• Another side of tax reform

    Ben D. Kritz

    Ben D. Kritz

    AMONG the economic plans the administration of President Rodrigo Duterte has shared with the public so far, the one that seems to have been the most well-developed and attracted the most positive attention from the business and consumer sectors alike is the plan to adjust the country’s tax framework to lessen the burden on individuals and enterprises.

    In general, the plan adjusts income tax brackets downward to reflect the current reality of Filipino incomes—the existing tax brackets were set in 1997—while raising taxes in some other areas such as the fuel excise tax, possible new “sin” taxes on things like sugary beverages, eliminating some exemptions to the value-added tax, and possibly raising the VAT rate as well.

    The independent development think-tank IBON Foundation is not impressed, however, and recently published an extended analysis on its website detailing why the new tax proposals may actually increase the burden on poor taxpayers, while giving high-income taxpayers an even larger break.

    The analysis, which is lengthy and detailed, is worth a read (it can be found at www.ibon.org), but here is its significant assertion:

    “The tax brackets and taxes due will be changed so that those earning up to P250,000 per year—or about P19,230 monthly (computed at 13 months of pay in a year)—will pay a fixed amount of P2,500. This is up to Php47,500 less than they are paying today, according to IBON estimates. This is very welcome relief for these low-income taxpayers.

    “But those earning a million pesos a year for instance will also be paying less—around P92,700 less in the first year of implementation and then P130,700 less in the second year of implementation. Those earning P5,000,000 a year will save even more—paying P112,500 less in the first year of implementation and then P260,000 less in the second year. The tax these wealthy individuals pay may even fall further after the third year as the DOF continues to adjust personal income tax rates downward. This reduction in income taxes paid by the ultra-rich and wealthiest Filipinos only reduces potential revenues for the government and worsens inequality in the country.”

    IBON goes on to point out that the proposed adjustments to corporate income taxes, for which the government has not yet provided many details, are expected to reduce tax revenue from that source by P34.8 billion. Taken together with the advantageous tax adjustments on individual taxes, the entire program works out to a hefty tax cut on the wealthiest part of the country, while the much bigger low-income segment will see most of any advantage it gains wiped out by the compensating measures involving excise, sin, and VAT taxes. Those kinds of taxes—taxes on what one spends rather than on what one earns—do tend to be more of a burden the lower one’s income, because they represent a much greater proportion of his income.

    On its own, the complaint that an income tax bracket adjustment is unfair because higher wage earners will gain a bigger tax reduction doesn’t hold much water. Even if the tax reduction proportionally favors higher wage earners, it is still substantial for low-income taxpayers. In reality, the proportional gain in disposal income is much greater with a tax cut the lower the taxpayer’s income is.

    However, IBON is right that the gains for lower income households will largely be canceled out by the “revenue replacement” measures. Although the math is rather complicated, it appears that none of the government planners has tried to determine whether or not their “tax relief” will actually be a “tax burden”; at worst, the revenue replacements should only match the relief, so that the taxpayer is in at least the same position he was in before the adjustments. IBON also points out that the Department of Finance’s assertion that the perceived financial disadvantages of higher VAT and excise taxes will be compensated by improved social services. As the government is actually forecasting higher revenues as a result of the package, obviously less than what is collected will be diverted to extended social services, IBON points out, meaning that the poor are, unless some deep changes in the intentions of the various tax reform measures before Congress are made, very likely to be still poor and maybe even a bit worse off, after all is said and done.



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