Income taxes, wealth and poverty

FOR MONTHS now, the two chambers of congress have pushed to increase the income of working families by reducing their income tax burden.

One highlighted version seeks zero income tax for workers earning P180,000 yearly. The proposed bill also seeks to make those earning between P180,000 and P500,000 annually to have their income tax liability reduced from the current 25-30 percent to just 9 percent, or a reduction of as much as 21 percent. There are a number of versions of this initiative, but these all uniformly seek to reduce the income tax burden of working families.

The justification for the bill is that the current income brackets and corresponding tax rates are still based on the value of money in 1997, which has not been adjusted for almost two decades now. An illustrative reasoning behind the bill goes like this: If P100 could buy six pieces of galunggong in 1997, it can only buy three pieces or less of the so-called poor man’s fish at current prices. Thus, the bill seeks to adjust both income tax brackets and tax rates to reflect the reduced buying capacity of income.

The Aquino administration has not disputed the problem that the bill seeks to solve; in fact, it implicitly admits the devalued nature of income. But instead of acknowledging the problem of overtaxing devalued income, the administration has launched a two-pronged attack against the proposed tax measure.

First, the administration virtually accuses the legislators who are sponsoring the bill of using the issue as a means to win votes. It argues that if it were to equally act irresponsibly with the motivation to merely gain points with voters, it can also participate in a race to impose zero tax on all income, but that such madness will cause the government to go bankrupt, which will spell eventual hardship for the people.

Yet it is actually the administration which is acting irresponsibly by automatically attributing bad faith to the proponents of the bill. The proposed revisions on income tax rates were not pulled out of thin air, but are actually based on the government’s own data and statistics showing the substantial devaluation of income. It is the administration which has pulled out of thin air an imagined mad race to bankrupt the government.

Even the timing of the proposal—coming so close to the May 2016 elections—does not diminish its worth and substance, but instead highlights its importance as a major issue. This major issue should be submitted to the court of public opinion, especially in the light of the state of the economy which is characterized by the ever-growing wealth of the rich in the midst of the multiplying numbers of the poor.

Second, the administration raises the fear that the aimed-for tax reduction will trigger a series of negative events: It will cause a P30-billion reduction in government tax revenue, which will increase the budget deficit, which will result in the downgrade of the Philippines’ credit rating, which will discourage foreign investments, and which will lead to loss of potential employment.

In other words, the administration quickly dismisses the bill based on its negative macroeconomic impact (a bird’s eye view of the economy) on government income and image, and even before it can comparatively evaluate the positive microeconomic impact (ground-level view) on family income and the incentive on domestic industry investments caused by increased consumer spending.

It has always been the government’s view that healthy macroeconomic figures of government revenues will lead to a trickle-down of benefits to families. But why should the government automatically conclude that such a trickle-down scheme will lead to more benefits for families, compared to a direct infusion of more income to families?

The P30-billion reduction in government tax income translates into a P30-billion increase in family income. This increase in family income will cause a series of positive events: It will increase consumer spending in food, clothing, appliances, and entertainment, among others. This increase in consumer spending will, in turn, trigger increased economic activity in all industries that have links to the production and sale of consumer goods, such as raw materials trading, manufacturing, advertising, and freight forwarding, among others. The government stands to reap tax revenues from the multiple incidents of business activity that are triggered by increased consumer spending.

It is the obligation of the government to present facts and figures showing that the people will ultimately reap more rewards if the government is left to spend the P30 billion, than if the people spend it themselves.

The government must pause and consider if its blind allegiance to macroeconomic analysis may be responsible for the current economic absurdity of growing poverty in the midst of a growing economy. The government should thoroughly consider if it must wean itself from an overreliance on gross national product, gross domestic product, per capita income, and the stock market, as measures of the wellbeing of its people.

Given the severe income inequality in the Philippines—the highest in Asia—its much acclaimed GNP/GDP growths largely reflect the galloping growth in the wealth of 40 families who control 76 percent of economic activity in the country, but masks the fact that 50 percent of the population wallow in poverty.

The government must recalibrate its policies by focusing its attention, not on increasing growth, but on eradicating poverty.

* * *

Comments to [email protected]