April 13, 2009

Current income tax structure not progressive in substance

Dahil papalapit na ang filing ng ITRs, napasulat ako ng isang income tax related letter sa Inquirer. Sana maprint at sana may sumuporta:

More than a decade ago, an individual with an annual income of just over half a million pesos may be considered rich. Nowadays, it would be ridiculous to consider a midlevel manager earning a gross income of P50,000 a month in league with tycoons like Henry Sy and Jaime Zobel de Ayala. But that is precisely what our current Tax Code implies, since the said manager is classified, along with the billionaires in society, in the topmost income bracket for income tax purposes.

The progressive income tax system which we adopted in this country works on the principle that those with greater means or ability has greater responsibility in bearing the costs of society. It is supposed to be a just system which tempers wealth and income inequality. However, a tax system which is progressive in form is not progressive in substance if it classifies an individual who can not earn enough income to buy his own house in the same league as a rich individual who lives in a gated high-walled exclusive village in Makati. Our current income tax system is so out-of-touch with reality that a professional or a call-center agent with only three to four years of experience already qualifies for the second highest income bracket and is asked to pay an income tax rate that is just 2% away from the maximum individual income tax rate (30% vs. 32%).

The current Tax Code was legislated way back in 1997 even before the Asian financial crisis. The decrease in purchasing power of the Philippine peso and the increase in cost of living since the law was passed has definitely made the individual income tax brackets outdated. I believe it is time for legislators to reexamine and adjust the income tax brackets in our Tax Code to make it more middle-class friendly and for it to serve its progressive intent. This is not just an issue of providing economic relief. It is also an issue of economic justice.

4 comments:

Anonymous said...

sir...u take my breath away...with the way things are going, an invitation to the palace is inevitable. i hope they do not coerce u..hehehe

Anonymous said...

An opinion from my boss
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if you have access to paeng's blogspot and can make comments to it, I think I agree with him on his argument that the tax brackets should be revisited, as the value of money has significantly decreased over the years. However, I don't think in a "capital hungry" economy such as ours, that to impose substantially higher taxes on the (filthy) rich would be a plausible consequence, because of the trickle-down effect it could have - they have the resources, and if taxes become so high on their income, it might be a disincentive for them to invest, and would look to place their capital elsewhere than in the Phiilppines (less jobs), or worse, look for ways to pay lower taxes "under the table". I remember a discussion we had in college with the argument that you cannot "penalize" the rich just because they are, on the premise that they worked hard for their money (now, whether that is true or not is an entirely different matter).

Probably not as good and understandable a digression as paeng's was, but it's a point worth discussing nonetheless. For the record, I'm nowhere being classified as "rich".

-MUB
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Anonymous said...

Regarding An Opinion from My Boss-

"I think I agree with him on his argument that the tax brackets should be revisited, as the value of money has significantly decreased over the years."

Comment:
Better if it stopped at this point, much illogical discourse - presumptions and conclusions based on presumptions - follows. Paeng's message is very clear.

"However, I don't think in a "capital hungry" economy such as ours, that to impose substantially higher taxes on the (filthy) rich would be a plausible consequence,"

Comment:

Digressing, or rather opening up another topic. I think Paeng never said it in his blog that imposing higher taxes would be the consequence. On the contrary, upward adjustments in the tax bracket without change in the tax rates may even result in the middle class paying relatively lower taxes compared with the rich class(which is what Paeng is actually saying).

"because of the trickle-down effect it could have - they have the resources, and if taxes become so high on their income, it might be a disincentive for them to invest, and would look to place their capital elsewhere than in the Philppines (less jobs), or worse, look for ways to pay lower taxes "under the table"."

Comment:
Directly and in the strictest sense, Paeng's is alluding to individual taxation. Taxation for subsidiaries, and other more common vehicles of foreign investment is different. There's not even a comparable tax bracket/graduated tax table for corporations :)

"I remember a discussion we had in college with the argument that you cannot "penalize" the rich just because they are, on the premise that they worked hard for their money (now, whether that is true or not is an entirely different matter)."

Comment:
Even in the present "progressive" system of taxation wherein the rich effectively get's taxed more, of course the State is not penalizing the rich just because they are, that's oppressive. The theories of taxation and its noble purposes should not be misunderstood. Recall Ability-to-pay theory, Benefit Theory, Redistribution of Wealth Theory, etc. and the rich jurisprudence and other well-settled doctrines in this respect.

I support Paeng's rather simple but insightful proposition :)

Paeng said...

Salamat sa lahat ng nagpaparticipate sa discussion dito. :)

Now if only the congressmen and senators whom I sent letter to would take notice.