Part One
Outgoing Finance Secretary Carlos Dominguez has openly voiced the need for the incoming Marcos administration to raise new taxes and postpone the scheduled tax reductions for certain categories of income earners. Under its “fiscal consolidation” blueprint, the Department of Finance (DOF) is urging the next administration to expand the value-added tax base, impose VAT on digital service providers, impose excise tax on motorcycles, repeal the excise tax exemptions of pick-ups, and so on and so forth.
The DOF message is clear: more borrowing is not a viable option. The national debt, close to P13 trillion, is truly alarming. Every Filipino—young and old—is now indebted by around P117,000. The debt-to-gross domestic product ratio is also headed towards the 70 percent level, or 10 percent above the globally-accepted standard of the maximum level of debt sustainability.
Thus for the DOF, the sensible way forward is for the next administration to impose more taxes, strengthen tax collection and “control spending.” The fiscal situation is dire.
But can the Marcos administration afford to impose new taxes, especially VAT and excise taxes on goods and services consumed by ordinary Filipinos who are already reeling from the raging stagflation (inflation + depressed demand + unemployment + underemployment)? Can the government resort to stringent austerity measures when the times call for more stimulus spending to rev up the economy and provide amelioration assistance to the impoverished millions who gifted Ferdinand Marcos Jr. with a landslide victory?
Are there options other than more borrowings and more VAT and excise taxes?
There is: Impose wealth tax on society’s most capable. In fact, wealth tax has become a prominent topic in global economic forums. Heavily-indebted countries that have been weakened by the Covid pandemic are being urged to enact wealth tax laws to enable their governments to address the cost of the pandemic and nurse their economy back to health. More borrowing and more taxes only contribute to the deepening of their debt-economic crisis.
Unfortunately, wealth taxation was not given enough attention under the Duterte administration. It was not included in the congressional hearing agenda. The DOF itself has been evasive about it, even dismissing the idea of wealth taxation as contractionary for the economy.
It will do the country good if the Marcos administration and his economic team can take a deeper look on the pros and cons of wealth taxation and its role as the alternative solution to the fiscal nightmare. Below is a short overview of the global discourse on wealth tax and a summary of wealth tax proposals advanced by concerned CSOs.
IMF pushes wealth tax to address Covid and inequality
The global discourse on wealth tax as an alternative fiscal measure received a boost from the world’s leading creditor, the International Monetary Fund. In April 2021, at the height of the Covid pandemic, a revisionist IMF formally called for governments to consider imposing higher taxes on the wealth of the rich to cover the cost of the pandemic and economic recovery. The fiscal affairs department of the IMF recommended a temporary or one-off tax on high incomes to meet crisis-related financial costs.
IMF Managing Director Kristalina Georgieva, who gave full support to the above recommendation, raised another argument why the enactment of wealth tax is needed. Since her appointment as MD in 2019, she has been harping on the importance of closing the growing gap between the rich and the poor across the globe and within countries.
In one of her earlier commentaries on inequality, she wrote: “Inequality of opportunity. Inequality across generations. Inequality between women and men. And, of course, inequality of income and wealth. They are all present in our societies and—unfortunately—in many countries they are growing.”
Further, she wrote that “tackling inequality requires a rethink” and adoption of difficult “reform” measures. One of these measures is “progressive taxation,” which promotes greater equity without sacrificing growth and productivity of a nation.
Progressive versus regressive taxation and IMF somersault
The above IMF “rethink” brings us to the age-old debate on progressive versus regressive taxation.
The idea of levying higher taxes on the more capable members of society is not new. A number of welfare states in Western Europe rapidly developed after World War II by embracing Keynesian economics, social welfarism and instituting progressivity in taxation. The higher the income or wealth of a person or a family, the higher the tax.
The problem is that the opposite of progressive taxation—regressive taxation—has become the reality in most countries. Economic elites, who dominate the political system and who determine taxation policies, are naturally averse to progressive or “socialistic” taxation measures. Thus, instead of favoring direct taxes on incomes and wealth, they promote indirect taxes that usually come in the forms of VAT and excise taxes on consumption goods and services. Most of these goods and services happen to be those consumed daily by ordinary people, such as food, fuel, medicine, household needs, transport service, various services and so on. Since the ordinary people (wage earners, farmers, home-based workers and other marginalized sectors) constitute the overwhelming majority of society, they shoulder most of the tax burden under the indirect system. This, in brief, is the picture of regressive taxation system, which obtains in the Philippines and many developing economies.
To a great extent, the IMF itself is guilty of promoting regressive taxation and economic inequality in debtor countries like the Philippines. In the 1980s-2000s, the IMF included the VAT system (dubbed as part of the “tax reform”) as part of the package of policy conditionalities imposed on the Philippines and other heavily-indebted countries. The bias in support of indirect taxes on goods was reinforced by the notion that reducing the tax burden of the rich makes the latter more likely to invest on new productive facilities and create more jobs. This supply-side labor-tax economics has become part of the Washington Consensus development framework. This neo-liberal thinking is obviously a formula for greater inequality in society and yet it is rationalized as the solution to lack of growth in a developing economy.
In recent years, this supply-side economics has spurred a new type of competition among investment-hungry countries: to get more investments, host countries should reduce the taxes of the big corporations, especially of the multinationals. This rationale was openly articulated by the DOF when it pushed for the passage of the CREATE law aimed at reducing, progressively, the corporate income tax (CIT). Less taxes for the rich, more jobs for the poor. This race-to-the-bottom (R2B) thinking is similar to the old World Bank thinking that lower wages mean more investments. Hence, the inclusion of “wage restraint” in the IMF-WB package of “structural adjustment” measures in the 1980s.
Global response to wealth tax
Now, back to the IMF proposal for emergency tax on the wealthy. What is the global response?
The OECD and EU have joined the IMF in the call for wealth tax, mainly in the form of a one-off hefty tax on assets of the rich. They are asking energy companies who are making sky-high profits from sky-high energy prices to support people hurt by the rising energy bills. In relation to this, some countries like Italy have imposed a windfall tax on windfall profits.
There is also a faction of the world’s one percent that has been asking governments to tax them to enable society to weather the crisis. In 2020, at the first year of the pandemic, over 80 millionaires from America, Europe and Australia-New Zealand formed “Millionaires for Humanity” and issued an open letter addressed to governments and “fellow citizens of the world,” with the following call: “Tax us” to “rebalance” and “heal” the world. The group includes the likes of Abigail Disney, film producer and heiress of the Disney business empire; John Farrell, an Irish IT venture capitalist active in Silicon Valley; Sir Stephen Tindall, founder of New Zealand’s biggest retailer Warehouse Group; and Morris Pearl, the former managing partner of Blackrock, the world’s biggest money manager.
In several countries around the world, there are also debates on the necessity of having a wealth tax. In the US, Senators Bernie Sanders and Elizabeth Warren have been pushing for a wealth tax since the 2008-2010 global financial crisis. Joseph Stiglitz, Thomas Piketty and other progressive economists have also come out in support of wealth tax as an instrument to raise needed stimulus funds, infuse more dynamism in the economy and close income gaps.
However, most governments, dominated by the wealthy politicians, have managed to transform the debates into endless and unresolved ones. During the pandemic years 2020-2021, even UN Secretary General Antonio Guterres openly asked governments to consider the wealth tax as a solution to counter the Covid-triggered recession. And yet, it was only debt-stricken Argentina that responded positively by imposing a wealth tax on Argentina’s wealthiest in response to the Covid crisis.
Response in the Philippines
The response to the wealth tax proposal by the Philippines’s rich and famous is a deafening silence. Not a word from them, despite the report from Forbes magazine that the wealth of the super-rich soared by 30 percent in 2020; this, at a time when the overwhelming majority of Filipinos, from the unemployed and informal workers to the owners of micro, small and medium enterprises, were all knocked down by the pandemic, due largely to the harsh and prolonged lockdowns declared by the Duterte administration. The Philippine Statistics Authority said poverty and misery deepened nationwide. But not for the rich and famous, whose wealth in stocks, land and other assets kept growing. This is especially true for taipans who control critical industries such as telecoms, power, pharma and food importation and distribution industries.
The silence of the rich and famous has been complemented by the silence of government officials, from the executive and legislative branches, on whether to tax or not the rich and famous. In fact, at the height of the pandemic, Congress and Malacañang ironically pushed for the passage of the CREATE law, which reduces the corporate income tax of the multinationals and big corporations. This law was obviously inspired by the questionable supply-side thinking that less taxes for the rich corporations means more investments and jobs for the nation.
Today, the government has very little to report on the success of CREATE in generating such investments and jobs. CREATE came at a time when FDIs have become shy worldwide because of the pandemic, GVC disruptions, trade wars and uncertainties in the global markets. Above all, the CREATE proponents have forgotten that FDIs do not necessarily go in liberalized places where wages and taxes are low. They go where markets are booming and where the supporting social and physical infras and institutions are in place, no matter how restrictive some of the business rules are. Look how high-wage Singapore continues to attract most FDIs in the region.
NLC-FDC wealth tax proposal
Meanwhile, the irony of the Philippine situation—surging wealth of the elites amid plunging incomes and jobs for the many—has not been lost to the trade unions and CSOs. The Nagkaisa Labor Coalition (NLC) and the Freedom from Debt Coalition (FDC) have been pushing since 2020 for percentile-based wealth tax measures to address the growing social-economic inequality and government’s fiscal crisis.
According to the 2020 NLC-FDC study, the total wealth of the rich in 2019 in the form of stocks, cash, securities and deposits was estimated at P31.6 trillion. Had there been a tax of just one percent, the government would have generated at least P316.5 billion.
Of course, not all those with bank deposits and other assets shall be taxed. Based on the wealth tax model developed by Senator Elizabeth Warren for the US, the NLC-FDC wealth tax proposal exempts those whose total “net worth” is less than P2 billion. However, it is up to the policy makers to determine the exemption level and the percentile figures to be applied, progressively, to those covered by the wealth tax.
Oxfam’s suggestion: Enactment of triple wealth tax measures
So how should the Marcos administration craft the wealth tax measures for the Philippines?
It will do well for the policy makers of the next administration to read the May 2022 report of Oxfam— “Profiting from Pain.” Oxfam raised a global alarm: Covid, cost-of-living crisis and inequality are killing people and making society unstable. The global toll from Covid is 20 million, while the increase in extreme poverty worldwide has been unprecedented in 20 years. Accordingly, the resulting poverty, cost-of-living crisis and inequality are killing one person every four seconds. Only the richest are immune, Oxfam wrote. Hence, the urgency for governments to implement “highly progressive taxation measures” to cover the high cost of Covid containment, and fill the financing gaps for the basic services needed by the people such as social amelioration, education, universal health and social protection.
Oxfam listed three major wealth tax measures that countries can adopt:
1. Imposition of windfall tax on windfall profits made by big corporations during the pandemic and economic crisis. Oxfam calls for a tax of “90 percent on excess profits on a temporary basis” across industries.
2. Urgent one-off solidarity wealth tax on billionaire wealth. This is also the suggestion of the IMF and other economists from the OECD countries.
3. Permanent wealth tax on the richest. This solution means the transformation of the regressive taxation system obtaining in countries like the US and the Philippines into a more progressive one. It is a progressive percentile-based taxation on wealth above a certain amount as discussed earlier. In the Oxfam model, the rate starts at 2 percent above $5 million and rises to 3 percent for those above $50 million and 5 percent above $1 billion.
To be continued
Dr. Rene E. Ofreneo is a Professor Emeritus of the University of the Philippines.
For comments, please write to reneofreneo@gmail.com.