The Philippines needs to reform its tax policy and administration to generate the kind of revenue required to remedy its decades-old investment deficit in infrastructure, health and education, a senior economist said in the recent report released by the World Bank.
Economists and recent financial reviews on the Philippines have often referred to the country’s underinvestment in infrastructure as a major reason for the weak inflow of direct investment from China and the west.
“Historically, the Philippines underinvested in physical capital, and even more so in the last 10 years,” Karl Kendrick Chua, World Bank senior country economist, said in the lender’s latest update on the Philippines.
Chua specified the lack of long-term investment infrastructure and education in the Philippines as he compared the country with its neighbors in the Association of Southeast Asian Nations.
To date, the Philippines’ investment gap amounts to about 6.8 percent of its gross domestic product (GDP). In particular, the shortage of investment in infrastructure is equivalent to 2.5 percent of GDP while that for social services stands at 4.3 percent of GDP, Chua said.
These investment gaps manifest in monstrous traffic, flight delays, and delays in importation, he said.
In contrast, the country could generate revenue equivalent to 3.8 percent of GDP or about P530 billion from improved tax administration, as well as better accountability and transparency, the World Bank said in the report.
That would still need additional tax revenues equivalent to 3 percent of GDP, or about P420 billion, to fulfil the 6.8 percent of GDP required to finance the infrastructure investment gap as estimated.
“The current system cannot raise that revenue because the system is quite complex, inequitable, and inefficient. So there needs to be a lot of thinking about how we can make our tax system simpler, more equitable and more efficient,” he explained.
In its Philippine Economic Update, the World Bank suggests that tax incentives should be rationalized by making them more targeted, transparent, performance-based and temporary.
“This should include the timely release of a tax expenditure statement, which enumerates all existing tax incentives and who benefits from them,” it said.
Tax rates and valuations that have not kept up with inflation should be adjusted to improve the equity of the tax system, it added.
For instance, the Washington-based lender noted that taxes for petroleum excise and property valuations have not been updated for decades.
“Rapidly falling oil prices provide an opportunity to adjust petroleum excise taxes to make the tax system more equitable. This should be enacted with utmost urgency,” it said.
Furthermore, the World Bank noted that only when new revenues are raised should reform to reduce tax rates be considered.
Such reform includes: lowering the top marginal income tax rate to 25 percent; reducing the gap between regular and special corporate income tax rates; and simplifying the tax regime for micro and small enterprises.
The lender said that for tax policy reform to be successful, changes to improve the transparency and accountability of government spending and to strengthen tax administration are essential.
These would allow the public to make a clear link between taxes and public services, the report said.
The World Bank cited the passage of the freedom of information bill as a key reform needed to institutionalize “open data,” which means making government data publicly available in user-friendly forms.
Lastly, the lender said enhancing budget reporting to allow the public and the government itself to track spending from appropriations to results on the ground is a key reform to institutionalize.