January 24, 2018, 9:28 am
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A tale of two tax tactics

Two distinct economies on both sides of the Pacific that had recently passed historic tax reform bills are opening 2018 in different ways and along starkly different attitudes. While both have been marketed as tax reform measures, each will be received in starkly different manners. One with apprehension and suspicion. The other, with welcome and perhaps even jubilation.

Immediately the impact of both will be felt albeit in varying degrees among each economy’s social classes depending on economic resiliencies as well as on the underlying rationale that the tax reform measures were originally founded against as proposed and advocated by both administrations and each of its distinct ruling parties. One will seem like a curse. The other will immediately accrue benefits to its constituencies.

We’ve only cursorily discussed the salient points of our domestic Tax Reform for Acceleration and Inclusion (TRAIN) bill before and compared it briefly with the tax reform bill authored by the Republican Party (Grand Old Party or GOP) under United States President Donald Trump.

In our neck of the woods, basically the Philippine TRAIN provides minimum wage earners some momentary relief by increasing the width of the tax exemption brackets where those at the minimum levels are granted tax reprieves while those at the higher levels shell out more. 

The other upsides of the TRAIN have to do with processes and the simplification of tax administration. There were some increases in taxes that would benefit society as a whole like those slapped on destructive enterprises such as mining. Other than those, however, the benefits to the greater public end all too quickly. The rest are compromises that pander to vested interests that range from moderate to severe burdens which negate pluses and yield to a tax regime more repressive than what had come before these mislabeled reforms.

For the most part, TRAIN is substantially a series of exponential multiplier taxes that catalyze government’s take.

In contrast, the US law on tax reform lowers business and individual tax rates, streamlines bureaucratic taxation processes and updates US international tax rules, generally and significantly overhauling a 30-year tax code. 

The new law establishes a single corporate tax rate of 21 percent regardless of net income. This repeals former minimum taxes and the current tax rate of 35 percent -- an embarrassing curse which should look familiar to Filipino businessmen as ours hovers at those astronomical levels. Tax rates between 30 percent and 35 percent are among the highest even for large developed economies. Imagine those inflicted on an agricultural economy. 

All told the new US tax rates situate the American tax structure below the European Union’s weighted average thus compelling American offshore businesses to relocate back home.

Of its impacts, the lowering of corporate taxes is especially significant and recent concessions granted by a number of US-based companies to their employees have shown its initial upsides. Already quite a significant number have granted their employees unexpected year-end bonuses, increases in wages and overall increased recruitment in anticipation of expansion. Take home pays are expected to rise further as economic inequity falls, while the significant slide in unemployment statistics is expected to increase within the next months. To validate, simply check the jobs data and the continuing historic highs on Wall Street.

Note that when values rise on Wall Street, corporate dependence on debt and general indebtedness fall thus leading to healthier balance sheets.

Moreover, one of the most significant reforms showing definitive improvement on US domestic jobs and American purchasing power is in the area of overseas taxation for US corporations.

The accounting impact alone is significant and is skewed to benefit American-based corporations. Prior to Trump’s tax reform initiative, American companies outside the US were taxed globally, where taxes due were deferred until earnings were actually repatriated. This loophole allowed those corporations to maintain funds offshore. Rather than benefit the US economy, these benefitted overseas host economies. 

To encourage repatriation, a one-off  “deemed repatriation” levy of 15.5 percent is now imposed on offshore earnings. Not only does this compel companies to remain US-based but this encourages corporations to stay American and hire Americans. Its positive impact on the American jobs market as well as on the welfare of the economy and the labor force is obvious.

On personal income taxes, note the across the board benefits compared to TRAIN’s take-home money impact due to simple re-bracketing or a change in income band width. In the US reform model, most rates actually fall significantly across all but two brackets.

Note the gambit and the radical differences between the American and Philippine tax reform measures. The Philippine model expands the income tax bandwidth specifically for minimum wage earners but imposes exponentially higher taxes on that sector by surrendering to vested business interests and slapping repressive excise taxes on value chain and economic multiplier products that impact negatively on those same minimum wage earners granted temporary if not illusory tax reprieves.

The American GOP model does the fundamental opposite. The lowering of taxes for corporations places the welfare burden on business interests and gives then adequate leeway to hire more and pay more. This generates much needed employment, leads to better wages and creates more equitable environments between labor and business.

The Keynesian differences are fundamental. Ours was driven by politics and vested interest. Theirs,  by public good.
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