perspective on this issue.

Edward Luce (The Retreat of Western Liberalism, 2017) drew a pachyderm, an elephant, on a chart to emphasize his point.

Plotting the global income growth in the last generation by percentile, poorest to richest, we find that most of the world have benefitted from the wave of liberal economic policies established post WW II under the Bretton Woods institutions (IMF, World Bank, GATT/WTO).

With income growth of 45% to 80% for those in the tenth to seventieth percentiles, the big losers in this global picture are relatively rich in the 75-85 percentile — with incomes now being 10% lower than a generation ago.

The dramatic improvements in the lives of most of the people globally is evident in every statistic on lower rates of absolute poverty, longer life expectancy, higher literacy, access to water and other basic services, eradication of major diseases, etc. in World Bank development statistics and the Human Development Report. The most considerable upliftment in lives has been in Asia. Especially China after Deng introduced liberal market reforms. (see Raul Fabella, “Inclusion and Delusion in TRAIN,” Oct. 23. To read this piece, please visit this link http://bit.ly/trainde or use a smartphone to scan the QR code.)

With this generally favorable picture, why the strident rhetoric vs. inequality and liberal economic polices? Especially coming from the leadership of USA that championed this after WW II?

Well, 75-85% percentile losers are basically the Trump and Brexit constituencies. Their discontent and political activism are driven by resentment over the top 1% and the loss of jobs, erroneously blamed on the countries whose peoples are in the lower end of the global income spectrum.

In truth most of the job losses were due to technological advances, and failure to adjust to these. This deepening anger is fueled by polarizing social media and populists nativist leaders like Trump.

We and other developing countries have no common cause with the narrow band of rich country losers complaining of inequality and globalization.

The rest of humanity (10-75 percentile) have clearly benefitted from globalization — liberal trade and investment regimes, freer movement of technology and people. Including the Philippines whose two main drivers, BPO and OFW remittances, are enabled by it. Globalization has put us recently among the highest growing countries and with the best prospects, even in our high performance neighborhood.

Admittedly, here in the Philippines, historical progress in addressing the poorest (dropping only to 25% currently from 34% in 1990) has not been as substantial as with the rest of Asia. (e.g. in ASEAN, Indonesia and Vietnam have halved their poverty rates.)

But let us not blame globalization and liberal economic policies for this.

As Dr. Fabella underlines, “there are two flavors of inclusion: one is reduced income inequality; the other is reduced poverty incidence. They are not the same; nor does one necessarily follow the other. So they require different policy responses.”

Past policies in the Philippines have not favored investments and job creation that would have allowed us to participate with our neighbors in an export led growth and addressed the problem of joblessness and poverty. Unfavorable policies include national law that deters foreign investment, underinvestment in essential infrastructure.

Likewise, agricultural productivity has suffered from an inward looking bias — a failed land reform program that favored inclusive poverty over efficiency needed for modern agriculture. An anti-poor food security policy defined as self-sufficiency in rice at exorbitant cost, rather than affordability of food, and focus on crops where we can have global competitiveness. A high population growth rate is an additional factor.

With poor and recently deteriorating scores in ease of doing business in the Philippines, government’s efforts need to focus on making us globally competitive — more globalization, not less. A market friendly investment environment — e.g. investments in infra, liberalizing rules for FDI’s — will foster more jobs for the unemployed. Coupled with more expenditure for social programs in health, primary education and conditional cash transfers, these policies will help the poorest.

This is well recognized in the ten point agenda of this administration, and elaborated in the latest NEDA Philippine Development Plan. TRAIN is essential for this. Our Foundation for Economic Freedom urges Congress to approve the DoF sponsored bill with the minimum of dilution. (See FEF statement “FEF Appeals to Senate to Preserve the Revenue Goals for TRAIN.” To read the statement, please visit the link http://bit.ly/FEFTrain or use a smartphone to scan the QR code.)

Let us persevere in achieving the goals of these economic programs under a democratic setting. And pay no heed to calls for quick fixes under a revolutionary government. Such siren songs are at best, distracting.

Romeo L. Bernardo is a Trustee of the Institute for Development and Econometric Analysis and Vice Chair of the Foundation for Economic Freedom. He was Finance Undersecretary during the Corazon Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

http://bworldonline.com/globalization-inequality-inclusive-growth/

Bye bye, Build Build Build?

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/

It ain’t Uber till it’s Uber

Introspective, Business World

The Uber-LTFRB controversy has highlighted, to our great inconvenience, what happens when modern technology clashes with antiquated laws and regulations. This is further complicated by the business conduct of a highly successful global upstart start-up confronting the dysfunctions of Philippine bureaucracy writ large in the DoTr agencies.

To be better educated on the subject, I turned to our eldest son, Ibba Rasul Bernardo. He is a net entrepreneur/geek with deep experience in tech start-ups and social enterprise.

After listening to him, I thought it best to relay it in his words. He also has written for a number of publications like Adobo Magazine, T3, and GamesMaster and co-hosts Ride PH TV.
“Gustavo Petro once said: “A developed country is not a place where the poor have cars. It’s where the rich use public transportation.”

Most people understand that when Petro said this, he contemplated public transportation so convenient that it was preferable to private car rides and luxury vehicles.

The founder of Uber is not “most people,” however. Upon hearing this quote, Travis Kalanick probably heard the ka-ching of a thousand cash registers and thought “OK, Mercedes Benz S Classes for us and a hundred friends!” And Uber was born.

Let me share with you the following potentially controversial thoughts about our favorite ride-sharing app.

Why It’s Game Uber in the Philippines
1. Boob-er
Many things said about Travis Kalanick are not fit for publication: He is a misogynistic creep who has created a toxic company culture. Uber is rife with stories/allegations of managers groping women, cocaine done in company retreats, to name a few. Kalanick even joked about an app for women on demand, “Yeah, we call that Boob-er.”

Ironically, because of the tracking and safety features inherent to Uber, women feel empowered to drive for Uber. Ask any Pinay Uber driver.

Good news: reports say that a new CEO will be stepping in, Dara Khosrowshahi of Expedia, an immigrant from Iran and poster child of the American Dream.

2. God View
Uber created a backdoor in their app called “God View” where they can track — stalk? — specific users. They’ve been accused of allowing some employees access to this information to follow exes, spouses, celebrities, and politicians. After a 14-month investigation by the New York State Attorney, Uber agreed to pay a fine and to encrypt passenger data.

Another privacy violating function was active until Aug. 29. Uber didn’t only track you while you were in one of their cars. They tracked you even after you’d gotten off.

3. Endo
Uber’s life blood is contractual labor whom they lovingly call “Partner Drivers.” Their business depends on actively finding ways to minimize support for drivers. This has led to a string of lawsuits and settlements in the US (Google “Uber labor law suit”).

In the Philippines, many UBER “Partner Drivers” work 10 to even 15 hours, by choice. An Uber driver I spoke with told me he earns more than twice what he earned when he was driving a taxi. Another driver told me she was getting P1200 pesos a day from Uber as support while they were banned from plying the streets of Manila.

Why do drivers and riders in the Philippines and in many countries all over the world love Uber, despite its many faults? Simple: in many of these countries, the transportation system is broken. Normal people are sick and tired of lousy, inefficient, expensive, and dangerous taxis. Most of these countries’ regulatory agencies are rent seeking, corrupt, and worst of all inept.

In a country like the Philippines, the few options commuters have are bad ones.

Uber gives the driver the perception of becoming their own boss, and the ability to own (finance) a car. Uber also gives the riding public convenient, reliable, and safe transportation. Even with Uber’s many faults, to the average commuter, UBER is heavenly ride compared to the commuting Hell we had to endure before Uber.”

Our laws have understandably not kept up with accelerating advances in technology in our globally wired sharing economy. Allow me to conclude by sharing and echoing the statement of our Foundation for Economic Freedom on this (see http://bit.ly/FEFUber).
Our Congress needs to move fast on a wide front less we be left further behind. FEF and others are pushing for legislation that can help open up our economy to foreign investments and innovations.

A key one is the amendment of the Public Services Act which will redefine the present ambiguous description of what constitutes a public utility, expanding the sphere for the private sector to meet growing demand of the public and a growing economy, since government alone cannot. (e. g. mass transport, ports, toll roads, info tech/telecommunications, water, etc.)

This most forward looking initiative is sponsored in the Senate by Public Services Committee Chair Sen. Grace Poe and championed in the House of Representatives by lawmakers Arroyo, Salceda, and Yap. We are pleased to learn that this is now in the LEDAC priority list, thanks to Planning Secretary Pernia.
Meanwhile, we plead with the authorities to be open to new private initiatives, regulate with a light touch, and take a broad view when interpreting our laws, with improved and expanded provision of public services as the primary concern. Don’t be like old generals fighting the last war.