* This is my article in BusinessWorld on March 24, 2017.
The current tax reform proposal of the Duterte administration promises to improve the Philippines’ competitiveness mainly by reducing income tax rates and cutting exemptions in value-added tax (VAT) and other fiscal incentives. The proposal has somehow created three myths in taxation.
The current tax reform proposal of the Duterte administration promises to improve the Philippines’ competitiveness mainly by reducing income tax rates and cutting exemptions in value-added tax (VAT) and other fiscal incentives. The proposal has somehow created three myths in taxation.
1. REDUCING THE INCOME TAX RATE CAN LEAD TO REVENUE LOSS.
No, for two reasons. (a) The Laffer Curve is a good
reminder that tax revenues can go down as tax rates increase. High taxes are
disincentives to honest business and that is why many companies are hiring good
law and accounting firms to either take advantage of legal loopholes and reduce
tax payments, or find technicalities bordering on dishonest tax payment. And
(b) Hong Kong and Singapore are good examples that low income tax rates do
attract more local and foreign businesses, which further expand the tax base.
2. THE NEED TO RAISE EXCISE TAX FOR VEHICLES AND OIL
PRODUCTS TO COMPENSATE FOR REVENUE LOSS IN INCOME TAX CUT.
No, for two reasons. (a) Vehicles and oil products are
necessary for more business creation -- petroleum is a public good, after all.
Petroleum allows huge trucks, buses, airplanes, and ships to transport more
people and goods, activities which again expand the tax base; and (b) raising
the oil tax (by P6/liter across the board) further raises the cost of doing
business in the country.
In the table, the Philippines is third highest in tax
payment as percent of commercial profit.
While the taxes on profit and corporate income is
comparable to many of its neighbors, its “other taxes” like VAT, documentary
stamp tax, franchise tax, capital gains tax, excise tax, etc. charge high
rates. So raising the excise tax on vehicles and oil products is a raise on
“other taxes” and that will dent the attractiveness of lower income tax.
3. NO NEED TO LOWER VAT, JUST REDUCE THE NUMBER OF
EXEMPTIONS.
No. For two reasons: (a) Many industries and sectors have
succeeded in their lobby for VAT exemption precisely because the 12% is high;
and (b) among ASEAN countries, the Philippines, at 12%, has the highest VAT
rate%; five countries have only 10% (Cambodia, Indonesia, Laos, Thailand, and
Vietnam), Singapore 7%, Malaysia 6%, Myanmar 5%, Brunei 0.
See the column on tax post filing index (PFI), distance
to frontier (DTF), 100 being the highest score. The Philippines has a low score
of 49.8 mainly due to VAT non-refund policy. Economies with scores of 63 and
above either do not have VAT or have VAT but have low compliance time with
paying their corporate income tax (CIT) (see table).
So a good compromise will be to bring the VAT back to 10%
and remove all exemptions except for raw agricultural and fishery products.
Another observable point from the above numbers is that
many countries in Asia (and other continents) were socialistic in their income
tax policy, started after World War II until the 1980s. For instance in 1980,
Malaysia, Thailand, and Taiwan have income tax rates of 60%, Philippines has
70% and South Korea has almost 90%. The faster pace of globalization from the
late 1980s onwards made many governments realize that the Laffer Curve indeed
is correct, that the higher the tax rate, the lower will be the business
activities and overall tax revenues.
To plug endless fiscal irresponsibility also known as
endless and yearly budget deficit that require endless search for higher taxes,
certain public spending and subsidies must be cut and certain government
offices and bureaucracies must shrink or be abolished. Governments should learn
to live within their means, even live below their means, especially during
years without crises so they can have fiscal surpluses and pay their
ever-rising public debt stock.
Bienvenido Oplas, Jr. is the head of Minimal Government
Thinkers and a Fellow of SEANET. Both institutes are members of EFN-Asia.
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See also:
BWorld 107, Top 10 myths for oil tax hike, January 28, 2017
BWorld 119, Seven myths in the mining debate, April 07, 2017 BWorld 120, Five myths of solar-wind energy, April 08, 2017
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