The Aquino Administration gets it wrong (again) on income taxes
BACK on August 26, responding to questions from the media about a proposed overhaul of individual income tax rates then under discussion in the Senate, presidential spokesman Sonny Coloma assured everyone that, “Government is open to consider (sic) proposals on changing the income tax rates and continues to work with Congress on this matter.”
A little more than a week later, however, once news began to spread about a counterpart measure in the House – this one sponsored by Administration stalwart Miro Quimbo of Marikina – another little door in the Palace cuckoo clock popped open, with bird-of-a-different-color Edwin Lacierda emerging to relay a text message from Finance Secretary Cesar Purisima. The message, although incomprehensible on its face, nevertheless clarified that “open to consider” in the earlier statement actually meant “open to considering new ways to say ‘hell no’ to any hint of reducing tax rates.”
“We urge Congress to approach fiscal reform from a holistic standpoint with the goal of making the structure more buoyant, equitable, progressive and competitive,” Purisima said.
(If anyone has any idea what that actually means—even Secretary Purisima—please drop me a line c/o The Manila Times, Intramuros.)
This is not the first time this public discussion has taken place, and once we hose away all the drool of pointless management jargon, it becomes apparent that what the Administration is resisting is what it perceives as a loss of revenue; for all their command of the more useless aspects of the English language, the nation’s economic policymakers two-volt logical processes function very close to the surface, and to them, lower and/or restructured tax rates automatically equal reduced government revenues. Bureau of Internal Revenue chief Kim Henares, who is hardly an expert when it comes to forecasting, estimated the loss, should the Quimbo proposal be implemented, at about P29 billion per year.
The current tax structure has been soundly criticized for having high rates – 32 percent (see table) is, in fact, the highest tax rate in Southeast Asia – but the bigger problem is that arrangement of tax brackets is stacked against low- and middle-income taxpayers. Assuming a taxpayer is able to take the maximum personal deduction (currently P150,000, provided he or she has four eligible dependents), the maximum that taxpayer can earn and still be exempt from paying income tax is P160,000 per year, or P640 per day. That is hardly enough to adequately support a family of four, and any additional income, such as overtime pay or a cost of living increase instantly kills the exemption. For a single taxpayer, the maximum exempt amount of income is just P60,000, or roughly P240 per day; in other words, just P20 more than the lowest minimum wage anywhere in the country, and only about half the minimum wage in the National Capital Region (the lowest rate currently stands at P444 per day).
For middle-income workers, the situation is even more oppressive. According to the wage survey site PayScale, the median salary for an entry-level call center agent is about P193,000 per year, which results in an income tax liability of P4,450. Moving up one step to a CSR agent position, which has a median salary of P221,000 per year (an increase of P28,000, or 14.5 percent) causes the income tax bill to jump to P8,700 – an increase of 95.5 percent. In other words, one’s tax liability increases at about 6.5 times the rate one’s salary does.
There is absolutely nothing about that sort of arrangement that can be construed as “buoyant, equitable, progressive and competitive.”
The other big problem with the current income tax regime is that it is unproductively complex. It is an axiom of tax economics that revenue proportionally decreases as complexity of the tax system increases; both taxpayers and the BIR have to complete dozens of steps to process tax payments, and as a result, collection efficiency suffers. BIR Commissioner Henares’ concern that a new, simplified tax structure would result in the loss of P29 billion in government revenue seems grossly misplaced, given that the BIR habitually misses its revenue collection forecasts under the current system: The P29 billion figure is just an estimate, but the cumulative P107 billion collection deficit through the first six months of this year is a sad fact.
The Quimbo proposal, as well as its counterpart in the Senate, chiefly sponsored by Senator Sonny Angara, solves most if not all of these problems. It instantly relieves the regressive tax burden on low- and lower-middle income earners by exempting most of them and shifting the tax burden to those who are better able to bear it. And because it is based on gross income, it theoretically increases collection efficiency to near 100 percent – taxpayers will no longer be required to compute taxable income, but can simply have their tax obligation met on their behalf by simple payroll deductions remitted directly to the BIR by employers.
It is a widespread public assumption – a sign of just how toxic the reputation of President BS Aquino 3rd and his merry men has become – that the Administration’s resistance to improving the tax regime is rooted in avarice. Even if we assume that is true, the Administration is cutting off its own nose to spite its face. Simplifying the income tax structure and (coincidentally) lowering tax rates for a great many income earners would actually result in more, not less revenue for the government due to more efficient collection. Good intentions or ill, there is not a single sensible reason for the Administration not to support the move. Of course, “sensible” is not a word that has found wide usage within this government, so perhaps we should not be surprised.