Simply lowering corporate income tax might prompt companies to just survive the COVID-19 pandemic, without any assurance that the tax cut would get them to either keep or hire more workers, a group said.
The response, however, should not be to scrap the proposed Corporate Recovery and Tax Incentives for Enterprises Act (Create). Instead, the Action for Economic Reform (AER) said the tax cuts should come with labor-related conditions.
The Create bill would immediately lower corporate income tax from 30 percent, the highest in Southeast Asia, to 25 percent next month, according to the proposal made by the Department of Finance (DOF).
It would also compute rational tax breaks, giving a longer transition period for companies that are currently benefitting from the current tax break. It is the latest reiteration of a tax package that had brought a lot of uncertainty for companies that would rather keep their current incentives instead.
Better times would have meant that the tax cut would give companies more money, which they could use to spend on expansions. AER cited some studies saying tax cuts could encourage more investments.
But the pandemic, along with the lockdown meant to contain it, had made doing business difficult to say the least.
“Having said this, we do note that in the current pandemic, the effectiveness of a tax cut as fiscal stimulus is limited,” said AER.
“From previous recessions, the gains from the tax cut are not necessarily used for consumption,” AER said.
Instead, AER said companies, for example, could just ride out the pandemic by saving their windfall, or use the gains from the tax cuts to reacquire stocks or give dividends to wealthy shareholders.
“Hence, our proposal is to make the immediate corporate tax reduction from 30 percent to 25 percent contingent on job preservation or job creation. This is a social bargain,” AER said.
“The firms will be entitled to the swift income tax reduction only if they would retain their workforce or better, increase employment,” it added.
The AER is a public interest organization that conducts policy analysis and advocacy on key economic issues. It was founded in 1996 by a group of progressive scholars as an independent, reform-oriented and activist policy group, according to its website.
Edited by TSB