One step forward, two steps back
JAFFY AZARRAGA
History comes in cycles; what goes around, comes around. In India, existence is thought to follow a sequence of life-death-rebirth, and history is told in terms of Yugas or the four stages in each cycle of history. In China, both imperial dynasties and family fortunes are seen to rise and fall repeatedly, much like the rising and setting of the sun and moon.
Sharing a historical bond, the Philippines and the US likewise seem to tread this familiar cyclical path in their manner of governance. During the cold war, the US and its allies embraced a protectionist stance against communism. Decades after, both countries fostered an open-door policy that encouraged the unrestrained mobility of people and goods across borders. Today, we see a sudden reversal in domestic policies with the imposition of stringent control measures — one banning immigrants from Muslim- majority countries and the other waging a deadly war against drug lords and users alike.
Despite the ebb and flow in political history, Philippine taxation seems uncommonly still with little evidence of implemented reforms despite the current administration’s efforts to fulfill its campaign promises to lower taxes. This is illustrated by House Bill 4774 (also known as the Tax Reform for Acceleration and Inclusion Bill Act) filed last month which contains the proposal of the Department of Finance (DoF) to lower personal income taxes, as well as reduce the estate and donors’ tax rates, but also makes up for losses through countermeasures that broaden the value-added tax ( VAT) base by cutting down on exemptions, and increase excise taxes on petroleum and automobiles.
The bill proposes to raise the collection goal via revenue- boosting measures, including a staggered increase in the diesel excise tax from zero to P6 per liter over a three-year period from the second half of 2017 up to 2019. The diesel excise tax will then be adjusted by 4% beginning 2020 to account for inflation.
Consequently, even if the rates on personal income taxes (except for the high income tax brackets) stand to be reduced, taxes on consumption will effectively increase due to higher excise taxes as well as the removal of VAT exemptions, among other “compensating measures.”
Thus, it appears that despite the change in administration, the government remains as always, resistant to concede any loss of revenue. Ostensibly, the reason behind this reluctance is the need to show fiscal responsibility to the country’s creditors, particularly the International Monetary Fund (IMF), by meeting fiscal targets set as conditions for continued extension of credit. Failing to meet these targets, the country is threatened with a Venezuelan-style economic crash if it runs out of foreign credit to meet international trade obligations.
Yet, such cannot, and should not be, the only reason to justify this policy, which already seems to have been carved in stone. Such a mindset appears to have been influenced by the impact of the recession in the mid-80s, and reinforced during the recurring political and economic crises thereafter, when credit was tight and hard to come by. In those days, government had no choice but to secure bailouts from the IMF with onerous strings attached. However, these conditions find little in common with the present world, which is already awash with credit and drowning in a flood of competing currencies.
Further, one of the main reasons behind the proposal to reform the tax system was to place the Philippines on the same footing as most of its ASEAN partners, which have long mandated lower personal, corporate and indirect taxes, not at the expense of fiscal viability, but with the aim of spurring economic growth in the region. As a result, these economies have overtaken the Philippines which languished as the perennial “Sick Man of Asia” suffering from recurring crises, low domestic savings and capital flight.
While the Philippines appears to have prevailed over this stigma lately due to several years of strong economic growth, this was largely due to the fact that the country was only catching up, and the previous administration was able to encourage foreign investment then stimulated by globalization and neoliberal policies. Now, however, the world is undergoing another sea change, and the country’s newly-acquired status is coming under the twin threat of de- globalization and protectionism, in what seems to be a reversion to a dark past in international relations that culminated in the divergence among political economic ideologies.
As a consequence of an ambiguous stance, half-hearted tax measures may, and are often passed, which merely pay lip service to reform and only serve the purpose of political propaganda. History has demonstrated all too often that excessive taxation stifles productivity, causes misallocation of resources, and encourages flight of capital to less-taxed jurisdictions. By way of contrast, a more liberal and fair tax system has the effect of encouraging capital formation and increasing domestic savings, investment and productivity, which eventually redound to higher tax revenue for the government.
To validate, the Philippines only needs to observe the tax strategy of the US under the Trump presidency. Perhaps, as a businessman and real estate tycoon, Trump knows very well the dampening effect of high taxes on the US economy. He is set in reversing the trend by cutting rates of domestic taxes, despite opposition from more traditional politicians. This policy has led to the “Trump Rally” which saw the US stock market hit all-time highs, indicating that it is well received and supported by the business community. Consequently, capital funds which have been lodged in investments offshore, including the Philippines and other emerging markets, are finding their way back to their homeland, spurred on by the siren promise of tax breaks.
The need to institute genuine tax reform therefore comes at a critical time, as the country already faces a future where it may no longer be able to depend on its usual foreign partners, and where the world is retracing its steps from unbridled globalization. To ensure future growth and development, the government should not hesitate to ease the onerous taxation currently shackling the fortunes of Filipino citizens. By doing so, state policy can finally become an instrument, rather than an obstacle, to the development of the financial strength and capability of its own people, who have been, and will always be, the pillars of this nation.
TAXWISE OR OTHERWISE
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article.