Of taxes and elections

By Ma. Teresa T. Ledesma, 18 April 2013

It is often said: “Things are often calm after an upheaval.”

After a major upheaval, we have time to reflect and ponder on how events occurred, what went right, what went wrong and what should not happen again. And so it is, after the filing of the ITRs, that we have time to ponder on matters other than income taxes, of things past, of the future and this coming May elections.

On May 13, 2013, we would be electing from among the present candidates, our local officials and legislators both for Congress and the Senate, who will be holding office in the next six years. It is perhaps in light of this major event that I dreamt last night of former US President Ronald Reagan who during his term, introduced a tax and fiscal policy called the “Reagonomics.” Prior to the administration of Reagan, the US economy had a decade of unemployment and inflation. There was political pressure on government to provide economic stimulus that would result in an expansion of the money supply. Under his Reagonomics policy, Reagan pushed for lower marginal tax rates in conjunction with simplified income tax codes, continued deregulation, and less government subsidy. His brand of tax and economic policy resulted to increased productivity growth and output per hour in the business sector. Reagan likewise promoted the concept of free enterprise which encouraged people to rely more on their own efforts rather than on government subsidy.

Although the Philippine economy has been registering a positive outlook the past few years, I believe that there are still many economic and financial issues that our government needs to address to sustain this growth. One important issue is taxation, specifically taxation on individuals which for the past several years have not gone through any significant amendment to address the accumulated yearly inflation and the increased cost of living and poverty threshold level. However, I am yet to hear a candidate for Congress or the Senate who has a keen understanding of the impact of taxes on people’s lives and how this influence their choices, and who would put individual taxation among his or her major program of government upon assumption into office.

Under the present Tax Code, individual taxation consists of seven income tax brackets which are subject to graduated rates ranging from 5% (for those earning below P10,000 a year) to 32% (for those earning more than P500,000.00 a year). The seven income tax brackets are intended to categorize individual taxpayers based on their income levels to ensure that the burden of income taxation is equitably distributed in accordance with their earning capacity.

Relative thereto, the results of the latest Family Income Expenditure Survey (FIES) showed that an average “middle class family” earns an average monthly income of P36,934 or P369,340 per annum, while those classified as rich earn an average monthly income of P200,000.00 or P1.4 million per annum. Families falling under the bottom 30% earn an annual average income of P62,000 (poor families), and those in the upper 70% (non-poor families) earn an annual average income of P268,000.On the other hand, average annual expenditures of each family in the country, at current prices, amounts to P176,000. In 2009, families in the bottom 30% spent about P64,000, while families in the upper 70% spent about P224,000.Food expenditure gets the largest slice of the incomes in both poor (59.9%) and non-poor families (40.5%).

Given these figures, our current individual income tax brackets would effectively draw the following conclusions:

  • The second tax bracket (Over P10,000 but not over P30,000 income per annum) up to the fourth tax bracket (Over P70,000 but not over P140,000 income per annum) for a single income earning family may well fall within the current poverty threshold of Filipinos.
  • There is only a 2% tax rate difference between a “middle-class taxpayer” and a high income taxpayer. The middle class taxpayer which has a net take home pay of P36,934/per month or P443,208/annum, is taxed at 30% tax rate (the second to the highest tax rate) while a rich taxpayer with a net take home pay of P200,000/month or P1.4Million/annum is taxed at 32%.
  • The 32% income tax rate applies to both a middle/upper middle class taxpayer who earns a monthly income of P41,666.67 or P500,000.00 and to taxpayer who earns P200,000 who is classified as rich under the FIES.Moreover, Republic Act (RA) No. 9504 grants income tax exemption to individual taxpayers earning purely compensation income not exceeding the statutory minimum wage (SMW) prescribed by law. Thus effectively, in Metro Manila where the SMW is P459 per day or P110,000 per annum, individual taxpayers falling under the first up to the fourth income tax brackets are exempt from income tax.

On the other hand, for those based outside Metro Manila where the SMW is lower, the income tax exemption may be available to individual taxpayers falling under the first up to the third income tax brackets only.

It will be noted, however, that the income tax exemption under RA 9504 applies only to salaried individuals and does not extend to other individual taxpayers such as self-employed individuals engaged in business or practice of profession, or even minimum wage earners earning marginal extra-income (referred to a mixed-income SMW earners).Although laws granting tax exemption are construed strictly against the taxpayer, there seems to be some form of inequity in the tax treatment of individuals under our present laws. If we are to follow the Reaganomics policy of encouraging free enterprise to achieve and sustain economic growth, all individual taxpayers whether purely or mixed compensation earners or self-employed should be given equal tax treatment.

In the spirit of social justice and promoting entrepreneurship, we hope that those who will be elected to Congress among the present crop of candidates can enact laws which provide that the income tax exemption of SMW earners shall not be lost even if they engage in business or if they invest a portion of their savings/salaries in financial instruments, the gains of which are subject to regular income tax rates. Of course, they should be fully taxable with regard to their business income/other income subject to the 5% to 32% income tax rates.If only we can have a senatorial or congressional candidate who can be a Ronald Reagan for the Philippines... if only...

The author is a director  at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. 

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.