PIDS: Proposed income-tax cuts ‘well justified’

Even the government think tank Philippine Institute for Development Studies (PIDS) says proposals to amend the personal income-tax schedule “appear to be well-justified,” if they are accompanied by measures that would allow the government to recover the revenue loss from lower income taxes. 

The bill to reform the tax schedule was shot down by Malacañang early this year, saying it preferred a holistic tax-reform scheme while hinting at a possible downgrade in credit ratings as a result of reduced government revenues.

PIDS Senior Research Fellow Rosario Manasan said at a seminar sponsored by the Senate that the government should look for new revenue measures to compensate for the projected revenue loss resulting from the implementation of any of the various proposals to restructure the personal-income tax.

As the presidential election looms, tax reform has increasingly become a critical election issue.

Tax reform is long overdue, and experts opine that a comprehensive tax reform should be a top priority for the presidential candidates. “I think our candidates should make a stand on this issue, so that voters know what they are voting for,” Manasan said.

Currently, there are several income-tax reform proposals pending in both houses of Congress.

All of them, according to Manasan, have the same objective of addressing the phenomenon of bracket creep, which results from “non-indexation to inflation of personal income-tax brackets.”

Simply put, bracket creep occurs when employees’ income increases over time as a result of inflation.

This pushes them to pay higher taxes, but their purchasing power remains the same. He noted that the personal income-tax system has not been adjusted since 1998. Manasan also noted that all the proposals attempt to reduce the country’s high personal income-tax rate relative to its neighbors in the Association of Southeast Asian Nations (Asean).

In particular, the Philippines’s top marginal personal income-tax rate of 32 percent is higher than that of all the Asean members, with the exception of Thailand and Vietnam. Proposals to amend the personal income-tax law were embodied in Sen. Ralph Recto’s Senate Bill 716, Sen. Paolo Benigno “Bam” Aquino’s Senate Bill 1942, Sen. Juan Edgardo “Sonny” Angara’s Senate Bill 2149, Rep. Romero “Miro” Quimbo’s House Bill 4829, and Rep. Neri Colmenares’s and Rep. Ricardo Zarate’s House Bill 5401. Similar proposals have been raised by the private sector, most notably by the Tax Management Association of the Philippines (TMAP).

Manasan said Recto’s SB 716 and Quimbo’s HB 4829 will reform the personal income-tax system by adjusting the tax brackets according to changes in consumer price index between 1998 and 2015.

Aquino’s SB 1942 will exempt incomes below P60,000 and raise the top bracket income threshold to P12 million. Angara’s SB 2149 will affect changes in tax rates in phases over a span of three years, reducing the bottom marginal tax rate from 15 percent to 10 percent, and the top marginal tax rate from 32 percent to 25 percent. Under this proposal, all incomes below P20,000 will also be exempted from taxation.

Colmenares’s and Zarate’s HB 5401 exempts income below P396,000 and raises the top threshold to P2 million.

Manasan noted that all the proposals to amend the personal income-tax schedule are clearly progressive, given that the associated effective tax rates computed for various taxable income levels rises as the corresponding taxable income increases. However, she pointed out that some proposals are less progressive, particularly Angara’s SB 2149 and Quimbo’s HB 4829.

Manasan’s analysis shows that the tax liability in Angara’s bill actually increases for those in the lower bracket during the first two years of its implementation; Quimbo’s bill increases tax for non-wage tax payers below the P500,000 mark.

“As for losses in government revenue, the costliest bills are Quimbo’s HB 5892 and Colmenares’s and Zarate’s HB 5401, which is estimated at P130 billion and P232 billion, respectively,” Manasan said.

In contrast, Recto’s SB 216 will result in a revenue loss of about P52 billion for the government, while Angara’s SB 2149 will cost the government P10 billion in the first year and P61 billion in lost revenues for the third and final year,” she added.

She noted that, whichever proposal passes into legislation, government revenue will suffer.

One way for the government to recover the revenue loss is to increase the value-added tax (VAT) rate, she said.

Manasan pointed out that a 1-percentage point increase in the VAT rate is enough to recover approximately P26.25 billion loss in revenue from other taxes, like the personal income tax. However, she noted that raising the VAT rate would nullify the increased purchasing power resulting from the modification in the personal income-tax rate schedule, especially among the poorer segment of the population. “Increasing the VAT will only recover revenue loss to a certain point, assuming that the increase in disposable income is fully spent. Moreover, the poorest will remain the hardest hit if the price of goods increases proportional to the VAT,” Manasan said.

Another option, she said, is to levy an excise tax on sugar-sweetened beverages, which, based on the computation of the Department of Finance, will give government an additional P30 billion yearly.

Alternatively, the government can apply an additional variable excise-tax rate on petroleum products or increase the road-user’s tax and motor-vehicle user charge.

According to Manasan, both measures will have a positive impact on the environment through reduced pollution and congestion.

Meanwhile, former TMAP President Rina Manuel said the estimated billions in losses resulting from a tax-schedule reform would be a “real price to pay.”

Apart from compensatory measures, Manuel thinks that taxation could be largely improved in three possible ways: improving the collection system, and establishing a “specialized taxpayer program” for the self-employed and for the professionals.

LUIS LEONCIO