The need to adjust taxation on individuals

THERE IS no question that everyone welcomes payday, which is when all of us are sure to have at least some resources to pay for our needs and desires. What isn’t often realized is that the government has paydays of its own, in the form of tax collections. It is these funds that pay for public goods and services which, in theory, help improve the people’s quality of life.

   

Pursuing this line of thinking brings us to conclude that higher taxes ought to mean a better standard of living. A government that asks for more taxes must deliver on an implied promise of more infrastructure, better health care services, increased education and R&D funding, among other things. Otherwise, there would be little or no return for the public. The other side of this argument is that a government collecting fewer taxes would leave the public free to spend for its needs and desires as it sees fit.

For some of us, the key to progress and economic growth lies in enhancing the government’s ability to raise revenue. But lowering income taxes on individuals does not necessary mean a country cannot grow. The counter-argument has always been that when individuals are taxed less and left with more resources to spend, a large share of these additional resources will find their way to corporations, which will pay more taxes to the government -- a win-win scenario for everyone involved.

Against this backdrop, let us examine the recent expansion of the tax exemption for bonuses and other benefits.

On Jan. 5, the Bureau of Internal Revenue released Revenue Regulation No. 1-2015, expanding the list of tax-exempt benefits to include those received via collective bargaining agreements, as well as productivity incentive schemes to the extent of P10,000 per employee per taxable year.

On Feb. 12, President Benigno S. C Aquino III signed into law Republic Act No. 10653, which increased the ceiling on tax-exempt 13th month pay and other benefits to P82,000 from P30,000. The new law also mandates that the President adjust this threshold every three years to its present value using the consumer price index as published by the National Statistics Office.

The expanded exemptions may only be felt by those receiving 13th month pay and other bonuses of more than P30,000 a year. How about low- and middle-income earners? Does the government intend to take away a bit of the tax burden from them as well?

Our tax system should be progressive. The poor and the middle class should never be taxed at the same level as the upper class. Unfortunately, our tax rates have remained stagnant for decades, distorting the lines between the poor, the middle class and the wealthy. The result is that an ordinary worker, who earns more than P500,000 annually, pays the same 32% personal rate as that paid by a company president.

The good news is that our lawmakers are now addressing these distortions. Bills pending in both houses of Congress would reduce the income tax burdens on individuals. Some bills aim to increase personal and other exemptions, while others aim to adjust income tax brackets and reduce the rates for individual taxpayers.

My hope that enough time remains to pass these into law, considering that the 2016 elections are fast approaching.

Meanwhile, Republic Act 9504, which took effect in 2008, increased the personal exemption to P50,000 and the additional exemptions to P25,000 for each qualified dependent up to a maximum of four. For almost seven years, however, the exemption amounts have not been adjusted. Since personal exemptions are meant to aid individuals in meeting their living expenses, I believe that personal exemptions and additional exemptions should also be adjusted -- to take into account inflation.

Another bill pending with th e legislature seeks to amend the tax brackets and reducing the rates on individuals. This bill was drafted as a measure to discourage migration of our own workforce and to attract human capital by the time of implementation of the Association of South East Asian Nations (ASEAN) Economic Community (AEC). The AEC has the goal of regional economic integration starting Dec. 31, 2015. One of the objectives of the integration is to create a single market and production base through the free movement of goods, services, investment and skilled labor in the region.

Next to Thailand and Vietnam, the Philippines has the highest top tax rate at 32%. When the AEC Declaration was signed in 2007, some member-states started to gradually lower their corporate and individual income tax rates.

If ASEAN Integration goes through this year, the Philippines must brace for competition from other ASEAN nations. One of the implications is that the workforce may move elsewhere to seek a better quality of life, making it critical for the government to address the problem of improving local conditions. Currently, the government is still working on improving services, but my hope is that it gives its citizens the freedom to help themselves -- by enacting fair and equitable tax laws.

Donna Flor V. Lipat

Let’s Talk Tax

Punongbayan and Araullo