THE INSIDE MAN

Keeping TRAIN (tax reform bill) on Track

Keeping TRAIN (tax reform bill) on Track image

Tito F. Hermoso / AutoIndustriya.com | November 20, 2017 09:14

Weighing in on tax reform in the transport sector

It's all over except for the announcing. Which will prevail, the haste of urgency or the delay of prudence? As we speak, the TRAIN or Tax Reform for Acceleration and Inclusion of the CTRP or Comprehensive Tax Reform Program and its two disparate versions, the Senate's and the House's, should be going through the LEDAC [Legislative Executive Development Advisory Council] wringer. From the way each is constructed, LEDAC will need to burn the midnight oil if they are serious in meeting PRRD's deadline, yesterday. The prize, of course, is the “Golden age of infrastructure”, the Build-build-build battle cry amounting to some 8.4 trillion pesos spending over the next 6 years.

Tax Reform means Economic Reform

Ever since the CTRP was pronounced last year as the signature landmark economic reform program of the PRRD administration, we have been cautiously pushing for its adoption but not without detail changes for tax efficiency's sake. This administration's economic triumvirate of Diokno [DBM], Pernia [NEDA] and Dominguez [DoF] has invested in what they think is the answer to our hopes and dreams of 1. infrastructure catching up with 40 years of underinvestment [Build-build-build], 2. an economic climate that is competitive income, tax and opportunity wise, with the rest of fast growing ASEAN and 3. a more equitable tax regime that puts more cash in the pocket of low and middle income earners. CTRP's main author, Usec Karl Kendrick Chua has been toiling night and day to explain why TRAIN is only the prelude to 5 to 6 other major tax reform programs/legislation to enhance the three main objectives of the Economic triumvirate.

Our Devil in the details

Belonging to the nitpickers, as opposed to the Left that lead the naysayers, our opposition to CTRP is in the details. The difference is that our tool of preference lean on our applied economics assumptions against USEC Chua's ivory tower economic assumptions. To summarize;

  • We are for equitable distribution of income and tax burden but we, admittedly a minority nowadays, do not believe that CTRP's regressive income taxation i.e. ramped up tax rates for the rich, is the best way. Our proof lies in global practice where countries with a light hand on taxes approaching the flat tax ideal – Hong Kong, China – have more robust growth and wide spread prosperity compared to regressive tax regimes – India, Argentina, Brazil, Venezuela – which brings heavy debt burdens, debt default, still high Gini coefficients, capital flight, leakages [smuggling, tax evasion], uneven growth and patchy prosperity over the medium term. For the Philippines, tax the rich high, higher than the ASEAN average, invites them to take their money elsewhere.

  • We agree that fuel taxes should be reinstated not only because the last time fuel taxes were paid was more than 15 years ago but because now would be a good opportunity while stubbornly high shale oil production puts downward pressure on OPEC's determination to raise prices. We do not agree with CTRP's assumption that the higher fuel tax, albeit staggered over several years, will not bear pressure on pushing consumer prices upwards – thus negating the cash back take home pay from the reduced personal income tax rates of CTRP.

  • We agree that car prices need to align with ASEAN excise tax rates, but we do not agree with CTRP assumptions that sales will not suffer. For one, the heavily taxed price segment happens to be the most popular multi-passenger family vehicle. CTRP envisions a forced shift into smaller cars but historically, the Philippine car market has always leaned towards extended family transport. Lesson number 1 from the past : The Subic JDM [Japan domestic model] used SUV imports – wherein government did not benefit from tax collections – grew to 180,000 per year - threatening the viability of the 7 or so main car assemblers of the country who could only manage 110,000 per year.

  • Like our argument against regressive taxation or 'Robin Hood' style tax rates for the rich, extortionate levels of taxation for luxury cars will just net zero sales, hence zero tax collection. Before the 2003 Excise tax reform, there was hardly any luxury car sales in the country but after the Reform, several hyper luxury brands have entered the market and are pulling in their fair share of tax contribution. We present proof of the harm this can do.

Mr. Wellington Soong who attended the House hearings articulated this latter view against extortionate taxation of the luxury sector and eventually had to give up the dealership for Jaguar-Land Rover, opening the gates to a revival of the essentially tax free grey market. Like capital flight, luxury car buyers will return to gray market purchases which, history has shown, is always a workable alternative because the country has never been able to mount a sustained campaign against smuggling.

The House Bill: slightly altered

First to pass was the House Bill. The House Bill generally kept the CTRP proposal intact except for the contentious fuel tax and automobile excise tax. Cong. Joey Salceda's committee agreed to auto industry proposal to add 3 or 2 more tax tiers to the proposed 4, resulting in lower taxes for the crucial PHP1.5M to PHP2.0M segment, the segment of SUVs, AUVs, MPVs, or your basic extended family transport. Taxes for the luxury class remained industry killing extortionate.The other item that Joey's committee passed is the reduced taxes of fuel. These adjustments loped off some 30% of the Php200-B tax take that the CTRP was supposed to collect in the first year.

How about the poor?

When quizzed by ex-NEDA Secretary W. Monsod about how the government plans to compensate for rise in prices which will negate the lower income tax, Congress pointed to the catch all CCT or Conditional Tax transfer. Which is not a must nor a pre-condition in the CTRP law. Hence if prices go up due to rising oil prices, there will be no official safety net despite Cong. Salceda's assurances. Secretary Monsod adds that if the CCT will be handled by the DSWD, its tantamount to workplace stasis as DSWD is already overloaded as it is.

The Senate Bill: neutered, absolutely

After the House, the CTRP, now called TRAIN was passed unto the Senate, particularly the committee of Sen. Sonny Angara. Here TRAIN was rehashed into something the DoF would not be able to recognize for it has transformed from an Economic plan into a masterpiece of democratic political compromise. The Senate's TRAIN, while giving in to almost all the wailing and ranting affected sectors, lost its teeth and in its neutered state, ended up greatly diminishing its revenue potential prompting the FEF [Foundation of Economic Freedom] to call on the passage of the original proposed CTRP.

Keeping TRAIN on Track

Disclosure

For our vested interest, as car and driving enthusiasts, we could live with the reduced excise taxes for the lower category of cars and the reduced fuel tax increases. Though we do not [yet] belong to the category, we bewail that luxury car tax rates still did not display any concessions to the possible extinction of luxury car sales and disappearing tax collections.

Stop the TRAIN or take it off the tracks?

As the LEDAC grinder proceeds, we now address the possibility of junking TRAIN altogether. Perhaps no one dares says it, but if TRAIN is as neutered as the Senate's version, it puts into question the succeeding CTRP's from 2 to 6. It just cannot proceed to the next reforms if TRAIN is still riddled with exemptions and watered down tax rates. Which now begs the question, can we not just drop TRAIN altogether.

Note to Government: Private construction is unbeatable

We would not like that and neither would PRRD but there is cause to return to the drawing boards. For us the biggest stumbling block to financing the "Build build build" Golden Age of Infrastructure is the sudden turn around of the government, early last year, from a reliance on PPP to GA [Government Appropriation], with PPP lying in the shadows only for O&M. PRRD's criticism of the PPP was the delays caused by lawsuits filed by losing bidders. But that was true when PPP was still a work in progress, a learning experience for the PPP authorities. Now that they've gotten their act together, PPP should be at the forefront of building and not just operating and maintaining infrastructure. Local and International evidence proves that Private sector construction will beat Public sector construction, in both speed and quality, anytime. Need we add that Public construction is a magnet for graft and corruption?

Keeping TRAIN on Track 

PPP, the silver bullet

If PRRD ditches this preference for GA, and returns to PPP, the Private sector will now absorb financing the bulk of the 8.4 Trillion Pesos. Which means a great reduction in planned borrowings and forecast interest payments, the latter usually the bane of ODA [Official Development Assistance] funding as there is no forward cover [insurance against currency exchange rate surges]. This is what Investment Banker Francis Yuseco has always riled at – ODA's absent forward cover result in our paying exorbitant interest rates for the life of the infra loan, sometimes up to 300% effective rate. You won't have this problem with PPP as the finance risk is borne by the private proponent. True, there will be some overheating of the economy, but this is small beer considering Banking system resources of 14.7 Trillion today alone. Finally, with a lot less debt to to finance the 8.4 trillion, DoF can now proceed with the other CTRP's 2 to 6 and now deal with financing the welfare state freebies of PRRD; doubled salaries for military/police personnel, fully funded retirement funds, free irrigation, free College tuition, fully funded CCT, free medicine, free housing, free Jeepneys, etc. etc.

PPP Hybrid, the mystery

It is quite a simple solution that we have been championing as early as 3rd quarter of last year. Why if falls on deaf ears remains a mystery. Are we so stubbornly bound to the order that PPP be relegated to being just a hybrid now? That to us is the root of the problem why TRAIN cannot create the foundation for further CTRPs without taxing us to high heavens. Pushing the burden of building and financing to the Private Sector via PPP will relieve government to fund its social and missionary non-profit programs. Time to change TRAINS?