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No Free Lunch

A tale of two tax laws

/ 05:20 AM December 29, 2017

Early in 2003, I wrote of striking parallels between the economies of the United States and of the Philippines. It was a time when both countries were led by second-generation presidents — that is, offspring of former presidents. Both economies faced ballooning government deficits, and a boost in investments was direly needed where consumer spending was the main economic driver. And owing to the sluggishness in investments, both economies were facing rising joblessness then.

Fast-forward to nearly 15 years later, and we find ourselves in another remarkable confluence of events with the United States. The similarity between our respective presidents is already well-known. Just before Christmas, three days apart, Philippine President Rodrigo Duterte and US President Donald Trump signed into law new tax laws that introduce major changes in their respective countries’ tax systems. Both will reduce income taxes, with the US version cutting more prominently from corporate income taxes. The TRAIN (Tax Reform for Acceleration and Inclusion) Law signed by President Duterte on Dec. 19, on the other hand, most prominently reduces personal income taxes for an estimated 99 percent of Filipino income tax filers. Corporate income tax cuts are reserved for the next phase of the proposed Philippine tax reform package, which the Department of Finance is pushing in five phases.

Beyond how the new US and Philippine tax laws both make significant cuts in income taxes at the cost of large foregone revenues for both governments, they have little else in common. President Trump’s “Tax Cuts and Jobs Act” cuts taxes mostly on the rich with the aim of spurring investment. It is based on the age-old Republican reasoning that it’s rich people who invest, and with it create jobs, thereby making the benefits “trickle down” to the working class. “You all just got a lot richer,” he reportedly declared to an audience of rich friends at his exclusive Mar-a-Lago resort, soon after signing the law. It’s the same premise behind the Reagan and Bush tax cuts pursued during their time. But contrary to the Republicans’ traditional balanced budget philosophy, this time the cuts are expected to widen the federal deficit by hundreds of billions of dollars. Still, they somewhat wishfully believe that the resulting economic expansion will expand the tax base and thereby offset the losses.

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TRAIN, on the other hand, is more segurista than that, and is designed to yield a definite net expansion in revenues, especially given the need to fund Mr. Duterte’s aggressive “Build, Build Build” infrastructure program. Lowering of income taxes thus had to be coupled with raising excise taxes on petroleum fuels and coal, mining, tobacco, sweetened beverages, cars, and cosmetic procedures. While up to P167 billion in additional revenues was expected from the measure in its original proposed form, the law as passed will net an estimated P92 billion—much lower but nonetheless substantial. Unlike the new US tax law built on the hope of raising private investments by leaving more money in corporate pockets, our own new law will directly raise public investments via the increased government revenues it will raise.

Proponents of Trump’s tax reform seem to have had no qualms coming up with a package clearly favoring the rich, arguing that its benefits will trickle down to the poor. Mr. Duterte’s package, on the other hand, is largely designed to favor the poor and middle classes outright, by raising their take-home pay. Still, it has not escaped being branded by critics as “antipoor” for its excise tax provisions, even as the excise taxes will mostly fall on goods and services more heavily consumed by richer households. Moreover, cash grants of P200-300 per month will be given to 10 million of the poorest households until 2020. But TRAIN does have a glaringly prorich provision with no sound rationale behind it, not even a trickle-down effect: It actually cuts in half current excise taxes on luxury cars (i.e., costing P1-4 million), yet doubles them for cheaper cars (costing less than P1 million).

I can’t wait to see how effects of the two tax laws unfold in the year ahead.

cielito.habito@gmail.com

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TAGS: Cielito F. Habito, Donald Trump, No Free Lunch, Philippine economy, Rodrigo Duterte, Tax Laws, tax reforms, train, US economy
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