For most taxpayers, I believe lower income tax is still very much preferred to lower value-added tax. And it is in this line that popular support may be expected for House and Senate initiatives to lower income tax rates and adjust existing tax brackets to account for inflation. And it is unsurprising that tax breaks are offered just before an election year. Taxes are always political.
The present House ways and means chairman promises that the bill on cutting income taxes, with expanded exemptions for more workers and a lowering of the top tax bracket to 30%, will move by next week. “We will finalize and report out (the bill to the plenary) next week a two-step process for the overhaul of income taxes,” says Marikina Rep. Romero Federico S. Quimbo.
Income tax brackets were last adjusted in 1997, or almost 20 years ago.
At present, persons and businesses earning more than P500,000 pay an income tax of 32%. This will be changed under the proposed law, but with tax deductions for breadwinners or those with dependents also to be removed. Then another adjustment will be made three years after to limit the tax brackets to only four:
• the tax-exempt threshold, for workers earning less than P180,000 per annum;
• 9% for those earning P180,000 to P500,000;
• 17% those earning between P500,001 and P10 million;
• 30% for those earning beyond P10 million.
At the Senate, Senator Juan Edgardo “Sonny” M. Angara is also pushing for changes, saying that “tax brackets should be adjusted to make (these) more sensitive to current salaries of Filipinos. Because at present, a person who makes P50,000 a month -- who is considered middle class -- is already in the top tax bracket and is also paying the same tax rate as the billionaires in our country.”
I support these changes, but with caution. Offhand, there is a need to address a situation of inequality that the government itself perpetrates.
As an example, why is the tax system prejudiced against those who have more than four children or dependents? Why can’t taxpayers claim tax deductions beyond the fourth child? And why can’t people claim maternity benefits from the Social Security System beyond the fourth pregnancy?
Quimbo’s solution to this inequality is to remove the exemptions altogether, also to make the tax system simpler.
Instead, based on income, tax rates will be adjusted to allow those who have less in life to pay lower taxes. His plan might just work, and jibe with his logic that “the simpler the bracket, the simpler the computation, the easier for compliance.” Thus, more people and companies will be inclined to pay the correct taxes.
However, I have some misgivings as to how his proposed four-tier tax bracket is structured, which tend to leave one with the impression that the tax breaks appear to favor the rich more than the poor. I get the same impression from the Angara proposal at the Senate, which aims to peg at P1 million and above -- from the present P500,000 and above -- the country’s top income tax bracket, and to reduce the maximum tax rate from the current 32% to 25%.
As I had commented previously on the Angara proposal, the top income tax bracket should be nearer the P3-million level, which is more in tune with what we can realistically define as being rich or wealthy or having more than enough in this country. On the other hand, the Quimbo proposed cap of P10 million is just too high, in my opinion.
Taking the case of a family of six, an annual family net taxable income of P1 million minus P250,000 in tax (at 25%) results in a daily household budget of only P347 per head -- which is below the present minimum daily wage in Metro Manila. Taking the same family and Quimbo’s P30 million at 30%, that leaves the family a daily household budget of P9,722 per head. Notice the disparity? The proposed tax brackets will redefine the meaning of wealthy in this country.
An income of P1 million a year makes one a millionaire, but not necessarily wealthy.
On the other hand, triple that income to P3 million and your daily budget goes up to P1,000 per head per day. Even a tax rate of 25% will still allow you to become a millionaire, spend enough on your family, and maintain a bank account. But to multiply that income by 10, as Quimbo proposes, even at a higher tax rate of 30%, still leaves one with plenty of money.
The Quimbo and Angara proposals are major steps in the right direction. But they need to be reviewed thoroughly to benefit more the poor and middle income earners, rather than the rich. A top bracket of P1 million, with tax at 25%, saves the poor but penalizes middle-income earners. In this line, Angara should propose a higher top bracket.
As for the Quimbo’s top bracket of P30 million, that’s too much leeway for the rich. Also, one who earns P500,000 pays 9% tax but one who makes P505,000 pays 17%? Just because of a P5,000 increase? And those earning more than P500,000 pay at the same rate as those earning P10 million? That doesn’t seem right, does it?
At present, those who earn P500,000 already pay 10%. Quimbo wants this cut to 9%. Those who earn more than P500,000 pay 32%. Quimbo wants this cut to 30% for those making more than P10 million, but to 17% for those with more than P500,000 but less than P10 million. I believe these are minimal cuts with little benefit to the poor and middle income.
Perhaps those who make more than P500,000 but less than P3 million should pay 17%, and those who make more than P3 million should pay 25%, as Angara suggested. Anyway, those who make tens of millions or even billions don’t really bother with tax brackets, as they will always have more than enough money to pay for taxes. But one who now earns P10 million currently pays 32% tax. Does he really need Quimbo to cut his income tax to 17%?
Marvin A. Tort is a former managing editor of BusinessWorld, and a former chairman of the Philippines Press Council
matort@yahoo.com
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