Necessary reform

It is beyond question that the Duterte administration’s tax hikes implemented this year aggravated the economic pain that Filipinos are suffering due to the spike in global oil prices and bottlenecks in the local commodity supply. With the gyrations in world energy prices and the (suspected artificial) rice shortage that policymakers have yet to resolve decisively, the Tax Reform for Acceleration and Inclusion (TRAIN) Law’s passage has resulted in record inflation and economic unease.

As such, the aversion of lawmakers and the general public toward the second phase of the tax reform package is understandable and justified. After all, economic managers did promise Filipinos that any tax hikes would not hurt, offset as they would be by a reduction in personal income taxes—a key equation that was thrown out of whack by the monkey wrench of international commodity prices.

But to reject TRAIN 2 simply because it comes on the heels of an unpopular and similarly named tax law would be a mistake.

The second phase of the administration’s tax reform package is, in truth, a tax cut for all companies registered in the Philippines; it proposes to reduce their corporate income tax rate from the current 30 percent down to 25 percent.

This proposed tax reduction will benefit about 1 million registered corporations, from conglomerates all the way down to the smallest “mom and pop” operations. In theory, the billions of pesos that companies will save in tax payments will almost certainly be used for another round of investment activities to expand their operations and, thus, create more jobs.

Unfortunately, these tax cuts are not free, and someone has to pay for them. Under the proposal, that “someone” will be an estimated 3,000 companies currently enjoying tax perks under over 200 special laws granted by a motley assortment of 14 state agencies. These tax-free benefits were meant to help them gain firmer footing during their startup years, but some of these companies   have been enjoying the perks for three decades now.

TRAIN 2 seeks to correct this situation by phasing out the tax benefits not all at once, but over an eight-year period. These companies will be weaned off their training wheels gradually—something that should have happened many years ago.

At its core, the debate is between granting income tax breaks to 1 million corporations employing an estimated 10 million direct workers, or maintaining the current scheme that benefits 3,000 firms registered with the Philippine Economic Zone Authority and the Board of Investments and employs around 600,000 workers. Note, too, that many of the firms in the latter category are classified as “low value-added” operations that import raw materials, assemble them here using local labor, and ship the products back out.

With the midterm elections less than a year away, lawmakers have become skittish and are refusing to endorse TRAIN 2. Many still recall the fate of Sen. Ralph Recto who, after championing the painful but necessary Expanded Value Added Tax Law in 2005 which staved off a fiscal crisis, promptly lost his reelection bid in 2007, with the public blaming him for the resulting higher prices.

What economic managers can do is to ensure that the bill presented to Congress will not result in higher consumer prices, but will clearly redistribute the tax burden to 3,000 companies that should be pulling more of their own weight. But the Palace economists shouldn’t stop there. The Filipino public needs to understand what the bill is about and what its long-term benefits are. The regiment of technocrats that crafted TRAIN 2 would do well to fan out and engage the citizenry more fully and transparently in this regard, without dismissing their concerns as “bellyaching”—as Budget Secretary Ben Diokno once characterized public criticism of the inflation spike. The Duterte administration also needs to implement more anti-inflation measures to assuage the public’s hostility  toward another tax law.

While the timing of TRAIN 1’s implementation could have been improved, in the case of TRAIN 2—a key reform measure that  Presidents Estrada, Arroyo and Aquino all tried to push without success, due to well-entrenched lobbies—the right time is now. But for it to work, the proper spadework must be done.