The coronavirus pandemic and our response to it are worsening economic inequality

(Second of two parts)

The government’s recently enacted tax reform initiatives, the Corporate Recovery and Tax Incentives for Enterprises Act (Create) and the Tax Reform for Acceleration and Inclusion (TRAIN) Act, are officially intended to “rationalize” the country’s tax and incentives system. These measures have also been touted as a major component of the government’s overall response to the COVID-19 crisis.

Arguably the most controversial provision of Create is the proposed gradual reduction of the corporate income tax from 30 percent currently to 20 percent 10 years hence when it shall have taken full effect.

The underlying rationale behind this policy is four-fold:

• To assist businesses during the downturn caused by the pandemic;

• To accelerate investment expenditures and to promote employment during the recovery period;

• To enhance the country’s competitiveness in the global markets among our Asean (Association of Southeast Asian Nations) neighbors; and

• To attract foreign investors who are seeking opportunities to diversify their regional supply chains.

The purported policy goals of Create are certainly laudable. However, the assumed efficacy of the chosen means to achieve them and the validity of their underlying premises are, to say the least, questionable.

To begin with, the notion that reducing corporate profit taxes will encourage investment is based on the dubious theory, commonly known as supply-side economics—and derisively labeled as “Zombie economics” by its critics—that taxing businesses less will encourage investment and will generate incomes that will eventually “trickle down” to the poorest segments of society. There exists no credible evidence to support this economic model.Moreover, as noted in the first episode of this essay, big businesses and multinationals are generally awash with cash and have access to easy credit and don’t need any tax breaks to induce them to seize investment opportunities that are expected to abound as soon as the economy starts bouncing back from the pandemic. Any tax incentives given to healthy businesses at this time will therefore yield only marginal benefits.

Equally contentious is the recently implemented reduction of personal income taxes across the board mandated by the TRAIN law.

To be sure, the country’s revised system of personal income taxation is reasonably progressive. Starting at 20 percent for individuals earning between P250,000 and P400,000 annually, increasingly higher levels of income are taxed at progressively higher rates of up to a maximum of 35 percent for individuals earning over P8 million. This uppermost crust of Philippine society includes the handful well-heeled individuals earning unconscionably high incomes that run in the billions of pesos of a year.

This maximum marginal tax rate of 35 percent is quite low compared with some of the more egalitarian countries in the world, such as Austria, Denmark and Japan (at 55 percent), Belgium (50) and China (45).

Bear in mind, however, that in these countries, the more affluent members of society shoulder an inordinately large share of the state’s expenditures on public health and social welfare, which are equally accessible to all. Not so in this country!Just as controversial are the provisions of the new tax measure to reduce estate taxes from the current rates that range from 5 percent to 20 percent, depending on the value of the asset in question, to a flat rate of 6 percent, regardless. Additionally, the donor tax will be reduced from 30 percent of the gross amount of taxable donation, to 6 percent of the net donations for gifts above P250,000 annually. These iniquitous provisions of the law patently benefit only the most prosperous members of our society who have enormous wealth to donate or to pass on to their heirs.

To compensate for the anticipated decline in tax receipts resulting from the reduction in taxes on business earnings, the personal income tax, and the estate and donor’s taxes, TRAIN provides for higher excise taxes on a wide range of consumer goods, including tobacco products, petroleum products and automobiles. It also expands the coverage of the value-added tax, and repeals existing exemptions on certain classes of products. These taxes are fixed and paid equally by all consumers regardless of income and wealth. They are regressive and are thus contrary to accepted principles of taxation.

Misdirected policies

Both Create and TRAIN, the two major components of the government’s overall tax reform program, are viewed by many observers as being heavily biased in favor of big business and the very rich individuals who own and manage them, big salary earners, highly successful professionals and entrepreneurs, and those who have accumulated great economic wealth over the years.

While the country’s revised system of taxation grants substantial economic relief to large numbers of ongoing business enterprises and high-income earning individuals, it fails to provide any corresponding benefit by way of some form of financial assistance—known variously as subsidies, transfer payments or negative taxes—to the thousands of struggling small businesses many of which face the prospects of going out of business as a result of the COVID-19 pandemic, and the millions of citizens who are languishing in extreme poverty during these critical times. The ultimate outcome of the government’s tax reform schemes is to worsen the already dismally inequitable distribution of income and wealth in the country.

Fighting a war on two fronts:

Finding new policy directions. On deep reflection, the government should seriously explore alternative policy directions in addressing the economic consequences of the current pandemic, and putting in check its devastating impact on public health.

To improve our dismally run-down system of public health, and put our economy back on track once the COVID-19 crisis has been placed under control, the government’s current developmental programs should be thoroughly rethought in favor of supporting a huge “war effort” against a deadly and unseen enemy that can potentially kill our citizens in the hundreds of thousands, and put in place a gigantic “postwar” rehabilitation program aimed at developing the industries and the physical and social infrastructures that are most suitable to the emerging needs of our society in the new normal.

To fund such an all-out coronavirus recovery effort, the government should borrow heavily and increase—not decrease!—taxes across the board.

Accordingly, the government should rethink its longstanding predisposition toward meeting the usual economic growth targets. It should instead shift emphasis away from high-profile, hard industrial and infrastructure projects, such as airports and expressways, in favor of heavy investments in public health, renewable energy, mass transportation, research and development, broadband internet, public health, food production, education and institutional development.

In this way, not only do we enhance the country’s overall economic well-being and the state of its public health well into the future, but we also prepare ourselves for the following pandemics, which are expected by most public health experts to be more frequent and much more virulent. INQ

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines, or MAP. The author is a retired professor of economics and management, and currently professorial lecturer at the University of the Philippines Diliman..