[ANALYSIS] Why Duterte’s corporate tax cuts won’t save PH economy

On Thursday, November 26, the Senate passed on final reading the Corporate Recovery and Tax Incentives for Enterprises (Create) bill. 

In essence, this bill pushes for lower income tax rates paid by corporations: an immediate reduction from 30% to 25%, followed by a gradual reduction to 20% by 2027. 

Create will also make more stringent the handing out of fiscal incentives to investors who, for the longest time, have allegedly been receiving too many perks from government.

Create — a sequel of sorts to the 2017 Train law — has undergone multiple stages of evolution over the years.

Simply called Train 2 at the outset, the bill was rebranded as “Trabaho” (Tax Reform for Attracting Better and High-Quality Opportunities), then rechristened as “Citira” (Corporate Income Tax and Incentive Rationalization Act), until finally the proponents settled on Create.

Secretary Dominguez originally sold these corporate tax cuts as a way to invite investors and generate as many as 1.4 million jobs over the next decade. 

More recently, because of the pandemic, Dominguez modified his narrative and claimed Create will prove to be “one of the largest economic stimulus measures in the country’s history” — reviving our economy and rescuing it from the deep recession. 

But will Create be the economic savior it’s being hyped as? For many reasons, no.

Create will rapidly deplete tax revenues

First, Create will likely drain our government’s coffers. 

Sure, the bill’s proponents admitted the same long ago. But with the pandemic beating our economy to a pulp, government revenues have dried up too fast even without Create.

Figure 1 shows the sharp decline in tax revenues in April and May this year, following the strict lockdowns and the deferment of annual tax payments. Tax collections bounced back in June, but have shrunk again since.

In October, tax revenues were 13% lower than they were in the same month last year.

Figure 1.

Numerical simulations by economists Marjorie Muyrong and CJ Castillo show just how much Create stands to hemorrhage public coffers. The drastic tax cuts, alongside massive layoffs because of the pandemic, are likely to hurt not just the growth of government revenues but also national and household incomes (Figure 2).

Figure 2.

This, just when government is expected to implement aggressive fiscal policy in the form of, say, massive spending on health infrastructure, the upcoming vaccines, economic aid, and education resources for distance learning.

Simply put, Create could impair our government’s responses to the pandemic and the recession.

Apart from this, Create will also make us more reliant on domestic and foreign loans — even as we’ve grown more and more indebted in recent months.

Create won't jumpstart our ailing economy

Create’s proponents also believe that the sheer reduction in corporate income tax rates will bring our ailing economy back to life.

The idea is simple: with fewer taxes to pay, corporations and other businesses are expected to use their tax savings to build new structures, buy new equipment, hire new workers, and expand their operations — all of which will generate jobs, boost incomes, and benefit ordinary workers. 

This is otherwise known as “trickle-down economics.”

Dominguez boldly claimed that Create will generate P42 billion in extra capital this year, and P625 billion over the next 5 years. For his part, Senator Juan Miguel Zubiri — a proponent of Create — said the bill is “the only way to pump-prime” businesses.

These claims are overblown. 

First off, there’s no assurance at all that corporations will expand their operations and generate jobs and incomes as expected. 

With demand expected to remain anemic in the coming months, most corporations will hesitate to invest and expand just yet. Instead, many might choose to distribute tax savings to shareholders and management, or otherwise invest in financial assets such as stocks and bonds — all of which have little bearing on most Filipinos.

Small businesses, too, will not instantly bounce back because of the lower taxes. Whatever extra cash they can get they will likely use to repay previous obligations — especially those accumulated during the pandemic — rather than expand operations.

Consumer confidence is key: until people overcome their fears of the virus and confidently resume business as usual, revenues will remain weak and tax breaks will not generate huge waves of activity throughout the economy. 

Rather than try to help workers indirectly through corporate tax breaks, government will do much better to put money directly in the hands of workers — through cash transfers, wage subsidies, or zero-interest loans. 

Create will favor big businesses, not small ones

There are also concerns that Create’s tax cuts will redound more to the benefit of large corporations rather than micro, small, and medium enterprises (MSMEs) that need help the most. 

The fate of our economy is intertwined with that of MSMEs, which constitute virtually all firms in the country and employ about 63% of our workforce. 

MSMEs were hit hardest by the pandemic. The Asian Development Bank estimated that, in April and May, about 71% of our MSMEs temporarily shut down, while 66% reported temporary staff cuts. These are some of the highest rates in ASEAN. 

Sure, Create looks progressive enough: while firms in general will enjoy a lower tax rate of 25%, MSMEs — firms with assets no more than P100 million — will enjoy an even lower 20%. Firms with taxable income below P5 million will also just pay the lower 20% tax rate.

But in absolute terms, the differences between tax savings of MSMEs and big corporations can be huge. 

For a small firm earning, say, P1 million yearly, a 10% point tax cut means P100,000 in savings. But for a big corporation earning P500 billion yearly, a 5% point tax cut means P25 billion in savings.

In a press statement, a group of professional economists called Create “a mere tax relief for incorporated businesses, equivalent to a subsidy,” one that “falls short in terms of distributive justice.” Much better to pour economic aid directly into MSMEs. 

Create could turn off, rather than attract, investors

Lastly, Create is meant to “rationalize” the fiscal incentives handed out by government to investors. 

By assigning expiry dates on perks and tying them to firms’ performance, Create aims to discipline firms into greater productivity and efficiency.

But for years now, investors — especially those located in economic zones — have been threatening to pack up and leave for more welcoming investment hubs because of Create. 

Changing the investment rules in the middle of the game signals much policy instability and volatility — a major turnoff to investors, both old and new.

Under Create, the Fiscal Incentives Review Board (FIRB) — chaired by the finance secretary — will also have considerable power and discretion to approve or disapprove tax incentives for investments over P1 billion. 

Economists say this will needlessly add layers of uncertainty and bureaucracy to our already unattractive investment scene. 

To top it all off, removing perks in the middle of a pandemic and a recession — with many firms hanging by a thread as it is — could further nudge many investors to seek greener, safer pastures. 

As of October, investments approved by the Philippine Economic Zone Authority have already dropped by 27% from last year. (READ: Will Duterte’s new tax measure kill foreign investments?)

All in all, for being ill-timed, inutile, inequitable, and inhospitable, it seems Create will create more trouble than it’s worth. – Rappler.com

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations. Follow JC on Twitter (@jcpunongbayan) and Usapang Econ (usapangecon.com).

JC Punongbayan

JC Punongbayan is a PhD candidate and teaching fellow at the UP School of Economics. His views are independent of the views of his affiliations.

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