Gov’t is overtaxing middle class

IT SEEMS that the government today is exercising a preferential option for the poor (through the conditional cash transfer program) and for the rich (who are not required to pay the appropriate taxes). The ones who are being squeezed are the middle-class (especially the low-middle class) households!

Our policymakers, particularly in the Department of Finance, seem to ignore the very precarious situation faced by millions of households now considered low-middle class. They are above the poverty line but can easily fall into absolute poverty through natural calamities (such as “Ondoy” and “Yolanda”), climate change (El Niño), or the collapse of some sectors of the economy.

A few years ago, the Asian Development Bank came out with a publication defining the middle class as comprising households where the daily per capita income ranges from $2 to $20. Using this definition, a cursory analysis of the 2009 Family Income and Expenditure Survey (FIES) of the National Statistics Office showed that 58 percent of Philippine households are considered either very poor (23 percent) or poor (25 percent) because they fall below the international standards set by the ADB. Recently, as reported in the Financial Times (9/24/15), the World Bank revised its definition of poverty by raising the poverty line from $1.25 to $1.90 a day—the biggest change since the World Bank introduced its dollar-a-day yardstick of global poverty in 1990. This brings the World Bank figure closer to that of the ADB. This revision may lead to a surge of the poor on this planet by as much as 148 million.

I predict many of them will be Filipinos who are now considered low-middle class.

In the Philippines, an average household of five members (parents and three children) would need a monthly income of at least P10,000 to cover food, shelter, clothing, basic education and other personal services for the minimum decent and comfortable living. FIES data show that households with $2-$5 per capita daily income number about 7.6 million, comprising 41 percent of the total households of 18,451,541 in 2009. Those with $5-$13 add up to about 1.8 million, representing 10 percent of the total. High-middle income ($13-$27) households amount to 160,872 (1 percent), and the rich account for 29,653, an insignificant percentage of the total.

Even if we use the more recent data of 2012, the percentages would not change much. Among these households, the middle-class families most vulnerable to falling into poverty are the 7.6 million ($2-$5 per capita) who comprise 41 percent of the population. Every responsible state must have a plan to come to their rescue because market solutions alone will not suffice to prevent them from falling into absolute poverty.

Without denying the primordial principle of the preferential option for the poor, it must be acknowledged that the economic dynamism of every country principally depends on the middle class. The two most important engines of growth of the Philippine economy—i.e., the remittances from the overseas Filipino workers and the earnings of the BPO/KPO sector—are powered by middle-class people. Since the average earnings of OFWs range between $300 and $500 monthly, they are among the 51 percent of Philippine households belonging to the low-middle- or mid-middle-income families. The same can be said about the vast majority of BPO workers who earn about P15,000 to P20,000 monthly on the average.

An area where middle-income households can obtain much-needed relief is taxation. In a column in BusinessWorld, Marvin A. Tort discusses the merits of the tax reform proposals of Marikina Rep. Miro Quimbo and Sen. Sonny Angara.

Under the proposals, the tax brackets will be limited to four after three years: 1) the tax-exempt threshold for workers earning less than P180,000 per annum; 2) 9 percent for those earning P180,000-P500,000 per annum; 3) 17 percent for those earning between P500,001 and P10 million; 4) 30 percent for those earning beyond P10 million.

To take into account the precarious situation faced by the low-middle-income households, I suggest the following modifications, using the income classification of the FIES: 1) the tax-exempt threshold for those earning less than P130,000 per annum; 2) 9 percent for those earning between P130,000 and P1,100,000 per annum;

3) 17 percent for those earning from P1,100,00 to P2,200,000; and 30 percent for those earning beyond P2,200,000.

By expanding the range of the households subject to the 9-percent income tax, we capture 51 percent of total households, making sure that the tax base is not eroded inordinately. At the same time, by combining the low-middle- and mid-middle-income brackets, we provide for the possibility that households in these categories can experience wild shifts in their incomes due to natural disasters or market uncertainties. We can then subject the high-middle-income and rich households (comprising a little over 1 percent of the total) or about 190,000 households to the highest tax rate of 30 percent.

Even assuming that the reduction in personal income taxes to be paid by middle-income households would lead to a drop in total government tax revenues, the improved take-home incomes of close to 8 million households would certainly add strength to our consumption-led growth, considering the inability of the Aquino administration to fully spend its budget, especially on infrastructures.

Bernardo M. Villegas (bernardo.villegas@uap.asia) is senior vice president of the University of Asia and the Pacific.