Public Choice: Income Tax Cuts or Participative Spending?

In this election, there is a choice.

Election season kicked off this week with the various presidential candidates holding their respective proclamation rallies to officially start their campaigns (lots of unofficial campaigning has already taken place).

In this series I am entitling “Public Choice”, I will be highlighting principled policy platforms taken by the candidates. To be considered a true policy option, a candidate must put forth, not just pie in the sky statements, but specific actions he or she might take.

In this edition, I will be focusing on fiscal policy.

Two candidates, Mar Roxas and Jejomar Binay made their opening gambits in this presidential race by offering two distinct policy instruments with respect to fiscal policy (that is tax and spending policy).

At the heart of Roxas’ strategy to fight poverty, he proposes the setting up of a Karapatan Fund worth 100 billion pesos a year. This fund would be allocated as a reward payment to local governments that have been given a seal of “good housekeeping” by the Department of Interior and Local Government (DILG). It would be spent on anything that local residents, community groups and executives wish to prioritise.

The Karapatan Fund is simply another name for the Bottom-up Budgeting (BuB) program currently in place. BuB was scaled up this year to 18 billion pesos (including 6 billion pesos in road projects), up from 3.3 million pesos in 2015 (405 million pesos in 2014). An interim report by the government has found that since the program began in 2013, a very low percentage of projects  have been completed or are still ongoing.

It seems that BuB will be the flagship program under a Roxas presidency, just as  public-private partnerships (PPP’s) were under President Noynoy Aquino’s or the Comprehensive Agrarian Reform Program (CARP) was under his late mother’s time in office. It was the brainchild of his predecessor at the DILG, Jesse Robredo, whose premature demise led to the prominence of his wife, Leni who is on the ticket with Mar Roxas.

Vice president Jejomar Binay for his part announced that under a Binay administration, people earning 30 thousand pesos a month (360,000 pesos a year) would be exempt from paying any personal income taxes. That means for a single individual making 360,000 pesos a year with no dependents, a saving of 68,000 pesos a year. For a married individual with two dependents earning the same annual salary a saving of 53,000 pesos a year.

The proposal was immediately lambasted by Rep. Miro Quimbo (LP-Marikina), chairman of the powerful ways and means committee that oversees tax policy at the lower house, for being too drastic and unaffordable. Quimbo claims that Binay’s tax proposal could cost the government as much as 113 billion pesos a year in foregone tax  revenue.

This claim was disputed by Binay’s economic advisor Gary Teves (a former finance secretary). Tevez estimates the bill would cost the government only 30 billion pesos. It should be noted that Quimbo has his own proposed tax cuts which would exempt people earning about 250,000 pesos a year, but even this proposal was deemed unaffordable by Pres. Aquino. Mar Roxas has also been circumspect and decided not to make it a campaign issue.

When asked where the money to pay for these tax cuts would come from, Teves said that he had a menu of options available including the sale of government assets and the privatization of a number of government-owned and -controlled corporations; approval of revenue-generating measures, including Fiscal Incentives Rationalization; fuel marking to fight oil smuggling and continued improvement in tax administration and collection efficiency.

To get these measures passed, the vice president said that he would convene the Legislative Executive Development Advisory Council (LEDAC) within the first 100 days of his administration to gain congressional support for his priority bills. Contrary to the law which requires the president who chairs the council to convene it every quarter, Pres Aquino has only called for a meeting twice so far in his term.

Even if we assume that Teves is wrong and Quimbo is right, and the income tax cuts proposed by the vice president would cost 113 billion pesos, the amount would just be similar in size to the Karapatan Fund proposed by ex-Sec. Roxas. It should be noted that Mr Roxas hasn’t specified where he would get the money to fund his spending proposal. Would he increase taxes or cut spending in other departments?

If we posed this as a choice between the tax and spend proposals of either candidate, we could say that the money to pay for the Karapatan Fund would roughly come from not cutting taxes on individual incomes.

The electorate definitely has a choice then. If it believes in the virtues of Roxas’ central policy plank, it can opt to forego income tax cuts to pay for local development projects. Alternatively, if it believes that this money is best left in the hands of individual taxpayers, it could opt for Binay’s plan to raise the tax-free threshold, instead.