We have been running an “Adopt a Child in Marawi” for almost a year. But the COVID 19 crisis brought the program to the backburner. Our attention has been focused on protecting ourselves, our families, and our communities from the virus. But Jonas, a nurse from the US brought back the poor from Marawi into our radar. He sent his adopted child Hannifah P6, 000 and adopted two more children. He reminded us not to forget the thousands who have been left behind because of the crisis.
So within this context, I looked at the proposal of government to reduce the corporate rate, to rationalize the tax incentives, and to lengthen the period to allow firms to “carry forward” or deduct the losses they incurred.
Paying the corporate tax is perhaps the least concern of small enterprises. Only 19% of them are organized into corporations, and a great majority, 64%, are owned and run by individuals, i.e. sole proprietors. About 17 percent are organized as partnerships. And what is interesting is that 44% of them are run by females. They have had no income for over 2 months, and will incur more losses in the coming months. They have lost their customers, demand for goods and services will be weak, and the supply chain has not normalized. They have been required by government to make sure that their employees have been tested for the virus and to provide them with transport services. Is the grant of a tax cut the answer to their problems? Do they need tax incentives? I think even my students in Public Finance will answer no. A fiscal stimulus package is a lame response to what the economy needs. A group of UP economists cannot agree more. A public health issue cannot be addressed by a fiscal stimulus.
We are grateful for the fiscal health that government has given to the economy. Revenues have increased and the debt to GDP ratio has decreased to 39.6%. So, there is enough fiscal space for government to spend by monetizing the deficit. It can raise more funds by issuing government bonds and securities which the Central Bank can purchase.
True, billions have been appropriated to provide a lifeline to the vulnerable. But much, much more needs to be done. For one, we are falling short of providing an efficient random testing especially for people in the countryside. People must feel confident that they can go back to their work and worship in churches without feeling paranoid. They must have proofs that their children will be safe in schools. We hate to think of principals and teachers scrimping for fund once more to have their schools regularly sanitized, to reconfigure the classrooms for physical distancing, provide children with masks and sanitizers, and reproduce instructional materials for those with no access to internet. The lack of funds was a perennial problem of schools in the past. We hope that this will no longer be under the new normal. Children need access to adequate sanitary facilities and water supply; otherwise, their health will be placed at a greater risk.
Experience proves that corporate tax cuts do not help the poor and tend to be pro-rich. US corporations used the income that has been spared from taxation in increasing the salaries of their executives, broadening their capital base, and buying more shares to gain greater control of their corporations.
What can prove to be a tremendous help is a temporary cut in the VAT rate. It would reduce prices and make goods and services, such as medicine, transport, water, and electricity more affordable. This is an unthinkable proposal from someone who was part of the team that formulated the VAT in 1988. But extraordinary times need extraordinary solutions. Thailand that was hit hard by the 1997 financial crisis bit the bullet and reduced the VAT rate from 10% to 7%. The tax cut was so successful in stimulating the economy and restoring confidence in government that the tax relief that was meant for only two years was extended until 2017. Another pro-poor tax relief is considering assistance to employees, workers, and the very poor as a tax credit instead of a tax deduction. This means that the assistance that a taxpayer gives to the needy is considered equal to a tax payment.
Now is the time to think of subsidies, zero-interest loans, tax deferment, and technical assistance to small businesses. Cash transfers are integral part of a short-term recovery program. But government needs to put in place a long term program that includes food security, an efficient supply chain, and an adequate health care.
A safe and a healthy populace is the biggest investment that the government can make.