OVER the weekend, the incoming Duterte Administration—not the man himself, who was busy burnishing his Neanderthal credentials, but one of those who will do the real heavy lifting, his designated Finance chief Carlos Dominguez—poured cold water on two prized late-term ideas of Gang Aquino.
The first was the proposed merger of the government-owned banks LandBank and Development Bank of the Philippines, which Dominguez dismissed in rather colorful terms as unnecessary and ill-considered; we’ll come back to that topic in a different column. The second, more significant item was Dominguez’ rejection of a key part of the detailed Comprehensive Tax Reform Program floated by outgoing Finance Secretary Cesar Purisima a couple of weeks ago.
Purisima’s program, which seemed less like a sincere attempt to present real tax reform alternatives than it did an exercise in self-promotion on the part of Purisima, the political chameleon, would cut income taxes, but raise other taxes—most notably the value-added tax (VAT) to compensate for the lost revenue. Under the plan, tax brackets would be narrowed a bit and shifted up the income scale, while a new fuel excise tax and an increase in the VAT from its current 12 percent to 14 percent would make up for the reduction in revenue; in fact, if fully carried out, Purisima’s reform plan would actually increase government revenue by something between P165 billion and P531 billion after the first year.
Dominguez, in comments that were politely expurgated from most media reports, called the program (which doesn’t even have an original name, borrowing one that was first used in 1997) a “joke,” and said he was “appalled” by it, in part for the most obvious reason, that the Aquino Administration sat on their hands for six years before rushing to publish a large-scale proposal in their last 40 days in office. Although acknowledging, somewhat grudgingly, that he and his colleagues in the Duterte team would review and consider Purisima’s suggestions, Dominguez emphatically dismissed the suggestion that the VAT should be raised, characterizing it (accurately) as a regressive tax, and pointing out that raising it would actually undermine the whole purpose of tax reform.
Even though Purisima’s proposal had some flaws—and the suggestion to raise the VAT may have been one of them—and even though Purisima may have made the proposal with considerations for his own bureaucratic future in mind, Dominguez should not have rejected it so quickly, because his doing so now puts what has become an aspiration of a huge majority of Filipino taxpayers and businesses at risk of being delayed even longer, perhaps for as long as the next six years.
The reason why the Purisima plan should be considered is that, even if it was presented with some ulterior motive, it is based on ideas that have been developed over a period of nearly 20 years. Whether Dominguez or the goblin he works for realizes it, the Purisima plan, specific flaws notwithstanding, was developed from and in response to the existing taxation framework. Scrapping it entirely and starting from scratch, which was the implication of Dominguez’ lukewarm statement that the new Administration would “consider” it, will waste a great deal of time and effort already spent. It will also subject any new proposal to the full force of dissent from influential parties like the IMF, which has already had more to do with Philippine taxes remaining as high as they are than anyone in any of the last four administrations is likely willing to admit.
While business and economic observers are relieved that Duterte has chosen competent advisers like Dominguez and especially Ben Diokno as Budget Secretary, how much they will be able to influence their hard-headed chief remains to be seen, particularly in the absence of a well-developed alternative plan to what Purisima has proposed. Duterte is clearly even less inclined than his predecessor to listen to advice, and clearly has a much more forceful personality, which suggests two unpalatable possibilities: Either he will ignore the issue of tax reform, which will effectively prevent any progress from being made; or he will take an interest in it, which will likely result in a heterodox proposal acceptable to no one.
Those who have been here for some time have seen this before: The grand concept that is full of promise at the beginning of a political term, and fades to a dim memory before the end of the first legislative session. We hope that is not the case with tax reform, but given that the focus of the new Administration definitely appears to be on non-economic matters, we may be hoping in vain.