Saturday, June 02, 2018

BWorld 217, Dutertenomics, TRAIN and high inflation

* This is my article in BusinessWorld last Wednesday, May 30.

“There is no art which one government sooner learns of another than that of draining money from the pockets of the people.”

— Adam Smith, The Wealth Of Nations (1776), Book V, Chapter II, Appendix to Articles I & II.

Two columns in BusinessWorld on May 28 jointly defended Dutertenomics’ Tax Reform for Acceleration and Inclusion (TRAIN). These are “Eight former Finance secretaries support TRAIN 2” by Romy Bernardo of FEF and “Coolly explaining inflation” by Men Sta. Ana of AER.

I will quote some phrases from the two pieces and explain the title of this piece.

(1) “TRAIN has been unfairly blamed for the elevated inflation rate we are currently experiencing. By our estimates, fully two thirds of last April’s 4.5% inflation rate is typical of a rapidly expanding economy. The remaining is due mainly to the sharp increases in key imported commodities specifically oil, the realignment of currency exchange rates and a robust increase in domestic demand.” (Bernardo)

(2) “The higher inflation rate we are seeing is mainly a result of the increase in global crude oil prices. The Dubai crude oil price has increased to $68.43 per barrel in April 2018… The tax reforms resulting in higher fuel tax and higher prices of cigarettes and sugary drinks of course have contributed to inflation. But its effect accounts only for 0.4 percentage point of an inflation rate of 4.5%.” (Sta. Ana)

So the main explanation of Dutertenomics and its supporters as to why the Philippines has recently posted an outlier inflation rate are (a) high world oil prices, high sin taxes, (b) rapidly expanding economy, but the impact of (a) is very small while (b) is substantial.

If this is true, then other countries that bore the brunt of high oil prices and incurred elevated growth levels should also have rising inflation rates.

But this is NOT true and did not happen as shown in a chart covering Asian emerging and developed economies and the two biggest economies of America and Europe.

On (a), many countries even experienced lower inflation in January-April 2018 compared to December 2017 level despite the rise in world oil prices — UK, Germany, Malaysia, Pakistan, India, Indonesia, South Korea, and Singapore. Others have inflation differential of only 0.2% to 0.6% while the Philippines’ differential was 1.2% or 1.3% depending on the CPI base year used.

On (b), several countries that have reported growth momentums from 2016-2017 and were projected to grow at least 5.3% in 2018 experienced negative or low inflation differentials compared to December 2017 levels — Malaysia, Pakistan, India, Indonesia, Vietnam, China. These countries show that low inflation and fast growth can occur at the same time, no trade off expected (see table).

So are supporters of the TRAIN being less honest?

Moreover, their clamor for higher oil/LPG/coal taxes is directly proportional to their silence in calling for fare hike adjustments. They know 100% that higher oil prices will result in demand for higher fares/tariff by jeepneys, taxi, buses, UV express, trucks, etc.

And since January 2019 is fast approaching, another round of oil/lpg/coal tax hikes will come, prompting another round of demands for hikes in fares, electricity, and wages.

With this in mind, TRAIN supporters should be equally vocal in telling the LTFRB and DoTr to grant the fare hikes very soon, before the second round of energy tax hikes begin, then re-run their numbers on inflation impact and targets.

But there is sound of silence in this aspect.

If government will not grant the necessary fare hikes soon, PUV operators will cut costs elsewhere, like forcing bus drivers and mechanics to work longer hours at little or no extra pay, or using less-reliable but cheaper spare parts, or using old tires. Then we wait for more road accidents and government will blame the PUV operators then penalize them with huge fines or franchise cancellations.

(3) “We also believe that the corporate income tax (CIT) regime, burdened by the highest standard rate among ASEAN countries, at 30%, is in urgent need of reform. We strongly support the reduction of corporate income tax alongside the rationalization of tax incentives.” (Bernardo)

True, there is an urgent need for the Philippines to cut the CIT because our 30% is the highest in East Asia: Indonesia, China and South Korea 25%, Taiwan, Thailand and Vietnam 20%, Hong Kong and Singapore 16.5-17%.

But TRAIN 2 wants to cut the CIT to only 25% by 2022 or end of Duterte’s term while it will reduce or remove many fiscal incentives by 2019 if they succeed in having TRAIN 2 law this year.

So Dutertenomics is being less honest again on the extent of the Philippines’ taxation distortion.

Aside from the Philippines having the (1) highest CIT of 30% in East Asia, it also has the (2) highest withholding tax on dividends OF 15/30%, (3) highest withholding tax on interest of 20%, (4) highest withholding tax on royalties of 30%, (5) highest VAT/GST of 12%.

One big result of this is that the Philippines has the lowest FDI inward stock (inflows less outflows through the years) of only $64B in 2016 vs. $115B of Vietnam, $122B of Malaysia, $186B of S. Korea and Japan, $189B of Thailand, $235B of Indonesia, $1,096B of Singapore, $1,354B of China and $1,590B of Hong Kong.

A more economically realistic and politically acceptable CIT under TRAIN 2 would be 15%, or max 20% in exchange for reduction/abolition of many fiscal incentives. And such cut should be done in 2019 assuming that TRAIN 2 becomes a law in 2018, and not 2022.

Finally, the last point is that the implicit purpose of TRAIN’s tax-tax-tax strategy is to pay for loans-loans-loans from China and its crony contractors involved in Build-Build-Build as many previously integrated PPP were reversed to become hybrid PPP.

Bienvenido S. Oplas, Jr. is President of Minimal Government Thinkers, a member-institute of Economic Freedom Network (EFN) Asia.

See also:

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