ARE FILIPINO taxpayers burdened with an “inequitable” and “outdated” tax system?

The answer is yes, as far as Sen. Juan Edgardo Angara is concerned.

“The country’s current tax system is terribly outdated and inequitable. Since (the enactment of the current Tax Code in 1997), prices have increased, and the cost of living has roughly doubled,” he said in an email to the Varsitarian. Angara chairs the Senate Ways and Means Committee, which is the tax-writing committee of the upper house.

The first-term senator said individual income tax rates in the Philippines are among the highest in the Association of Southeast Asian Nations (ASEAN). The National Internal Revenue Code (Republic Act No. 8424) taxes income in excess of P500,000 at 32 percent. The equivalent of the same income is taxed at 10 percent in Thailand, 11 percent in Malaysia, and 20 percent in Vietnam, cited in a position paper submitted by the Tax Management Association of the Philippines to Congress last August.

“No wonder many of our people are enticed to move and work to these countries because it appears that the government there believes that their citizens deserve to keep more of their hard-earned money,” said Angara, who filed Senate Bill No. 2149 last February to amend RA 8424 and lower individual income taxes across the board and adjust tax brackets yearly beginning 2015 until 2017. In his bill, after 2017, the 2017 brackets and rates will be applied.

RA 8424 follows a scheduler system for individual income taxation. Individual income taxpayers are classified into brackets, where more income results in higher taxes, but the tax rates max out at 32 percent. Individuals with annual taxable income of P500,000 or more pay P125,000 plus 32 percent of the excess of P500,000. The lowest tax rate is five percent for individuals with annual taxable income not exceeding P10,000.

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Under the current tax law, an individual with annual taxable income of P600,000 will pay P157,000 in income taxes. If Angara’s tax measure becomes a law, the individual with annual taxable income of P600,000 will only pay P108,500 beginning 2017, or a reduction of almost P50,000 in annual income taxes. In SB 2149, individuals with annual taxable income of more than P500,000, but not more P1 million, will pay P86,500 plus 22 percent of the excess of P500,000 starting 2017.

Moreover, in Angara’s proposed law, individuals with income of P1 million or more will be taxed the most at P196,500 plus 25 percent of the excess of P1 million beginning 2017. The lowest tax rate will remain at 5 percent for individuals with annual taxable income not over P10,000.

Angara said it was necessary to adjust the individual income tax brackets and reduce the rate of income tax in preparation for ASEAN Integration. “If our tax system remains unchanged, more individual taxpayers, who are not considered high earning and who belong to the middle class, will be pushed into the same top bracket as the richest taxpayers or the billionaires in the country—a phenomenon called the ‘bracket creep’,” Angara said.

Angara hopes the simplified tax system and lower tax rates will increase collections because there are only six million taxpayers out of a hundred million Filipinos.

Alvin Ang, economics professor at Ateneo de Manila, agreed that the tax system should be updated. “Our existing tax system is from 1997. Our taxes seem high because in that particular period, the amount was considered high, but nowadays it is the norm,” he said.

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But Ang said that while Angara’s target to decrease the 32 percent maximum individual tax rate to 25 percent was feasible, it might not be fair to all Filipino employees.

The problem is that the poor outnumber the middle and upper class taxpayers. “The middle class taxpayers are the most affected. They are the ones carrying the burden,” Ang said.

UST Legal Management program coordinator Antonio Chua, who teaches taxation at the Faculty of Arts and Letters, echoed Ang’s observations, saying the income tax law should be amended to reflect annual inflation since 1997.

“If you earn P1 million, the tax will be around 28 percent or P280,000, which is more than one-fourth of your income. [You] still have to pay [other taxes] such as value-added tax (VAT), which is another 12 percent,” he said. “So that will be around 40 percent of your income.”

Imposing change

Angara said simplifying the tax system would be beneficial because more persons would be encouraged to pay taxes, resulting in higher revenue collection to fund the social services and programs of the government.

“Lowering tax rates could incentivize Filipinos to comply with the law and pay their due taxes. In fact, it happened in Russia and Singapore, where lower rates contributed to higher tax collections,” he added.

But Ang said the proposed decrease in tax rates would immensely affect the Bureau of Internal Revenue (BIR) because fewer taxpayers would pay high tax rates, reducing the government’s income.

Angara however cited a recent study that showed that “every peso decrease in the income tax yields up to P50 for a Filipino family to spend,” meaning the government might experience lower collections from income taxes, but more revenue from consumption taxes, such as VAT, because of increased purchasing power.

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“With some 21 million families in the country, this translates to billions being invested back into the economy,” he added.

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