Tax reforms critical, economists say

The next administration should prioritize tax reforms to shore up revenues that can be used to boost growth, economists and a Cabinet official said on Wednesday. Speaking at a forum held at the Makati Shangri-La, Finance Secretary Margarito B. Teves called for a higher value-added tax (VAT), lower corporate and income taxes, and approval of reforms such as the rationalization of fiscal incentives. The same proposals were aired by University of the Philippines economists — some of them former Cabinet officials of the previous administration — in a separate gathering a few blocks away. "We have a declining revenue base due to [the] crisis and tax-eroding measures. There is an increased pressure on the deficit [since the] government needs to sustain expenditures," Teves said. The ongoing El Niño weather pattern, power crisis, as well as volatile commodity prices are also threatening growth, he added. "The next government must support the passage of revenue enhancement measures," Teves said. The Finance department has been critical of revenue-eroding measures passed by Congress during the Arroyo administration, among these exemptions for minimum wage workers and other groups. Teves said the VAT should be raised to 15 percent from 12 percent, along with a corresponding cut in corporate and income taxes. He also said the next Congress should approve bills rationalizing fiscal incentives, restructuring excise taxes on tobacco and alcohol products, and simplifying net income taxation. The first measure could generate P8 billion, the second P20 billion, and the last P5 billion. Meanwhile, at a nearby forum sponsored by Ayala Corp., UP economists said tax reforms — given the long-standing fiscal shortfall — were critical. Former Budget Secretary Benjamin E. Diokno suggested broadening the tax base by gradually cutting the tax burden on corporations to 18 percent from 30 percent, while rationalizing fiscal incentives. He also sought an increase of the VAT rate to 15 percent, to be synchronized with a flat personal income tax of 18 percent. Excise taxes on cigarettes and liquor should also be reformed with a bias for an ad valorem tax system, Diokno said. Containing the fiscal deficit to 3-5 percent of the gross domestic product (GDP) through a combination of tax hikes and spending cuts were "needed to keep the economy on a modest to high growth path," he said. "But with large underspending in public infrastructure and social services in the past, a large part of the adjustment has to come from raising taxes," Diokno told the forum, which tackled economic issues that the next administration should focus on. Felipe M. Medalla, a former socioeconomic planning secretary, said increasing fuel rather than income tax is makes more sense. "More costly fuel is more advantageous as it does not only improve traffic but it also reduces pollution," he said. Both Medalla and Diokno were Cabinet officials during the Estrada administration. Economist Arsenio M. Balisacan, for his part, said: "Any increase in taxes must also mean extending conditional cash grants to the poor to protect them from getting hurt." Economist Raul V. Fabella said the next administration should target average growth of 6 percent for 2010 to 2020, achievable provided that the investment rate was raised to a quarter of GDP from 15 percent in the last five years. "To reverse the stemming slide, the next administration should target a 6-percent annual average growth for 2010 to 2020. Only then that we could expect poverty incidence to be reduced to 10 percent by 2020 from the current 33 percent," he said. Fabella also sought higher infrastructure spending to attract foreign investments. "The capital outlay for 2010, which is only $180 billion, accounts for 2.3-2.5 percent of our GDP when we actually need a higher 4 percent. That means that we have an over $200-billion lag," he told BusinessWorld. As this developed, the Bureau of Internal Revenue (BIR) on Wednesday said it had beaten its first quarter target, but warned that the April goal would not be met. "We are still on track [for] the ceiling of P110.9 billion for the first quarter," Teves said. He called for better pay at the main revenue agencies, the BIR and Bureau of Customs (BoC). "We consider the BIR and BoC as profit centers but the compensation for the tasks being performed is low." The government expects the deficit to hit P293 billion this year or 3.5 percent of GDP after reaching a record P298.5 billion last year. Data for the first quarter fiscal performance is expected to be released on April 21. Multilateral lenders have said the Philippines would be joining the rest of Asia in a sustained recovery this year. They noted, however, that the country would lag its peers given the weak tax take and anemic investments. The Asian Development Bank has forecast Philippine growth of 3.8 percent this year, while the World Bank’s estimate is 3.5 percent. The government is targeting growth of 2.6-3.6 percent, up from last year’s 0.9 percent. — BusinessWorld