Overtaxed

It is time for a tax revolt.

The existing tax structure will annihilate the Filipino middle class. It is no wonder that our economy is characterized by a widening gap between the rich and the poor as well as a sharp polarization in incomes.

When a senior public school teacher is taxed the same rate as a business tycoon, something must be very wrong. The income level at which a wageworker is imposed the maximum tax rate is the highest in the region. The 32% tax rate itself is among the highest in the world.

This is the reason why this government thinks it can afford a P3-trillion national budget. Among the unwritten assumptions of the budget proposed for 2016 is that income tax rates will be conserved. We can only hope the Congress will interrogate that implicit assumption thoroughly.

There are bills pending in both chambers of Congress proposing adjustments to the income tax rate and the exemption levels. The exemption level has not been altered in a quarter of a century. This is the reason a junior executive gets taxed the same rate as the owner of a conglomerate.

None of the bills proposing reform of the tax rates and exemption levels are supported by the administration. None of them are categorized as urgent – even if they really are.

Relief for the struggling Filipino middle class was never a concern of this administration. Filipino wage earners have to contend with a high food price regime, among the highest power costs in the world, comparatively lower wage levels and horrible traffic just to get to work – and government takes away a third of his income.

Even when a Filipino makes his money abroad – say, a Manny Pacquiao – his earnings will be taxed the difference between the tax rates imposed here and those imposed where the money was made.

Even when a Filipino white collar worker might enjoy parity in pay with his Southeast Asian peers, the higher tax rates (plus obligatory contributions to social security, housing and medical insurance funds) ensures he has lower disposable income compared with his peers.

Considering the high transport costs imposed by an inefficient public transport system, high energy costs due to an inefficient power sector and a high food price regime, the Filipino ends up much poorer than his counterparts in the region. At the end of the day, he has less disposable income than his regional peers.

Among Southeast Asians, Filipinos spend among the largest portion of their incomes on food. This is the reason why a large majority of Filipinos might be described as food-poor.

Filipinos labor under a despotic fiscal regime.

It should not be this way, however, if the political leadership recognized its obligation to reduce income tax rates and raise exemption levels.

When government introduced value-added taxation (VAT), the presumption was that the tax burden would be shifted from income to expenditures. In modern taxation, the shift of taxation from income to expenditure is considered more reasonable. It will help raise the savings and investment rate and, in turn, drive economic growth.

As a general rule, taxes on expenditure are more easily enforced. There is little inducement to evade taxes on spending. A whole army of supermarket and restaurant cashiers collects VAT efficiently on behalf of bureaucrats.

The efficiency in collection of taxes on expenditure is the reason why modern tax systems are increasingly shifting away from income taxation. Taxes on spending discourage profligacy and encourage savings, allowing for better capital accumulation and healthier financial markets.

When the Philippine government increased VAT, the unstated social compact there was that income taxes would be proportionally reduced. If that does not happen, the entire tax system cascades on the hapless wage earner.

The Philippine government reneges on that unstated social compact by increasing the VAT rate without simultaneously decreasing the income tax rate. This ought to be a crime. The omission is an act of cruelty against the Filipino taxpayer.

How long will it take for the Philippine government to remedy the situation?

It could take very long unless the suffering mass of Filipino taxpayers rise in revolt. It could take very long because government seems happy brutally collecting taxes on both the income and expenditure side.

Filipinos are overtaxed. That fact should be recognized as an inefficiency causing our economic performance to drag.

The existing tax scheme prevents the Filipino middle class from growing. Without a robust middle class, our democracy will remain superficial and tenuous.

Without a robust middle class, our civic discourse will remain impoverished. It becomes easier for demagogues to rule. That we have seen.

Without a robust middle class, our social structure will become increasingly polarized: a callous oligarchy dominating the teeming mass of the poor. A polarized society will be vulnerable to instability.

Without a robust middle class, the traditional political clans will continue to monopolize political power. Rebellions of every sort will continue to fester. There will be no peace.

Tax reform, therefore, is much too important to leave to the architects of our fiscal order. The tax system has the power to shape our social order, improve conditions for social equality and eventually for political liberty.

We cannot expect this administration to understand the profound importance of tax reform to improving social equity. It is an administration with the mindset of the traditional landowning class, a mindset that can only understand dole outs and patronage politics.

Filipino taxpayers must put reform of the tax system on the agenda of political debate this electoral season.