By: Dr. Luis F. Dumlao
RECENTLY, some lawmakers, either in the House of Representatives or the Senate, raised the idea of lowering individual income-tax rates for certain brackets, and largely for good reason. The graph below shows the income-tax rates of the so-called Association of Southeast Asian Nations 5 (Asean 5) members. The amounts shown include P53,000, which is the lowest annual income of a minimum-wage earner in Region 4B (Mindoro island and the provinces of Marinduque, Romblon and Palawan, or Mimaropa) and P120,000, which is the highest annual income of a minimum-wage earner in the National Capital Region (NCR). The graph also shows the annual income of up to P1.2 million that middle managers of corporations receive.
It is clear that the income-tax rate in the Philippines is the highest among the Asean 5. Whether your annual income is less than P50,000 or about P1.2 million, whether you’re a poor worker or a billionaire, the tax rate remains the same.
The table below highlights three specific examples. A minimum-wage earner in Mimaropa makes P205 a day. Assuming that there is work five days a week and 52 weeks in a year, this wage earner will have an annual income of P53,300. While Mimaropa workers pay a 12-percent tax, their Indonesian, Malaysian, Singaporean and Thai counterparts pay only 5 percent, 1 percent, 2 percent and none, respectively. Applying the same conditions, a minimum-wage earner in the NCR who makes P466 a day will have an annual income of P121,160. While the Metro Manila-based worker pays a 16-percent tax, his or her Indonesian, Malaysian, Singaporean and Thai counterparts pay only 5 percent, 2 percent, 2 percent and none, respectively. This seeming overtaxation is not just for the typical minimum-wage earner, but also for the typical middle manager of a corporation. The middle manager who makes P1.2 million in the Philippines pays a 29-percent tax, while his or her counterparts in the Asean 5 pay only 16 percent, 13 percent, 2 percent and 10 percent, respectively.
Besides the higher income-tax rate, the progressivity of the system is another thing worth comparing. From the first peso to the first million-peso income, all taxes are progressive. The Philippine individual income-tax rate increases from 5 percent to 29 percent; Indonesia’s, from 5 percent to 14 percent; Malaysia’s, from 1 percent to 11 percent; and Thailand’s, from 0 percent to 8 percent. Note that the Philippine tax rate increases much higher than the rest at 29 percent, compared with, say, 14 percent of Indonesia. The “rationale” for this is that the Philippine tax system defines a P1-million income as belonging to the rich and, hence, is given the maximum tax rate. In contrast, the tax systems of the other Asean 5 members regard that amount as belonging neither to the poor nor the rich. The Singaporean individual income tax, from the first peso to the first million peso, remains at 2 percent, as if it defines anyone making P1 million or less as poor.
From an annual income of P1 million to P4 million, the progressivity of the Philippine tax system almost entirely disappears. The individual tax rate increases from 29 percent to 31 percent. The system seems to think that the owner of a Toyota Innova car and the owner of several Lexus units are equally rich and should be treated equally. The individual tax rate increases from 14 percent to 25 percent in Indonesia, from 11 percent to 23 percent in Malaysia, from 2 percent to 7 percent in Singapore and from 8 percent to 22 percent in Thailand. Tax authorities seem to think that a person who makes P1 million a year is not as well-off as another who makes P4 million a year, hence, they tax one less than the other.
With all these, the initial reaction might be that we are overtaxed, compared to our Southeast Asian neighbors that are ahead of us in development, and so we must adjust to lower our income taxes to comparable rates.
Not so fast. Though the Philippines has the highest tax rates among the Asean 5 members, for some reason outside the scope of this article, it has one of the lowest tax-to-gross domestic product (GDP) ratios. As of 2012, the tax-to-GDP ratio of the Philippines is 12.9, as opposed to 16.1 of Malaysia, 14 of Singapore and 16.5 of Thailand. Indonesia’s 11.9 ratio may be lower than the Philippines’s, but that does not make our 12.9 a good one. The goal of the government is to raise the tax-to-GDP ratio to 16 by 2018, and this is already decent by world standards. Lowering the individual income-tax rate by itself will reduce what is already a low tax-to-GDP ratio. It will harm the fiscal position of the government, and this, in turn, will hurt the Philippine financial system and, ultimately, the real economy.
This is where the more reasonable lawmakers come in. They are not in favor of lowering the income tax only. Rather, they recommend lowering the individual income-tax rate, conditional on either better collection of tax from evaders or increase taxes elsewhere. They hope that this would result in the same or greater tax-to-GDP ratio and in a more progressive system.