Wednesday, November 18, 2015

Income tax reform and the 2016 elections

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The fact is that the Philippines has one of the highest income tax rates in the region. Its highest income bracket has an income tax rate of 32 percent, compared to Indonesia’s 30 percent, Malaysia’s 26 percent and Singapore’s 20 percent.

Tax reform is clearly needed, with at least 17 bills pending now in Congress, each with its own version of lowering income taxes and all arguing that the reforms are needed in the interest of social justice and fairness. However, President Aquino has been explicit in opposing the proposed reforms, expressing concern that these would reduce government income needed for vital projects.

Broad political spectrum

With the May 2016 national elections approaching, we should get the key candidates’ positions on these proposed reforms. If the President’s opposition to tax reform becomes the Liberal Party line, its standard-bearer Mar Roxas just might find himself in a bind given the growing opposition, across socioeconomic classes and the political spectrum, to the current income tax system.

With the long Apec holidays, you might want to look at the different proposals for tax reforms and see if you want to push candidates—not just for the presidency and vice presidency but also for the House and the Senate—on this issue.

What I did look at was one of the early tax reform measures, House Bill No. 5401, filed by the party-list group Bayan Muna last year, with an emphasis on relieving the taxes of lower-income households. I also looked at Senate Bill No. 2149, filed by Sen. Sonny Angara, who has taken up the cudgels for the middle class, which he says is the most oppressed by our income tax system.

I also looked at an online tax reform petition on, initiated by the Tax Management Association of the Philippines (TMAP), whose membership consists of professionals advising and handling the country’s top 1,000 corporations on tax matters. Its online petition has a clear and simple explanation of the need for reforms.

The TMAP was also behind a unity statement calling for tax reforms, issued in September and endorsed by several of the country’s large business groups, including the Makati Business Club and the American, Japanese, European and Filipino-Chinese chambers of commerce.

The tax reforms have a shared characteristic: the need to peg the brackets to the consumer price index (or, in the case of Bayan Muna, to the cost of living), in order to bring about fairness, especially for the lower and middle classes.

It is in the proposed adjustments that one finds variations. Bayan Muna proposes raising the minimum annual taxable income to P396,000 (from the current P60,000), based on the estimated minimum living wage needed (P1,096 per day x 365 days). It proposes that the highest income tax bracket be raised from the current “over P500,000” to “over P2,700,000.” It even proposes lowering the corporate tax rate from 32 percent to 30 percent.

The proposals in other bills, and from the TMAP, generally call for an indexing of the brackets using the consumer price index, so there would be adjustments periodically (the TMAP proposes three years). This makes sense because our current tax bases go back to 1986.

The result is that an annual income of “over P500,000” means that one is quite wealthy, and has to pay P125,000 plus 32 percent for income over P500,000.

Today, because of inflation, that top bracket—which means something like P50,000 a month—applies as well to the middle class, including many midlevel government employees. The TMAP calls this the “bracket creep,” where a small salary increase might transfer you to a higher income tax bracket.

Senator Angara points out that between 1986 and 2014, the consumer price index went up by 539 percent. His bill would have “over P1.2 million” as the top income tax bracket, with adjustments in the years ahead in line with the consumer price index.

Angara worries, too, that our income tax system may actually drive more Filipinos to work overseas. In an interview with Rappler, he points out that in the Philippines, someone with an annual income of P250,000-P500,000 pays 32 percent in taxes but in Singapore, that amount is considered so low it is taxed only 2 percent.

His observation provides a new take on Asean harmonization. Filipinos have been worried that with an open-door policy on labor in Asean, we will be “invaded” by other Asean citizens wanting to work here and displacing us from our jobs. But the reality is that the “pull” factor is stronger—the Philippines losing its citizens to other Asean countries—in part because our wages are so low and our taxes so high.

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One problem with the proposed tax reforms is that there are just too many proposals, from different groups. Those who do want change should at least be talking with each other, and looking for ways to exert more pressure on our politicians. A case in point: The TMAP called for a Black Payday Friday protest last Oct. 30, but there was very little publicity about it. It has brought local and foreign business groups together; maybe now it should be talking with Bayan Muna and the students and labor unions, maybe even launching joint actions, which would be a real first in bringing management and labor together.

Again, with elections around the corner, there is an opportunity to pressure candidates. Get them to take a firm stand on tax reforms, and to deliver if they get elected.

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