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DOF Economic Bulletin on IEF Rating Economic Freedom does not come Free

The Heritage Foundation defines economic freedom as the fundamental right of any person to control his or her own labor and property such that individuals are fee to work, produce, consume, and invest in any way they please and that governments allow labor, capital, and goods to move freely and refrain from constraining liberty. Economic freedom, in turn, brings greater prosperity and is associated with healthier societies, higher incomes, human development, democracy, and poverty elimination.

The Foundation calculates an Index of Economic Freedom (IEF) for economies. The IEF is weighed equally by twelve quantitative and qualitative factors grouped into four broad categories: rule of law, government size, regulatory efficiency, and open markets. For index year 2019, the Foundation ranks the Philippines 70th out of 186 economies. This is 9 notches down from the rank in index year 2018. While there was improvement in the property rights and labor freedom sub-indices, the reduction in scores in the ten other sub-indices caused a net reduction in overall score of 63.8, which is slightly better than that of France.

For index year 2020, the country’s score is expected to improve significantly. The signing of the Personal Property Security Act will improve the score on property rights. The signing of the rice quota tariffication bill into law will also reduce the penalty for non-tariff barriers in the computation of trade freedom index. We recognize that government should not stand in the way of private sector participation in the economy. That is why TradeNet.ph, for example, should already be made operational to cut red tape in the processing of trade-related documents by 76 trade regulatory agencies.

As in any measure, the IEF leaves out important details. For example, the Foundation puts a premium on small government without regard for the economy’s developmental stage; thus, there is penalty for increasing government spending whether an economy is industrialized or developing. But a developing economy may require greater government involvement in the economy as in the provision of infrastructure and social services such as basic education, health, and social protection.

On tax burden, a low tax effort because of high level of tax evasion gives a misleadingly high score for that index. Conversely, improving tax administration, which results in a higher tax effort, can mean lower tax burden score. The Foundation also does not take into account equity issues of progressive tax system. Since the IEF simply takes the highest marginal tax rate in the computation of the index, the score of the Philippines was reduced because the highest marginal personal income tax rate was increased from 32% to 35%. However, the IEF did not take into account the correction made for bracket creep which benefited millions of ordinary salary workers.

TRAIN is precisely a fiscal reform to finance developmental goals, among others. It is not lost on TRAIN that there is no such thing as free lunch. Put another way, economic freedom does not come free.

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