Abolish the fiscal perks!

THE controversy regarding the granting of fiscal perks by the Board of Investments (BOI) to Smart and Globe for their 3G projects simply confirms what economists have been saying all along: many of the incentives, even before the 3G controversy broke, had been found redundant; many of those industries would have set up shop in the country with or without them; and worse, the indiscriminate grant of perks probably provide just another avenue for graft and corruption. The Philippines has been suffering from a continuing fiscal crisis yet the government—in some misguided belief that all we need to do is dangle those perks to attract investors—refused to collect the taxes that could have gone to financing development.

The Senate right now is thinking about “rationalizing fiscal incentives” by doing its own review of the bills as approved by the House; it might as well look into the possibility of abolishing them and replacing the incentives with a low and uniform corporate income tax to remove bureaucratic participation in the private sector’s investment decisions.

For a long time, analyst after analyst has been telling policy makers that the grant of fiscal perks is not the answer to the lack of investments in the Philippines. Studies have been saying the determinants of investments generation are adequate infrastructure, stable and predictable macroeconomic policies, political stability; effective investments promotion, and good governance. And yet the government has been clinging on to them; legislating hundreds more laws granting perks to every Tom, Dick and Harry. Ask anyone from the government’s planning bodies how many laws and executive orders granting fiscal perks and chances are—and they don’t know. Yes, there are hundreds of them and not anyone in the government knows what firm got what fiscal perks from what law because the system has become so tangled, one could only suspect some people out there in the bureaucracy are making huge money from doling them out to the cronies, clients, and friends. And of course, from that confusing tangle, it’s so easy for some crooked bureaucrat to make money too. For decades, government has been granting them yet we really have nothing to show for it. How much investment do we attract each year? Just below a billion dollars. And our Asian neighbors? About four to five times as much. It’s really nothing but just another venue for “bureaucrat capitalism” or an institutionalized rent-seeking.

In simple terms: gatasan lang talaga ang estado! Why do we suspect this? Because of the total lack of transparency with which fiscal incentives are being administered. Try asking about the criteria by which BOI and its sister company administering those fiscal perks, the Philippine Economic Zone Authority (Peza), as well as several other government agencies, grant those perks; ask for the relevant documents and you wouldn’t get anything. Confidential information, they will say. Peza, for instance, won’t give you basic information like project costs and employment generation per project. They are supposedly public documents, yet these government agencies are guarding such information and documents like hungry dogs. Why? Because they contain truth that’s better not shared with the public?

The government has been trying to rationalize fiscal incentives in the last three decades. But every time policy makers did it, they always ended up messing the issue even more. Why? It’s because there has never been any honest-to-goodness or truly independent study of the policy and how they are being implemented by bureaucrats. In the last two to three decades, it’s clear that these perks never came close to achieving their objectives, yet policy makers and legislators seem to believe that all is well. Well, all is not well and it’s high time legislators look at those with critical lenses.

Here’s our recommendation: First, the Senate should commission an independent group of economists to analyze those perks. These technical people should examine the costs and benefits of having those perks and how government agencies are implementing them. With the tangle of laws from which anybody could claim fiscal perks, it’s highly probable some of those businesses are making business out of double-dipping. The study team should look at this angle as well. And while this is being done, the government should stop granting those perks until a better policy takes shape. At the same time, Congress should also require BOI, Peza, and other incentive-granting agencies to open all documents for public scrutiny to ensure transparency. Only then should the Senate continue deliberating on the fiscal incentives bill once the senators have all the right inputs.

Or better still, the Senate might as well just abolish the fiscal perks— including the BOI, if you ask some critics. In lieu of this body, an investment promotions agency could do the work. Lately, the Federation for Philippine Industries (FPI) has called for a lower corporate tax in lieu of the fiscal perks to lessen opportunities for rent-seeking and corruption among bureaucrats. That proposal makes sense. Those enjoying incentives right now could be given a transition period to adjust to a new policy regime (i.e., low corporate tax, no fiscal perks). They would even welcome it because under this new policy regime, companies could do business without having to see the faces of bureaucrats to make their investments going. Hong Kong and Ireland, which are less corrupt, have done this and they are now attracting more investments than the Philippines.

Indeed, abolishing the incentives system as currently constituted is necessary to give some sense of social justice in this country. Otherwise we will remain the only place on earth where the middle class, or the aspiring middle class, are squeezed through taxes while the rich wallow in fiscal “perks.” No wonder the middle class would rather leave for foreign shores.