#TaxReformNow: The 97.5% must back Angara, Quimbo

SINGAPORE—Lowering income tax rates will not benefit us, President Aquino pronounced last Sept. 14. This curt dismissal is short-sighted, unstatesmanlike and implies a refusal to discuss the more difficult issues that underlie #TaxReformNow. If a religious group that makes up 2.5 percent of our population can readily occupy Edsa to air its grievances, it is about time we the 97.5 percent demanded #TaxReformNow.

Mr. Aquino’s dismissal is a slap on the faces of Sen. Sonny Angara and Rep. Miro Quimbo, who put #TaxReformNow on the national agenda as chairs of the Senate and the House of Representatives’ committees on ways and means. Indeed, the “presidentiables”—Vice President Jejomar Binay, Sen. Grace Poe and Davao Mayor Rodrigo Duterte—have all voiced support for it.

Angara’s infographic campaigns frame how simple yet compelling #TaxReformNow is. We have the second highest maximum income tax rate in Southeast Asia at 32 percent. Thailand and Vietnam impose 35 percent, while Singapore, Cambodia and Burma (Myanmar) impose 20 percent.

However, #TaxReformNow examines the income brackets that determine one’s tax rate, not just the maximum rate. In the Philippines, one hits 32 percent at P500,000, which is any middle-class employee who has been promoted a few times. The P500,000 threshold was set in 1997, when the tax code was enacted. As Angara and Quimbo argue, P500,000 might buy a new house then, but it cannot even buy a new car today. In contrast, Thailand, despite its higher maximum rate, taxes a P500,000 income at only 10 percent, and Singapore, 2 percent. The Philippines taxes a P250,000 income at 25 percent, Thailand still 10 percent, and Singapore exempts this.

We must reform “bracket creep.” Middle-class employees are taxed at the same rate as billionaires, who effectively pay lower taxes because they earn from dividends instead of salaries. At the very least, brackets must be pegged to inflation instead of permanently latched to the 1997 economy.

Mr. Aquino’s simplistic response was that lowering income tax rates will lower government revenue, and one would have to increase other taxes such as value-added taxes. To rebut this, first, Angara and Quimbo do not argue in a vacuum. We are treated less equitably compared to our Southeast Asian neighbors. To borrow the Bureau of Internal Revenue’s favorite example, a public school teacher earning a mere P16,500 a month would already be in the high 25-percent bracket, yet taxed at 10 percent in Thailand and exempt in Singapore.

Ignoring #TaxReformNow will leave us less competitive as Southeast Asia integrates. A Philippine professional would happily work in Cambodia to earn more simply by paying lower taxes. An overseas Filipino worker in Singapore must think long and hard before coming home. Not only would his income be slashed by two-thirds, an OFW professional earning at least P1.4 million a year there would move from 7 percent to 32 percent—a 357-percent increase!

Second, the numbers in the tax rates and brackets do not tell the whole story. Eighty-five percent of BIR collection from individual taxpayers come from salaried employees, whose taxes are readily withheld from employers’ payrolls. The remaining 15 percent represent self-employed, business-owner and professional taxpayers whose incomes are not as transparent and claim various deductions. Budget Secretary Butch Abad noted that this 15 percent collectively underpays income taxes by almost P400 billion a year. On the other hand, Prof. Stella Quimbo, the pro bono consultant Miro could not afford to pay if she charged, has found that 73 percent of salaried employees are minimum-wage earners and tax-exempt. She computed that the BIR’s collection from salaried employees is really paid by only 16 percent of these 22 million employees, which in turn represents 85 percent of taxes from individual taxpayers.

Third, given how starkly inequitable our system is to middle-class employees, it is imperative to broadly reform budgeting and tax collection. Nonsalaried individuals must be encouraged to share the tax burden beyond the BIR’s antagonistic shame campaigns. Angara’s infographics argue that we lose P230 billion a year from agricultural-product smuggling, P30 billion from oil smuggling and P12 billion from tobacco smuggling. Angara further argues that P800 billion of the 2014 national budget was not spent as planned, so there is room for tax reform. Finally, there are blatant anomalies in tax implementation, and my recent column decrying the blatantly illegal customs duties on books (“Why no one trusts customs,” 8/31/15) elicited no response.

Ultimately, lowering tax rates will let our consumers spend more, and the government will recoup some of the short-term loss in revenue through consumption taxes such as VAT without necessarily raising them. Increased economic activity will hopefully lead to long-term increases in tax revenue.

#TaxReformNow presents an incredibly simple issue that greatly affects broad segments of citizens. Further, Angara and Quimbo are among our most credentialed young reformists, being The Outstanding Young Men awardees and star University of the Philippines law graduates (Angara holds a Harvard Law degree to boot). Nevertheless, #TaxReformNow is dismissed by a president who drops everything to call a marathon Cabinet meeting to address the protest of the 2.5 percent.

If the 97.5 percent political minority want fresh, concrete, intelligent reforms championed by lawmakers with spectacular credentials, then they must immediately push their congressmen to back Angara and Quimbo. If not, we should not complain the next time the 2.5 percent block Edsa and the national agenda is dictated by narrower interests and traditional politicians.

* * *

React: [email protected], Twitter @oscarfbtan, facebook.com/OscarFranklinTan.