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Too soon to assess tax reform

ONE of the biggest handicaps of media-driven democracy is that demands instant gratification. A policy move made today had better produce results of one sort or another that can be discussed tomorrow, or else uncertainty and dissatisfaction begins to grow.

Unfortunately, there are very few areas in which near-real time results are possible or even desirable, and economic policy is certainly one of them. Impatience to impart some kind of political justification for either pursuing or resisting a policy leads to bad conclusions; assumptions that more often than not mistake correlation for cause, which, if acted upon, can result in good policies being derailed or bad ones being left unrepaired.

The best example of this in this country at the moment is the Duterte administration’s vaunted tax reform program—the one with the pa-cute acronym that I refuse to acknowledge, because serious economic policy shouldn’t sound like something the student council came up with in a weekend group chat. The first package of this multi-stage fiscal reform plan has been in force for barely a quarter, and yet both its proponents and critics have ascribed all sorts of consequences to it, and already passed judgment on its success or failure.

The government’s assertion has been a fairly consistent one since the tax reform plan was first announced, even before President Duterte formally took office: The adjustments to the structure of income and various excise taxes would make the entire tax regime more equitable, increase government revenues, and provide the majority of Filipino families with more disposable income. All of that would provide the funding necessary for the government’s ambitious infrastructure development goals and other important programs, encourage job creation, and expand consumer spending, which all together would accelerate growth of the economy and reduce poverty incidence.

Those who have dissented against the tax reform plan—as a strictly personal observation, I think that the Ibon Foundation has, as it typically does, expressed the opposing view with the most clarity and evident rigor—argue that the measures will do more harm than good. Those who will benefit most from increased government investment and economic expansion are the privileged classes and big business, while the poor and near-poor will be faced with steadily eroding buying power from tax-driven higher prices, which any advantage gained from lower income taxes will be insufficient to compensate for.

One or the other of those viewpoints may be correct, or both may be partly correct. From the outset, the point at which the reform program was formally authorized by the legislature and implementation of it could begin, both of those viewpoints had the nature of hypotheses: “This is what we believe will be the result, and this is why we believe that will be so.” There’s nothing wrong with that; after all, that’s how planning is done.

The problem with that approach applied to public policy, however, is that the natural second part of it—“…and now we will test our assumptions, to see if they are actually correct”—takes too long to be of value to markets and a public with short attention spans, whose information about the world and the activities of their leaders is fed to them by a news cycle measured in seconds. Thus, every partial result or even simple correlation is seized upon as a conclusion.

Ibon Foundation’s clarity in expressing their views—in this instance, they are perhaps hoist with their own petard—provides an illustrative example. Early last month, after the release of the January inflation figures, Ibon posted a statement attributing a considerable part of that month’s 4 percent inflation rate (up from 2.7 percent a year earlier, and at that time the highest inflation rate since October 2014) to the increases in taxes on fuel and sweetened beverages, among other things, that were implemented when the tax reform program was launched on January 1.

That was probably true in a literal sense even though the government discounted the effect of new taxes on inflation, instead blaming oil prices and the depreciation of the peso. The problem is that the observation is unquantified, and might have been unquantifiable; that applies to the government’s counter argument as well.

Yes, some prices obviously did increase because of additional taxes, but without a context or clear metric, no objective conclusion can be drawn from that; certainly not one as broad as “the majority of poor Filipinos are going to feel even greater burdens once the domino effect of TRAIN starts impacting on prices all across the economy.”

The government for its part does much the same thing—drawing conclusions from one or two factors—but with much less effort towards justifying them. Commenting on data that showed markedly increased government collections and spending in the first quarter of the year, the Department of Finance simply said the government’s tax reform and infrastructure investment programs were “working as planned.” That may be, but again, there’s no benchmark or context for the data, and thus no clear connection—other than Finance Secretary Carlos Dominguez 3rd saying so in a text message—between the data and the conclusion offered. Particularly not with the existence of other indicators, such as lower foreign reserves, inflation that is so far consistently running higher than estimates, and a larger budget deficit, that may or may not eventually contribute to a different conclusion.

The bottom line is that any pronouncements, favorable or unfavorable, about the impact of the tax reform program will not have a useful grounding in facts until the program has been in place for an extended period of time, probably an entire budget cycle, or a full year. At this point, just three months in, new taxes on some products and reductions in taxes on most incomes have not even had a chance to cycle through the entire economy. Many manufacturers, for instance, are still using up pre-tax change inventories of supplies; and many businesses like airlines and shipping companies that routinely hedge fuel costs have not yet reached the end of their arrangements made prior to the increase in fuel excise taxes, which they all knew were coming well in advance of their implementation.

Therefore, any assertions about whether the tax reform plan is “working” or not working, or will have beneficial or detrimental effects should be taken with a grain of salt. Come back next January, and see how things have worked out; that will be the time, if expectations have not exactly been met, when valid conclusions can be drawn and any needed changes made.


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