Senator Recto’s tax cut plan shadows Reagan, Thatcher, and Trump tax cuts

“Government does not tax to get the money it needs; government always finds a need for the money it gets…. Whenever we lower the tax rates, our entire nation is better off.”

— former US President Ronald Reagan

Tax competition in the ASEAN is real and actual, not fictional. Vietnam and Thailand have corporate income tax (CIT) of only 20% while the Philippines has 30%. Last year, Vietnam and Thailand had merchandise exports that were nearly four times that of the Philippines. In addition, they have graduated CIT rates down to zero or 10%, and their VAT (value-added tax) rates are only 10% and 7%.

Indonesia’s CIT was 25% until 2019, cut to 22% in 2020, and to 20% by 2022. The foreign direct investments (FDI) inward stock (net of FDI inflows minus outflows through the years) in 2019 of Thailand and Indonesia were nearly three times those of the Philippines (see Table 1).

If we further consider Singapore with only 17% CIT and 7% VAT/goods and services tax, the above numbers validate Reagan’s statement that lower taxes result in a better economy, all other things being equal.

In the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill now in the Senate, the plan is to cut the Philippines’ CIT to 25% immediately and further down to 20% by 2027. Fiscal incentives like special CIT (SCIT) and gross income earned (GIE) are also revised.

Now Senate President Pro-Tempore Ralph G. Recto has proposed more liberal fiscal incentives and deeper tax cuts as he sees the degree of tax competition in the ASEAN. To save space, here is a summary of contentions on reforming the fiscal incentives (see Table 2).

With a high CIT even at 25%, high VAT 12%, high withholding taxes (dividends, interest income, and royalties), keeping the 5% GIE (about 3% goes to national and 2% goes to local government) forever is a good compromise.

And tax tax tax lover Action for Economic Reforms (AER) quickly attacked Sen. Recto. In a column “Ralph Recto, the Donald Trump of the Philippines?” (BusinessWorld, Nov. 16, 2020), AER Convenor Men Sta. Ana criticized the Senator that he “does not grasp the idea of taxes being a creator of wealth.”

“Taxes being a creator of wealth,” this formulation is next to socialistic thinking. If the illogic is extended, it would say that more taxes mean more wealth creation, a dangerous invitation for tax-hungry legislators, bureaucracies, and welfare-dependents out there.

The Senator also proposes two-tiers of CIT. Tier 1, companies with total assets not over P100 million, their first P5 million taxable income will pay only 20% while profits above P5 million will be taxed 25%. And Tier 2, companies with total assets over P100 million will also pay 25% CIT. That 20% CIT proposal is very good.

Furthermore, the Senator proposes other liberal provisions: 1.) raise the threshold VAT exemption on housing for residential lots from P1.5 million to P2.5 million, and for house and lot from P2.5 million to P4.2 million; 2.) suspend the minimum CIT (MCIT) from 2020 to 2022 and cut rate from 2% to 1% from 2023 onwards; and, 3.) just 1% income tax for private, non-profit educational institutions and hospitals for three years.

Good proposals by the good Senator. So is he the “Donald Trump of the Philippines” as sensationalized by AER?

To help answer this question, consider two other leaders.

Ronald Reagan was the President of the United States from 1981 to 1988. The integrated tax rates on corporate profits as computed by the Tax Foundation (US) was 88.7% in 1981, he immediately introduced tax cuts and it went down to 79% in 1982, 59.6% in 1988 at the end of his second term.

Margaret Thatcher was Prime Minister of the United Kingdom from 1979 to 1990. The integrated tax rates on corporate profits in the UK was around 83% in 1979, she later introduced tax cuts and it went down to 68.6% in 1984, and further down to 47.2% in 1990 at the end of her term.

From 1981-1988, the average yearly GDP growth of the US was 3.5% and the UK was 3.3%. In contrast, their neighbors grew slow over the same period: Canada 3%, France 2.2%, Italy 2.1%, Germany 1.7%.

Donald Trump is the first US President to continue Reagan’s tax cut. Trump inherited the high CIT 35% in 2017 and introduced tax cuts to 21% by 2018. From 2017-2019, the average yearly GDP growth of the US was 2.5%, higher than fellow rich countries with no tax cuts: Canada 2.3%, France 1.9%, the UK 1.6%, Germany 1.5%, Japan 1%, Italy 0.9%.

The Senate and later the Bicameral Committee should consider deeper tax cuts, more liberal and longer fiscal incentives in crafting a future CREATE law. These will help attract more investors and keep those who are already here.

Bienvenido S. Oplas, Jr. is the president of Minimal Government Thinkers

minimalgovernment@gmail.com