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Tyranny of the Minority?

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Tyranny of the Minority?

The “tyranny of the minority” is a term not often used. In democracies such as ours, primacy in decision making is given to the majority. But the power of the minority can be very real. Whether by formal or informal political structures, it is the reason that obviously beneficial reforms — such as Reproductive Health or Freedom of Information — can be blocked or at best take decades to pass. It can cause presidents to be elected despite not having a popular mandate.

TRAIN 2, as conceived, is a reform that will reshape our fiscal structures for the better. But like many landmark reforms, it can easily fall prey to the tyranny of the minority.

One of the main features of the second package of tax reform measures is a reduction of the corporate income tax (CIT). The rationale of such a measure is to boost our competitiveness, especially in the context of ASEAN.

Most of our neighbors have each gradually reduced their statutory corporate tax rates in the recent years. As a result, the Philippines has the highest corporate tax in the region at 30%. Singapore has the lowest tax rate in the region at 17% while our often-regarded-counterpart in Vietnam has lowered their rate to 20%.

ASEAN

A lower tax rate lowers the cost of doing business. Firms and its stockholders can enjoy greater returns for every peso invested. This theoretically translates to more jobs and higher wages for employees. However, things are not as simple as a reduction in the CIT benefitting all.

Lowering the corporate income tax rate would also imply a lower tax base for government. A lower tax base means there would be less available resources for government to utilize for social services and infrastructure. It would have to finance its spending through borrowing, which would raise interest rates and therefore crowd out private investment.

While others would argue that a lower tax may not necessarily lead to lower revenue due to the multiplier effect of the boost in businesses and job generation, historical data shows that a lowering of the corporate income tax rate immediately leads to a dip in our tax effort and an increase in budget deficit.

Indeed, when the CIT rate was decreased from 35% to 30% in 2009, the tax-revenue-to-GDP ratio decreased from 13.59% in 2008 to 12.23% while budget-deficit-to-GDP ratio went up from 0.88% in 2008 to 3.72%.

This is an important part of the policy calculus as our tax base is already comparatively low, despite our high tax rate.

Action for Economic Reforms’ initial estimates reveal that if the corporate income tax rate is reduced gradually to 25% in 2023, we would be forgoing nearly P158 billion in tax revenues. To be clear, while a CIT reduction might be a worthwhile endeavor, the government does need the fiscal space to pursue this.

But a greater consideration still is the fairness aspect.

Even though a CIT reduction might theoretically benefit all, our current fiscal incentive structure tends to concentrate benefits to the richest of these firms.

In 2016, there were an estimated 915,726 enterprises in the country. Of that number just roughly 5,000 are enjoying fiscal incentives through tax holidays and preferential tax rates.

The way our fiscal incentives are currently awarded is poorly designed, poorly targeted, and lacking transparency. Government should use incentives to encourage productive investment, and rationalizing our fiscal incentives regime — better targeting, better design, and greater transparency, would be hitting two birds with one stone. It would award incentives to the most deserving firms and promote more productive and equitable investments. At the same time, it would create the fiscal space for the government to pursue a reduction in the CIT.

Some sectors are certainly aware of this and would actively prevent the reform. The housing sector is one that receives generous incentives with the rationale of addressing the country’s housing needs.

Unfortunately, the incentives are structured in a manner that does not address the supply for those who need it the most — low-income families in need of quality but affordable housing. Instead, some housing firms do enjoy the incentives while catering to the upper-middle income market.

Given this, the said sector has one key person in the Senate, representing their interests. A major reform which would benefit over 900,000 businesses could very well be forgone as several members of a powerful minority scramble to protect their own undeserved privilege. But we can still give them the benefit of the doubt.

 

AJ Montesa is a member of the Action for Economic Reforms’ tax team.