Presidential bets told tax hike inevitable

By Maria Eloisa I. Calderon, Editor-at-Large | Posted on May 08, 2016 11:37:00 PM

PRESIDENTIAL CANDIDATES have promised investors a lower corporate tax and the masses who will vote, more purchasing power.

The elephant in the room, of course, is what will make up for the resulting revenue losses — particularly in terms of taxing other sectors more which exactly some of their economic advisors are recommending, according to BusinessWorld interviews.

Bringing down the corporate tax rate from the current 30% of gross income — both for domestic and foreign companies — will woo more investments and create a business climate needed to partly sustain an economy that has been expanding at a pace faster than many others in Asia and the Pacific.

The plan is to cut the tax to 25%, the average among the country’s Association of Southeast Asian Nations (ASEAN) peers, said University of the Philippines professor emeritus of economics Ernesto del Mar Pernia, whose advice presidential race front-runner Rodrigo R. Duterte has sought.

Workers will be taxed less too, he added in a May 4 interview.

“We will have a focused group meeting, sit down with him [Duterte],” Mr. Pernia said, adding that the Dominguez brothers from Mindanao — Carlos (an Agriculture secretary of Corazon C. Aquino) and Paul (chairman of a Mindanao-based business group) — will form part of that circle.

Former Prime Minister Cesar E. A. Virata was one of the names floated as Mr. Duterte’s top pick for an economic adviser. But the former Finance chief said only that the Davao City mayor went to his office two months ago and just “asked” him “about the economic condition of the Philippines this year and next year.”

“He told me some aspects of his plan — suppressing criminality, drugs, corruption to encourage investments,” Mr. Virata recalled. “It was a short visit.”

Raising taxes is generally regarded an unpopular move so that it was a topic barely heard in campaign sorties and televised debates, but the continuity of previous reforms presidential bets openly declared — including the public-private partnership (PPP) project and the conditional cash transfer (CCT) program — will need money.

Mr. Pernia said that while Mr. Duterte’s hard stance against corruption and smuggling would stem leakages and consequently boost revenue collection, higher taxes elsewhere could be inevitable.

“Maybe increase the VAT [value added tax] from 12% to 13% or 14%,” Mr. Pernia, who was once the lead economist of the Asian Development Bank, said in a May 4 interview at his office.

The additional tax pain won’t necessarily damp consumption, a major driver of the economy, he said.

“It will hurt [consumers] but a lower personal income tax will mean higher disposable income. That will compensate,” Mr. Pernia said.

“Government will be assured of better collection [because] there’s no escaping the VAT… it’s built on your bill.”

Romeo L. Bernardo, a Finance undersecretary during the Ramos administration which championed oil deregulation, water privatization and telecom demonopolization, is proposing a variable tax on oil that will go up or down depending on the movement of global oil prices. His advice is being sought by Sen. Grace Poe Llamanzares, who’s No. 2 in presidential election surveys.

Mr. Bernardo estimates the next government will need nearly half a trillion pesos or P500 billion if it wants to catch up on infrastructure spending to bring it to 5% of gross domestic product (GDP), offset revenue losses from reduced corporate and personal income taxes, and pay state workers higher wages under Executive Order 201.

The current tax on oil is an excise tax, whose share eroded to just 0.1% of GDP now from 1.1% in 1997, Mr. Bernardo said.

“What’s the remedy? You should have a variable tax to capture the windfall from declining oil prices. My own estimate… $6 billion in annual savings when oil dropped, which is 3% of GDP. If you capture a third of that, that’s P100 billion in incremental revenue,” Mr. Bernardo said in a May 3 interview.

Former Finance Secretary Margarito B. Teves, who Vice-President Jejomar C. Binay announced will be part of his cabinet should he become president, estimates an additional P136 billion in needed financing “for every one percentage increase in infrastructure-to-GDP ratio.”

Mr. Binay wants to boost infrastructure spending to 7% of GDP to create jobs and attract foreign investments during his term, if elected president. The current ratio is between 2% and 3%.

“It’s less challenging to bring it to a level of 5% of GDP. For every one percentage increase from 5-6% of GDP, assuming an economic output of P13.6 trillion, that’s an additional P136 billion,” Mr. Teves said in a phone interview on May 4.

The former Finance chief of then President Gloria Macapagal Arroyo said the Binay government should keep the budget deficit “not more than 2% of GDP,” where it has been at least since the tail end of the Arroyo administration — a fiscal balancing that merited the Philippines investment grade status.

The tax-to-GDP goal is 18% under a budget that will “enable us to help attain a 7-8% growth in GDP,” Mr. Teves said.

“A large portion [of financing] will come from the private sector, especially if we’re able to amend the economic provisions of the Constitution,” Mr. Teves said, adding that a rationalization of tax incentives rather than a tax hike would be the fiscal reform path the Binay government will take.