The clamor for lower income tax rates continues to gain momentum, primarily from the business sector which rightfully justifies its posture with a comparative chart showing the Philippines as having the highest corporate income tax (30 percent) in the ASEAN region, higher than that of Indonesia (25 percent) and Thailand (20 percent).
Comparatively high corporate income taxes are clearly a deterrent to the competitiveness of local businesses, and are a critical factor for foreign investors to decide not to set up their businesses here in the Philippines.
Clearly, if the country wants to continue its growth levels in the next years, the government must align its corporate income tax structure to make it attractive to business and national growth.
High personal income taxes
With regards personal income taxes, the Philippines has also one of the highest rates slapped on its citizens within the ASEAN. At 32 percent, income taxes on working Filipinos are second highest in the region, almost comparable to the 35 percent of Thailand and Vietnam.
While many working Filipinos belonging to lower income brackets earning minimum wage rates are technically exempted from paying income taxes, there in the next salary levels have to endure the high taxes.
While the current personal income tax system is on graduated basis, the lowest rate applicable to those that are not minimum wage earners would still be 20 percent. Thus, a struggling P15,000-a-month employee will effectively bring home only P12,000.
The case gets worse for those in the middle-income brackets, the managers who earn P500,000 a year. After deducting 32 percent tax on their income, they are able to take home only about P30,000.
The current inequitable tax rates on personal incomes of those in the lower and middle classes have not only reduced their capability to improve their standard of living, but have likewise dampened economic growth since personal spending is constrained.
Similarly, the 19-year-old personal income tax structure needs to be reformed to align with new realities, and give more Filipinos some breathing space from the payday-to-payday survival syndrome.
Challenge
Reforming corporate and personal income taxes is estimated to cost the government about P30 billion. And while this may be regarded as a mere fraction of the P3-trillion state budget, this could be significant given the possibility of increased infrastructure spending by the current administration.
During the last six years under the Aquino government, tax collections were effectively raised through new laws (notably from sin taxes) as well as an intensified campaign to run after tax evaders and similar reforms in the bureaucratic tax collection efforts.
But the biggest “stabilizer” was in fact the ultra-conservative demeanor with regards spending, and while the budget deficit was maintained at only roughly two percent of GDP throughout, there were far fewer infrastructure projects that should become the country’s stepping stones for economic growth well into the next decade.
Thus, the move to revise income taxes comes with the biggest challenge: where else could the “lost” P30 billion be earned?
Tax leakages
The previous administration’s recommendation had centered on increasing VAT to 14 percent from the current 12 percent. Recently, the current Finance Secretary Sonny Dominguez had conveyed the government’s reservation to raising VAT.
Instead, he chose to focus on the age-old problem of tax leakages, which includes tax evasion. However, despite all the reforms introduced since the term of former president Fidel Ramos, the two main collecting agencies of government – the Bureau of Internal Revenue and the Bureau of Customs – remain underperformers.
The push to introduce information technology, even closed-circuit television cameras, has been met with opposition, even sabotage attempts. Even the electronic filing of returns remains a challenge, often getting mashed up in system failures especially when nearing deadline dates.
Realistically, there is scope for the BIR and BOC to improve each one’s tax collection efforts through real and meaningful reforms, and perhaps recover more revenues than what will be “lost” from reforming the current income tax structure.
But this has been an aspiration unmet for decades now, and to bank on such becoming a reality in the next few years may be a little risky.
Therefore, as a stop-gap measure, there is a need to line up other revenue generating measures that would not just replace the foregone collections from lowering income tax rates, but hopefully, would even add more to the national coffers.
Choosing the least ‘evil’
Here are a few that’s worth considering:
First, raise taxes on sweetened carbonated and juice drinks. This is basically an anti-sugar consumption act, basically following the principle employed in justifying the increases in tobacco and liquor taxes.
Sugared drinks have basically been linked to the rise in obesity and hypertension problems. Like sin taxes, someone must pay for the public health cost of those affected by sugar ingestion. Likewise, higher taxes could raise selling prices, thus dampening demand.
Reduce VAT; remove much-abused input-output mechanism
Another measure worth considering would be reducing VAT to, say 7.5 percent, but removing the input-output mechanism that has made this tax collection scheme another avenue for corruption and evasion.
Now is perhaps the time too to consider indexing excise taxes on oil and oil products. At current low levels, Filipinos have been benefiting from the successive reductions in pump prices. Thus, an effective increase in petroleum product prices through new taxes may not hurt as much.
Paying taxes must not be a chore
Improving the system for tax payments could further be strengthened, including the simplification of procedures, adoption of a one-stop shop for payment of all personal- and business-related taxes, and definitely a unified identification card so that payments for licenses, SSS/GSIS collections, and similar fees could be done at a single collection point.
Definitely, the ultimate goal should be to streamline the operations at the BIR and BOC so that corruption is essentially eliminated, there is transparency in tax payment transactions and processes, and paying for taxes is painless and not a chore.
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