ECONOMISTS supported the rationalization of fiscal incentives and reduction of corporate income tax (CIT) under the second package of the Comprehensive Tax Reform Program (CTRP), saying the reforms are needed and will not cause substantial job or revenue losses.
In the first Committee on Ways and Means hearing for the CTRP’s Package 2 at the House of Representatives on Tuesday, the President’s economic team defended “TRAIN 2” by highlighting the benefits for government and the economy if it is passed into law.
Unionbank Chief Economist Ruben Carlo Asuncion, Action for Economic Reform Senior Economist Jo-Ann Diosana, and Ateneo Center for Economic Research and Development (ACERD) Director Alvin P. Ang said they supported the measure, provided it is carefully implemented.
“TRAIN 2 is going to be great if orchestrated effectively and properly. We know that the current incentives landscape is outdated and needs to be attuned to the challenges of the time. I agree that incentives should be ‘transparent, targeted, time-bound and performance-based’,” Asuncion told BusinessMirror.
“DOF (Department of Finance) has maintained that TRAIN 2 is revenue-neutral. So, I do not expect any adverse impact on revenue collection from corporate taxes,” he added.
However, Dean Cid Terosa of the University of Asia and the Pacific School of Economics said TRAIN 2, specifically the rationalization of fiscal incentives, could lead to job losses, “particularly the jobs of the less economically privileged.”
Terosa said the framing of TRAIN 2 as being pro-rich could stem from the fact that the cut in corporate income taxes will not directly benefit workers but only companies.
“It can be considered pro-rich because TRAIN 2, particularly the reduction of corporate income tax, directly benefits capitalists and corporate owners. The poor and the unemployed, however, can indirectly benefit if jobs and interrelated activities will be spurred by TRAIN 2,” Terosa said. “TRAIN 2 will directly benefit investors, businessmen, capitalists, and the like. The rationalization of tax incentives, even if non-negotiable, can lead to job losses particularly the jobs of the less economically privileged,” he added.
Still, he agreed with other economists, including Socioeconomic Planning Secretary Ernesto M. Pernia, that while a lower CIT could cut government’s revenues, such can be compensated for by the rationalization of fiscal incentives. This means even government spending for basic and social services, including its ambitious infrastructure program in the medium term, will not suffer fiscal constraints with the reduction in corporate taxes.
“The government plans to fill the gap with loans given the better credit standing of the country. Also, the government hopes that lower corporate taxes will spur more activities and consequently more revenues from taxes in those activities,” Terosa said.
Rationalization of incentives
Diosana said the rationalization of tax incentives could also encourage companies to hire regular employees to continue receiving incentives, which AER proposes should be included in the criteria for granting incentives nationwide.
These can be accompanied by other performance indicators such as adoption of inclusive business activities and value-added production, as well as using cleaner, energy-saving, and other relevant new technology.
Job creation in relation to the rationalization of tax incentives is also something that even Neda Undersecretary for Planning and Policy Rosemarie G. Edillon supported.
In an interview on the sidelines of the House committee hearing, Edillon said the removal of incentives will not lead to significant job losses, as only 4,000 out of 900,000 establishments are accessing these incentives.
Based on partial information submitted to the Neda, these firms generated some 2.5 million jobs in 2015. However, based on the amount of wages paid, the Neda estimated that this only makes up 6.3 percent of total compensation of all employees recorded in 2015.
“There will be more firms who will be motivated to expand because of the rationalization of incentives which only 4,000 firms use. Job generation can even be turned into a performance-based indicator moving forward,” Edillon said.
Trade Secretary Ramon M. Lopez also told reporters on the sidelines of the hearing that incentives are not the only reason the country attracts investments. The country has a highly educated and talented work force, which many firms here and abroad consider as assets, he said.
In fact, despite granting incentives for the past 50 years, the Philippines remains a laggard compared to its neighbors in the Asean in terms of attracting foreign direct investments, Finance Undersecretary Karl Kendrick T. Chua said.