Yellow Pad

By Filomeno S. Sta. Ana III and Arjay Mercado


In a press statement, Action for Economic Reforms (AER) described Senator Ralph Recto as the Donald Trump of the Philippines. AER said that Sen. Recto behaves like President Trump: Trying to impose his will and having his way in shaping CREATE (Corporate Recovery and Tax Incentives for Enterprises). AER criticized Recto for delaying CREATE’s passage and for insisting on a position that perpetuates tax incentives for some exporters.

Sen. Recto reacted and said: “They [AER] got it wrong…. we are creating, not disrupting, [to] make the Philippines great again…. Our job is to create wealth. Please explain to all idiots.” (The quotation is sourced from Business Mirror’s story “Recto gets flak from AER for CREATE tweaks, but foreign business groups back him,” Nov. 14, 2020.)

Isn’t Recto’s statement very Trump? His “make the Philippines great again” echoes Trump’s “make America great again.” That phrasing is also similar to Ferdinand Marcos’s campaign slogan before he became dictator: “This nation can be great again.”

Recto’s use of coarse language — “explain to all idiots” — is, again, very Trump.

Sen. Recto seems to suggest that all those who disagree with him on keeping incentives forever are idiots. So AER is not the only idiot. So are the economic managers and the former Finance Secretaries, the economists, technocrats, academics, businessmen, civil society leaders, etc. who support the reform and who disagree with Recto.

But we assure Sen. Recto that AER is not hurt at all by his labeling. To be called an idiot by the Donald Trump of the Philippines is a compliment.

So now, let the idiots correct Senator Recto.

Recto, it seems, does not grasp the idea of taxes being a creator of wealth. A high level of tax effort is necessary to have macroeconomic stability, which in turn will be conducive for increased investments and jobs and hence increased wealth. Tax revenues are necessary to finance infrastructure and human development, which will make our industries and our labor force more productive.

On the other hand, forgone revenues arising from unjustified, unnecessary incentives constrain development financing and hence impede wealth-creation.

To provide some perspective, the government’s estimate of forgone revenues from 2015-17 amounted to P1.12 trillion (source: Department of Finance). The biggest chunk, P879.1 billion, went to firms registered at the Philippine Economic Zone Authority (PEZA). Such an amount would have gone a long way, for example, in fighting COVID-19 and in enabling the stimulus package.

Recto is right that wealth is still accumulated from tax incentives, but this wealth accumulation benefits vested or particularistic interests, not society at large.

In truth, a significant number of tax incentives are unnecessary or redundant. They are redundant because even without the tax incentives, the investments would have still been made. This is validated by a counter-factual study of the Department of Finance (DoF), showing that firms not enjoying incentives are performing at par with the fewer registered firms that get the incentives.

In general, says the DoF, registered firms (those enjoying tax incentives) when compared to non-registered companies, “have the same employment relative to size, have similar average wages, but pay top management higher, spend more on fixed assets but do not spend higher on R&D, and have the same level as exports relative to sales.” Moreover, no difference in productivity is observed between the registered and non-registered firms.

Yet, despite the evidence, Sen. Recto wants the status quo preserved by having an amendment that will exempt PEZA firms from the new law or have a grandfathering clause wherein the old rules would still apply to these firms. The concept of grandfathering means that despite the new law making tax incentives time-bound and subject to rigorous economic criteria, the Recto amendment, if passed, would still allow some ecozone locators, especially those registered at PEZA, to enjoy incentives in perpetuity. In essence, the Recto proposal is going to kill the very essence of the reform.

Recto has consistently resisted tax reforms; again this is Trumpian. He diluted the reforms to adjust the mildly progressive excise tax on fuel and to rationalize the value-added tax (VAT), which were main components of the 2017 TRAIN (Tax Reform for Acceleration and Inclusion) law.

And he has always sided with the tobacco industry on taxation matters. The questionable concept of “grandfathering” that Recto wants for his favored exporters has been a ploy used by other vested interests as well, especially the tobacco industry.

This type of grandfathering perpetuates favors for the few by exempting them from new rules. In the case of tobacco, the legacy brands enjoyed lower taxes for a long time because of a grandfathering clause, which in this case was called the price classification freeze.

Senators like Recto and Bongbong Marcos attempted to block the tobacco tax reform during the Aquino administration. Recto, who then served as Chair of the Senate Ways and Means Committee, exhibited rashness when he rejected the reform bill that went through thorough deliberations and replaced it with a Committee report that mimicked the position of Philip Morris Fortune Tobacco Corp. This led to an upheaval.  The health professionals and civil society advocates branded Recto as “Recto Morris” for favoring Philip Morris, and they called for Recto’s resignation as the Chair of the Ways and Means Committee. In the face of popular pressure, he resigned.

We doubt whether Sen. Recto has learned lessons from past episodes of tax reforms. What we can say is that Senator Recto has evolved from being “Recto Morris” to being the Donald Trump of the Philippines.

Filomeno S. Sta. Ana III is the coordinator of Action for Economic Reforms (AER) and Arjay Mercado is the team leader of AER’s tax reform team.