Tax rates

Although Rep. Miro Quimbo remains hopeful his bill bringing down rates for individual income taxes might still be passed, his counterpart at the upper chamber Sen. Ralph Recto readily concedes there is no time left to pass the measure. The two legislators have been working to reduce our unrealistic tax rates imposed on fixed wage earners.

The Philippines has the highest tax rates in the region. The rates have remained fixed for over two decades now.

Earlier, when government was trying to pass VAT, our people were promised reductions in income tax rates as revenues are being collected from expenditure. VAT signaled a shift in the burden of taxes from the revenue side to the consumption side. This should reflect more advanced theories about fiscal management.

The old orthodoxy about imposing “progressive” tax rates on income is not only tedious to administer. It simply does not work. The fixed income earners end up paying more taxes than the richest entrepreneurs.

When the tax brackets are allowed to be overrun by inflation, the injustice just grows. As wages rise, more and more wage earners are obliged to pay the maximum tax rates. Today, with our unadjusted tax brackets, nearly every white collar worker pays the maximum rates.

For two decades, our government reneged on the promise of reducing income tax rates in exchange for introducing VAT. The state, always greedy for revenues, ends up wiping out the middle classes. As the high tax rates cut deeply into real disposable income, income inequality deepens.

Shifting taxes to the consumption side is the saner course. It does not inhibit the drive to raise income while encouraging savings and investments through prudence in spending. Incomes should not be penalized. Ostentatious consumption should be.

As the global economy slows down, in the face of China’s dwindling growth, it becomes imperative for governments to adopt counter-cyclical measures to boost domestic consumption. The best way to achieve that, at this time, is to immediately reduce tax rates.

We can no longer rely on our chronically underspending government to sustain the demand side of our economic performance. If we cut tax rates now, it will be the consumers who will boost demand and rescue our industries.

Unfortunately, on the matter of adjusting tax rates, it is the narrowest view of the problem that appears to hold sway. That will likely doom our economy.

The narrowest view is always that held by the Secretary of Finance. It is his job, of course, to generate the maximum revenue for government. That job dictates he tax everything in sight, whether this be Balikbayan boxes or the tenuous incomes of our workers.

As well-intentioned legislators in both houses of our Congress worked frantically to reform the tax rates, Finance Secretary Cesar Purisima issued his potion by way of a text message. The message read: “We could not put our fiscal sustainability and credit rating at risk by doing piecemeal revenue reducing legislation.”

That message, strangely, was immediately echoed by Palace spokesmen, making it appear to be the position of the executive branch. That created a political roadblock to the reform of the tax rates.

Not only is there very little time left to enact tax reform legislation, it now appears there is very little wind to drive the sails of the tax reformers.

Purisima makes it appear that reducing the tax rates will undermine our competitiveness. That is very wrong. What undermines our competitiveness, in this era of ASEAN regional integration, is to have the highest tax rates in the community of nations. The high tax rates induce pressure to raise wages in order to boost disposable income. Higher wages will make us uncompetitive.

The Philippines now has among the highest nominal wages in the region. Taxes eat up the wages anyway, shrinking the effective demand capacity of our workers.

Purisima is likewise wrong when he says adjusting our tax rate to inflation will reduce our fiscal sustainability. If we adjust our income tax rates to inflation, government stands to lose only P40 billion in revenues. This revenue reduction may be easily covered by improving anti-smuggling efforts. Rampant smuggling is estimated to account for about P200 billion in tax leakage annually.

Besides, for 2014, government failed to spend about a third of the national budget. Its capacity for underspending is matched only by its obsessiveness to collect the taxes it already does, even if these taxes actually distort our economy performance.

Our workers are entitled to the wages they worked hard for. They will, in the end, have a better sense of how the money ought to be spent. Leave our workers alone to buy better food and invest in housing. Government only wastes the billions it collects from income taxes.

By standing against tax rates reform, the Aquino administration now finds itself at odds with all wage earners. The punitive tax rates we have in place will unavoidably become an election issue. When it does, Aquino will be on the wrong side of the tax debate.

By opposing tax rate reductions, Aquino and his anointed risk being painted insensitive to the plight of the working class.

The state of the MRT is the icon for this administration’s incompetence. The Balikbayan box is now the icon for its insensitivity.

Failing to adjust the tax rates when it should paints Aquino and his allies as the rouges in an emerging fiscal morality play. Defending an oppressive tax system, they become the oppressors.

Failing to act on tax reforms when they should have, the administration now becomes the enemy of overtaxed wage earners.