THE INSIDE MAN

Taxing for Infra: The dream versus the reality

Taxing for Infra: The dream versus the reality image

Tito F. Hermoso / AutoIndustriya.com | February 13, 2017 18:26

WARNING: May contain predictions that will be upsetting.

Laudable it may be, the current administration's ambitious intent to make up for lost time and spend trillions for infrastructure in the next 5 years needs to be funded. Thus its economic managers have just proposed House Bill 4774 which aims to cut personal income tax — to enhance take-home pay of all those employed and are earning not more than 20,000 Pesos a month (for 13 months) — and increase fuel tax and auto excise taxes, to make up for revenue losses due to the income tax cut, retention of PWD discount privileges, rationalization of estate taxes and the target infrastructure budget of close to a trillion Pesos come 2022.

Noble team, noble objective

Background: the current administration's Economic/Finance managers are not only highly experienced but are also respected practitioners and leaders in the academe and economic development. The troika of Dominguez (Sec. Of Finance), Diokno (Budget) and Pernia (National Economic and Development Authority, NEDA) are contemporaries of the late Dondon Paderanga, (Director-General of NEDA during Cory and PNoy's first year) and are of the same caliber. To make up for lost time so that infrastructure can catch up with its 30 year lag, the Department of Finance (DoF) staff, under Usec. Chua, devised the Comprehensive Tax Reform (CTR) or House Bill 4774. HB 4774 posits that the cut in income taxes will need to be compensated by a rise in taxes, but since the timetable for the impatient President Rodrigo Roa Duterte (PRRD) is too short, higher taxes need to be imposed starting 2018. Though some congressmen rightfully claim that the income tax cut was mulled during the waning days of the PNoy administration, the DoF had to resort to bundling (or hostaging, as some congressmen accuse) any tax reduction with compensatory tax increases.

No tax increase/sales decrease simulation

The problem with the CTR's chosen tax rates is that it had to be high, owing to the truncated deadline. Which is why we wonder if the projected net tax collection increase by PhP 162.0B for 2018 went through some kind of testing of simulated forecasts of how the economy will react to what is now being looked upon as an outrageously high pie-in-the-sky estimated tax take. Without a doubt, we differ dramatically with the assumptions of Usec Chua's team.

Beneficiaries from the tax cut

To begin with, easily half of the registered employed are “contract workers”, ENDO (5-month contract) included, and contractors or people whose paycheck are only deducted the standard 12.0% VAT. Moreover, the tax cuts will not give those of “irregular” employment the desired increase in purchasing power when the fuel taxes kick in. On the other hand, the remaining half — of whom more than one half — will see their take home increase by a generous 30.0%. So the tax deduction's desirous effects, finds attention with quite a good number.

Taxing for Infra: The dream versus the reality

Staggered fuel taxes

Now factor in the increase in gasoline price from PhP 4.35 to PhP 7.00 in 2018, to PhP 9.00 by 2019, then USD 10.00 by 2020 (Diesel to increase by PhP 0.00, 3.00, then 5.00 respectively). The DoF team postulates that the low gas prices and government's failure to reinstate the fuel tax last charged at the start of the Asian Financial Crisis in 1997 will mean packing in high value taxes on its captive tax payers. Nevertheless, the tax framers believe that the main beneficiaries of the low gas prices/low fuel taxes were the high income tax group, specifically those households that earn PhP 250,000/month. They claim such households can easily pass on the fuel price/tax increase through cost of goods sold and that the economy can absorb such price increases without crowding out economic growth.

Death by taxes, ad nauseum 

Now this last conjecture is fatally flawed. Every time fuel taxes increase, fuel price increases. And fuel price increases raise the price of many other goods and services, i.e. tolls, fares, salaries, prices of food, utilities, electricity, potable water, etc. This across-the-board price increase virtually erases the monthly increase in take-home pay that the tax cut initiated. And without anyone to pass the higher cost of living to, the across-the-board price increases of all necessary consumption would hit the unemployed and the underpaid (hence, untaxed) with a decline of their purchasing power. When that declines, economic activity stutters and growth stalls. The only good fruit of this slowing economy is reduced traffic.

Discredited tax policy 1

The above is a result of the insistence of many taxmen around the world to impose social justice-driven tools that failed spectacularly since the 50s. This is the regressive tax system, a rallying cry among the Peronist and Chavista faithful. This system charges a climbing rate of tax for the higher the income, the purpose of which is to “robin hood” (distributive justice) the rich to alleviate the poor. The problem with this is that the rich will always find a way to “flee” or spirit away their hard-earned capital to safer countries. Not only that. If their favorite luxuries are outrageously taxed in one country, the rich will also “flee” their consumption to friendlier markets. Our economy now loses both their savings/investment and taxable consumption. All those Peronist and Chavista economic policies in Latin America have proven to be disastrous to this day and almost all have sputtered their recovery every time when they elect leaders who espouse these kinds of Loonie Left policies. If we are pursuing these regressive taxes just because we want to be authentically Left, loonie or otherwise, better think again.

Discredited tax policy 2

The other Loonie Left tool is indexing to inflation. We have seen that when hyper inflation sets in and we see outrageous prices, the taxes become outrageous too. Usually coupled with a regressive system, one can see the ridiculous tax rates everyone, rich or poor, will be subjected too. Worse, the so-called poor will see their income bracket rocket up into the rich bracket, now subjected to confiscatory tax rates for the rich, just because hyper inflation has added so many zeros to their paycheck. Besides Latin America, Italy's economy suffers from the degenerative effects of this indexing.

Taxing for Infra: The dream versus the reality

Domino effect

The same domino effect happens — tax rises, price rises, starting a sales decline, resulting in overall net tax collection decreases — when auto excise taxes and luxury car taxes reach outrageous levels. Particularly galling is not only our forecasted slashing of auto sales to pre auto excise tax reform levels of 2002, but the demise of legit tax collections from the luxury car segment only to be replaced by a resurgent grey market, from whom proper taxes are never paid. Hence the PhP 162.0B estimated net increase in tax collection for 2018 is illusory because falling economic growth due to excessive price rises and the Trumpian isolationist policies of our largest trading partner, will cut collections to levels far lower than what BIR's Kim Henares achieved during the “sue, name and shame” and ruthlessly intensified collection days of the C. Purisima-led DoF during the PNoy administration.

Here's the rub; the vetting and approval

Granted the government gets its trillion Pesos over the next 5 years, Sec. Ben Diokno will be the first to tell you that the line departments do not have the capacity to process, evaluate and bid that many projects. Even if you triple the staffing and IT, you still end up with projects falling in line to be evaluated and approved by the NEDA-ICC. It is chaired by the President and given if PRRD wants to chair a NEDA ICC (Investment Coordination Committee) meeting once or even twice a month. It is just systemically impossible.

Embarrassing wrongful pursuit

Say what we want about the intellectual lightweights, little minds and second stringers running the Budget, NEDA and Finance portfolios of the PNoy Cabinet. At least they recognized the good policies left behind by GMA, applied “laissez faire” since it ain't broke, resulting in the record economic growth for 6 consecutive years. Mind you this was achieved with only a mild increase in sin taxes. It would be downright embarrassing if the much vaunted PRRD economic team throttles this record growth, induces economic pain particularly to the poor who felt “excluded” by the PNoy era's selective growth, all for the wrongful, greedy, unrealistic and impatient pursuit of this “1 trillion Pesos” of infrastructure by 2022.