Angelo Taningco
Economist, Treasury Group
The Department of Finance (DOF) has submitted to the House of Representatives the second package of its Comprehensive Tax Reform Program (CTRP). This package aims to be revenue neutral by cutting the corporate income tax (CIT) rate to 25% from 30% and to “modernize” fiscal incentives. We empirically found that lowering the CIT rate would raise GDP per capita growth, suggesting that this tax reform package can help promote faster economic growth and thereby improve the country’s standard of living.
The Philippines has one of the highest CIT rates in ASEAN at 30% versus the regional average of 23%. But its tax collection from corporations is one of the lowest in the region—amounting to only 3.7% of GDP as opposed to Malaysia’s 6.5%, Thailand’s 6.1%, and Vietnam’s 7.3%, according to the DOF—suggesting inefficiencies in generating tax revenues from the corporate sector. Moreover, the country offers fiscal incentives (ex. income tax holidays, special rates, value-added tax exemptions) that are comparable to its ASEAN peers. However, the DOF has estimated that fiscal incentives cost about P301 billion per year (2% of GDP) in terms of foregone government revenues. Also, we observed that fiscal incentives are not enough in attracting FDIs.
Economic theory and evidence have documented a significant relation between tax structure and economic growth. According to studies, changing the tax structure by lowering the CIT rate would generate an investment boom and harness entrepreneurial activity that in turn would translate to faster economic growth. We provide empirical evidence for the Philippines by using annual data spanning the 1980-2016 period. We found a negative correlation between the country’s GDP per capita growth rate and its top CIT rate (coefficient: −0.50). Moreover, when we conducted a regression analysis with GDP per capita growth as the dependent variable and the CIT rate as the independent variable, we found a highly statistically significant negative relation between the two, consistent with the theory and evidence. Thus, we believe that passage of this tax reform package would be pro-growth for the Philippines.
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