TRAIN 2 and The Fatal Conceit

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

— Friedrich August von Hayek

In a previous column, “My problem with Train 2,” I criticized the Tax Reform for Acceleration and Inclusion Package 2 (TRAIN 2) for lumping the biggest foreign exchange earner in the country, the BPO industry, together with those who have abused tax incentives.
I also said that already saddled with government regulations that make labor very expensive, such as numerous holidays and increased SSS pensions, the BPO industry will suffer from uncompetitive tax rates and will likely and easily transfer business to other countries.
From paying a simple to follow 5% of gross income tax, TRAIN 2 would want BPOs to pay 25% of net income, which would be a financial shock and subject the industry to harassment from the Bureau of Internal Revenue.
In fact, until now, I haven’t gotten any response to a point I raised in my previous article: how on earth would the BIR audit transactions that take place over the Internet?
However, there’s another problem with TRAIN 2.
It would not only phase out all existing tax incentives but would centralize approval of all incentives in a superbody called the Fiscal Incentives Review Board (FIRB), dominated by the Department of Finance (DoF). This means that all companies seeking incentives must do a song and dance before the FIRB and, like a Roman emperor, the FIRB will give the applicant a thumbs up or down, based allegedly on whether the applicant has “new” technology, is big enough, or its projects are in accordance with the government’s plan.
This is an example of industrial policy gone amuck: a fatal conceit of government determining winners and losers. It’s downright crazy, if not hilarious. The government able to appreciate “new technology?” LOL. Even the LTFRB didn’t know about ride-sharing apps when it hit them.
It’s still trying to over-regulate the ride sharing industry and closed down Angkas, a ride-sharing app for motorcycles, which was doing a public service by legalizing “habal-habal.”
History shows that the Philippine government is incompetent in picking winners, and even creates losers. Jollibee, our lone national champion, didn’t grow because of incentives (I don’t think they got any) but because it faced competition in the fast food industry, which had little barriers to entry.
On the other hand, the Board of Investments then under the Department of Trade and Industry was creating oligopolies by prescribing “measured capacities.” In other words, the government would cease giving incentives beyond what it determined to be the proper balance between supply and demand. New entrants were not welcomed.
The DoF must be drinking the Japan and ADB Kool-Aid on industrial policy. However, even Japan’s record with industrial policy is questionable. Japan’s MITI (Ministry of Trade and Industry) famously snubbed Sony in consumer electronics and Honda in car manufacturing.
Besides, what’s Japan’s record in industrial policy to date? It has no internet champions like a Google, Microsoft, Amazon, Tencent, or Alibaba. Its companies fell behind Korea’s Samsung in digital electronics. Mobile phone technology is dominated by US firms, Apple and Google. Its car industry faces irrelevance with the advent of autonomous and electric vehicles.
There’s also the likely risk that industrial policy will be politicized.
Look at the US. President Donald Trump is protecting sunset industries such as steel and coal. Yet, his immigration policy is hurting US champions, such as Google, Facebook, and Microsoft, which rely on talented immigrant engineers to innovate and grow.
However, I do believe in industrial policy, but not the kind where government throws money at “winners.”
To my mind, effective industrial policy is determining the constraints of each industry and doing something about them.
For example, the real constraints to the tourism industry are lack of infrastructure and peace and order. Tax incentives to hotel operators and multimillion-peso promotional projects like Ms. Universe and Buhay Carinderia are a waste of the people’s money.
Or, as another example, take the agriculture industry. It suffers from high shipping costs and port costs due to monopolies in those strategic downstream sectors. It also suffers from a restrictive land market due to Comprehensive Agrarian Reform (CARP) regulations.
The government should do something about these constraints instead of deluding itself that it can create agribusiness winners through an incentive-giving superbody.
The government wants to create winners in the Internet industry? It should foster more competition in the telco industry and reduce broadband prices.
In contrast, the BPO industry is already a champion, a big generator of foreign exchange and generator of employment. How did it arise? It arose when the government started deregulating the telecommunications industry and dismantled PLDT’s monopoly.
In other words, it’s broad government policies that create champions, not the arbitrary decisions of government about who are the winners and losers.
Moreover, it fostered the industry’s growth by insulating it from the corrupt and inefficient Philippine bureaucracy through the simplified taxes and regulations of the Philippine Economic Zone Authority. Sadly, because of the BPO industry’s success, the government wants to punish it with more taxes and subject it to BIR harassment under TRAIN 2.
Don’t get me wrong. Fiscal incentives have to be rationalized. But too many companies, from renewable energy companies, gaming companies, to social housing developers, are abusing them. There are also too many incentive-giving bodies giving away incentives left and right. However, two wrongs don’t make a right. TRAIN 2 commits another wrong by creating a superbody to centralize all incentives.
If it were up to me, I would abolish all income tax holidays and other incentives that need a bureaucracy to approve them.
Instead, I would have a system of reasonably low and simple tax system that’s universal and easy to follow. I would raise the gross income tax to 8% for export-oriented industries or give companies the option to choose a 22% (the Asean average) net income tax system.
Under the net income tax system, to encourage employment, I would give a double deduction for employment and training expenses without having to get approval from the FIRB.
As former Socioeconomic Planning Secretary Philip Medalla said, we tax employment via high food costs, the NFA rice monopoly, restrictive labor rules, numerous holidays, and high payroll taxes. (This is why employment-intensive industries, such as garments and light manufacturing, have fled the country). So, why don’t we give employment-intensive companies a break by allowing double deductibility of manpower and training expenses?
For start-ups, I would just give a 7-year net operating loss carryover, instead of income tax holidays.
The beauty of my proposal is that it simplifies tax computation and compliance. It minimizes the exercise of discretion by an incompetent or politicized bureaucracy. No song and dance needed.
Aside from the assumption of an all-knowing bureaucracy, TRAIN 2 creates a superbody that may be subject to palakasan and corruption.
“Honey will attract flies,” if I may again quote former Socioeconomic Planning Secretary Philip Medalla. By giving the superbody so much power, TRAIN 2 makes the superbody vulnerable to political influence and corruption.
The Department of Finance should know better.
While the DoF is one of our most competent and honest government departments, it’s not immune to corruption, especially if it’s vested with too much power.
In 2009, the Ombudsman charged DoF officials, headed by former Assistant Secretary Antonio Bellicena, of the One Stop Shop InterAgency Tax Credit and Duty Drawback Center, with plunder. The One Stop Shop was in charge of issuing tax credit certificates (TCCs) for taxes paid on raw materials by BoI-registered firms. The Ombudsman charged them for issuing TCCs even to unqualified companies.
As a further sign that too much power could lead to corruption, Resorts World arsonist and gunman Jessie Carlos, who engaged in his gambling habit and went into debt while working as a tax specialist in DoF, also came from this One Stop Shop.
Let me state, however, that I have the highest respect and admiration for the current DoF officials, particularly Secretary Sonny Dominguez, Usec Karl Chua, and Asec Tony Lambino. I know that they only want to ensure that incentives are performance-based and limited in duration.
However, the idea of a superbody determining winners and losers, which will survive them, is all wrong.
To sum up: two wrongs don’t make a right. Pass Train 2 but amend it.
 
Calixto V. Chikiamco is a board director of the Institute for Development and Econometric Analysis.
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