The Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill recently passed by the congressional bicameral conference committee and awaiting the president’s signature is a self-destructive move for the economy and the people. It is however very good for big corporations who are its main beneficiaries.

Big corporations are the ones that stand to benefit from CREATE. Crises are apparently always good for them – the last two corporate income tax (CIT) cuts happened after the 1997 financial crisis and the 2008 global crisis, followed now by the COVID-19 crisis.

Good for business, bad for the economy

The economic managers and legislators behind CREATE seized on the pandemic to justify cutting CIT as a stimulus in response. After employment contracted in 2017, the Tax Reform for Acceleration and Inclusion (TRAIN) Package 2 was rebranded as the Tax Reform for Attracting Better and Higher Quality Opportunities (TRABAHO) bill. No science in the world could show that the tax changes will create jobs though, so it was quickly renamed the Corporate Income Tax and Incentives Reform Act (CITIRA).

Still not getting anywhere, upon the pandemic in 2020 it was renamed CREATE and opportunistically claimed as stimulus to respond to the pandemic economic shocks. Yet by whatever name and however embellished by things like fiscal incentives and COVID-19 exemptions, it is still most of all about the biggest cut in corporate income taxes in the country’s history.

But not all change is good, and certainly not all big changes are revolutionary. CREATE is, at the end of the day, bad fiscal policy even if it is welcomed by large corporations and foreign firms. It is counterproductive for three main reasons.

First, it is utterly senseless to pass a revenue-losing measure just when revenues are needed the most for huge needs emerging since the pandemic hit. The single biggest reason for the historic 9.5% contraction of the economy last year is the government’s refusal to implement real expansionary fiscal policy to compensate for the pandemic-driven economic shock.

The economic managers keep insisting there is no money for such essential stimulus measures like emergency cash subsidies to poor and low-income households. This would not just alleviate household suffering but also give a significant boost to aggregate demand. Unlike import-intensive big-ticket infrastructure projects, money in their pockets will be spent in the local economy rather than abroad.

Yet while claiming no money for stimulus, CREATE will result in Php251 billion in foregone revenues (Php133.2 billion in 2020 and Php117.6 billion in 2021) that could otherwise be spent for cash subsidies, a stronger health response, and other urgent needs.

It is bewildering that the government is giving corporations hundreds of billions of pesos while refusing to help millions of needy Filipino families. With the 2022 elections approaching it isn’t far-fetched to think that many legislators will parlay their support for CREATE into contributions for their respective electoral war chests. If there is no face-to-face campaigning, the expenses for mass media and social media wars will only become even more exorbitant.

Second, CREATE actually undermines government finances by narrowing its revenue base. The increase in corporate profits is a direct loss of possible financing for national development. To make things worse, the government will likely compensate corporate tax revenue losses with higher consumption taxes which is at the expense of poor and low-income families.

Corporate income taxes are the single biggest source of tax revenues. Over the 1986-2019 period, they accounted for 27.6% of total tax revenues compared to: personal income taxes (19.1%), value-added tax (VAT, 16.8%), excise taxes (16.5%), other taxes on net income and profit (7.7%), percentage taxes (6.3%), and other taxes (5.9%). (See Chart 1)

Changes in CIT strongly influence revenues. The last two corporate income tax cuts were upon the 1997 and 2008 crises, respectively. Measured as a percentage of gross domestic product (GDP), steep drops in CIT collections after these tax cuts were clearly reflected in similarly steep drops in tax revenues as a whole. (See Chart 2) While other tax sources also fell at the time, the impact of CIT cuts is unmistakable.

It is unclear why CIT collections fell by so much between 2017 and 2019. In any case, corporate tax collections dropping to just 3% of GDP in 2019 which is as low as a decade ago in 2010 only means that the tax cuts that CREATE gives will undermine collections even more.

It is also clear how regressive consumption taxes – borne most heavily by poor and low-income households – are being used to compensate for falling corporate tax collections. Again measured as a share of GDP, corporate income taxes have fallen from 3.5% of GDP in 2008 to 3% in 2019. On the other hand, excise and VAT collections increased from 2.5% to 3.7% over that same period. (See Chart 3)

Conspicuously, corporate tax collections measured as a share of GDP have been falling while corporate profits have been soaring. Corporate profits are far outpacing corporate contributions to tax revenues – for instance, the net income of the top 1,000 corporations tripled (273% increase) between 2008 and 2018, the latest year for which data is available. But corporate tax payments only doubled (106%) between 2008 and 2019. (See Table)

Revenue losses from CREATE that are not compensated by consumption taxes will also ultimately be filled in by additional debt. The passage of CREATE is a key factor in national government debt soaring in the closing years of the Duterte administration. By the end of its term, the administration will have more than doubled its debt from Php6.1 trillion in 2016 to Php13.7 trillion in 2022 – in effect increasing government debt in its six years by as much as the Philippine Republic did over 120 years since the Malolos Congress in 1898.

Third, CREATE will not even really stimulate investment and economic activity. CREATE proponents have taken to making extravagant claims about its benefits: over the next decade alone it is claimed to result in at least Php12 trillion in combined domestic and foreign investment (including US$90 billion in foreign direct investment) and 1.8 million jobs. The hyperbole has no basis and seems designed to distract from the reality that certain revenue losses will not be offset by gains which are uncertain at best.

The precise numbers are supercharged trickery. It is simply impossible to say whether any particular investment is because of a particular tax law especially over ten long years and with so many things affecting investment decisions. There is no way to model vastly varied behavior by different foreign investors in different industries from different countries.

Similarly, there is no lucid way to account a decade of changes in: other countries’ foreign investment regimes, tax regimes, infrastructure, wages and productivity; global interest rates and exchange rates; markets and technologies; patterns of global value chains; and agglomeration economies. It is also well-established how sensitive foreign investment is to trends in corruption, political stability, free trade or protectionism, global finance, and the global economy.

CREATE’s tax benefits will improve corporate balance sheets and likely be mostly pocketed rather than reinvested especially as overall economic activity remains subdued. The problem is not really lack of investible funds. The economy is already awash in liquidity, with the lowest real interest rates in decades, yet bank lending still contracted in December for the first time in 14 years.

The insistent claim that CREATE is for micro, small and medium enterprises (MSMEs) is also misleading. While the finance department acknowledges almost a million MSMEs in the country, it fails to disclose that less than one-third are CIT taxpayers so the overwhelming majority will not really benefit from CREATE. Even among those paying corporate income taxes, CREATE even comes too late to help the thousands of MSMEs who have already closed, from the lack of stimulus programs for almost a year now, and those who will still close.

Moreover, the staggered implementation of CIT cuts, with the rate for MSMEs going to 20% and large corporations initially just to 25%, does not change how CREATE really disproportionately benefits large firms. For instance, in 2019, large taxpayers accounted for Php422.3 billion or 71.9% of total corporate payments and the CIT cuts will put more money in a few large firms than in MSMEs.

Large stable firms including foreign corporations will then be the biggest and most certain beneficiaries of CREATE.

Elitist economics

From a development perspective – which is presumably what should underpin all economic policy – the fundamental problem is that CREATE asks the wrong question: what CIT will attract foreign investment? This puts us in a mindless race-to-the-bottom where our fiscal policy is defined by what corporations want rather than what national development and upholding social and economic rights demands.

The real question, rather, is to ask what kind of tax system is needed to generate financing for development. Asking the right question makes all the difference and is vital if we are to build the progressive tax system that the country sorely needs to finance its vast development needs.