THE proposed reduction in corporate income tax, coupled with the overhaul of the fiscal incentive system, will help reduce poverty by at least 4.9 percentage points, create jobs and attract foreign investments, a study commissioned by the Labor department showed.
In a statement, the Finance department said lower corporate income tax and the modernization of fiscal incentives will boost the employment rate across all sectors and reduce poverty incidence, citing the study “The Potential Economic Effects of Reducing Philippine Corporate Income Tax and Reforming Sectoral Incentives.”
“Any reduction in corporate income tax needs to be accompanied by a compensatory sector tax (referring to the reforms in fiscal incentives) for the reduction to be growth-enhancing, employment generating and poverty reducing,” the Department of Finance said, quoting the study.
The study was conducted by Caesar B. Cororaton, a research fellow at the Virginia Polytechnic Institute and State University and Marites M. Tiongco, a professor at the De La Salle University (DLSU) School of Economics, before the coronavirus pandemic. It was based on the Corporate Income Tax and Incentives Rationalization Act (CITIRA) bill’s provision that sought to gradually cut the current 30% corporate income tax to 20% over a 10-year period.
However, since the pandemic started, the CITIRA has been repackaged as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). CREATE, which is still pending at the Senate, seeks an immediate corporate income tax cut of 25%, which would then be lowered to 20% by 2027.
Sought for comment, Labor Secretary Silvestre H. Bello III said the reduction in corporate income tax and the rationalization of fiscal incentives would create over a million jobs in the next decade.
“Yes, potentially the decrease in corporate tax will yield some 1.4 million jobs in 10 years and will rationalize any corporate incentive to performing corporations only and cannot be accessed perpetually. Also, the decrease in tax will allow companies to allocate that money to hiring more workers,” Mr. Bello said via Viber on Sunday.
The study showed if the corporate tax rate was lowered to 20% without rationalizing the incentive system, the deficit would rise to 4.3% by 2029. It also noted employment and real wages would drop, while poverty incidence would increase.
“Corporate income tax is a major source of government revenue. Reducing this source could put a lot of pressure on government finances. Increasing taxes on select sectors to reform the fiscal incentives reduces the pressure on government finances,” it said.
If the savings from a lower corporate tax rate will be fully reinvested in the country, the study estimated up to P1.08 trillion of new investments will be generated by 2029 when the rate is lowered to 20% as originally proposed. Under this scenario, 212,000 more jobs will be created this year or up to 2.3 million by 2029. It said GDP growth could also reach 8.2% in 2029.
The study also showed inflow of foreign direct investments (FDI) could reach P1.75 trillion by 2029, noting that the “reduction in prices is higher under this scenario as the inflows of FDI expand the aggregate supply in the economy.” It also assumed that the government would cap its budget deficit at 3.2% of gross domestic product and fully implement the “Build, Build, Build” program.
Since the study was done before the pandemic, UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion stressed the need to be cautious in interpreting the data now since the coronavirus pandemic has dealt a serious blow on the economy.
“The original simulation results may look different taking into account these potential damages. Looking at the economy, in employment specifically, there may be jobs in certain sectors that may or may not come back any more. Some jobs may be slow to come back as well. Thus, we must be careful in the interpretation,” Mr. Asuncion said via e-mail on Sunday.
He said the measure still has a “positive impact” and an “essential part of the bumpy road to economic recovery.” — Beatrice M. Laforga