DISCONCERTING were the statements, attributed to Budget Secretary Florencio “Butch” Abad, that the tax reform package is in limbo simply because the national elections are near. He was quoted as saying that it is “difficult to talk about taxes during an election season.” More worrying was the statement made by Internal Revenue Commissioner Kim Henares that any changes in the income tax structure would not happen under President Aquino’s term.
Malacañang’s loss of interest in pushing for the tax reform package became apparent when President Aquino failed to mention it in his final State of the Nation Address last July 27. Sen. Juan Edgardo “Sonny” Angara had earlier urged the chief executive to push for the tax reform bills in Congress so that a progressive and equitable tax system could be put in place during the remaining months of the Aquino presidency.
Angara, principal backer of the tax reform bill in the Senate, has been batting for lower tax rates on both corporate and individual income taxes, pointing out that the tax rates in the Philippines are the highest in the Asean and neighboring Asian countries. The maximum individual rate in the country is 32 percent for a salary cap of P500,000 in annual earnings (or about $11,000)—a clear case of a high tax rate on a low income bracket. Compared to its neighbors, Singapore’s tax rate on its top bracket of $250,000 is 20 percent; Indonesia’s is 30 percent on $43,000, and Malaysia’s is 26 percent on $30,000. Thailand has a higher tax rate of 35 percent, but the income bracket cap is $123,000. In Hong Kong, the standard income tax rate is 15 percent of net total income.
The Aquino administration seems to fear a possible backlash from the voters if it gives the go-ahead to the proposed tax reform package, which not only aims to ease the income tax burden but also seeks to recover any foregone revenue by further raising the value-added tax.
A very important component of the tax reform package is the proposal to raise the tax-exempt cap on incomes of individuals and small businesses. At the same time, it will reduce to 25 percent the corporate income tax ceiling. The net effect, as studies have shown, is that it would address the so-called “bracket creep” phenomenon. A paper presented by Rep. Miro Quimbo, chair of the House committee on ways and means and the principal author of the bill that seeks to overhaul income taxes, noted that the tax brackets have been frozen since 1997. (They were not adjusted for inflation.) This, even as salaries were adjusted for inflation, thus eventually pushing salary workers into the higher tax brackets.
In 1997, the bulk of salary workers was found in the lowest tax brackets. By 2013, the paper noted, most of them have crept up to the higher brackets without even realizing it. Thus, salary workers pay higher tax rates today even though there has been no real increase in their income. The paper noted that this phenomenon of “bracket creep” was very apparent among selected professions, notably teachers and soldiers. In 2001, about 65 percent of teachers were classified in bracket 4. By 2013, only 21 percent remained in that bracket as most had been shifted up to brackets 5 and 6, even higher.
Early this year, tax managers submitted to Congress its comprehensive tax reform proposal. The Tax Management Association of the Philippines (TMAP) proposed an all-inclusive tax-exempt annual income threshold of P300,000. At present, a tax base of P10,000 and less is already slapped a 5-percent tax rate. TMAP is proposing a rate of 10 percent for those earning P300,000 to P500,000 a year; 20 percent for those earning more than P500,000 to P1 million; 25 percent for those earning more than P1 million to P2.5 million; and 30 percent for those earning more than P2.5 million.
By correcting the tax brackets, it is believed that a considerable number of teachers and soldiers and ordinary taxpayers would be back to brackets 3 and 4, in effect increasing their take-home pay. However, it is a pity that elections—or the political interest of those running in 2016—stand in the way of an equitable income tax structure.
Taxpayers should unite and convince their legislators to act on the tax reform program, NOW! Ordinary taxpayers deserve such fairness.