Fat-Free Econ 41: Cut Income Taxes

* This is my article yesterday in interaksyon.com. The "movie editor" that I referred here is Manny Castaneda, my co-cast in the late 80s political satire program, "Sic O Clock News" aired in IBC 13 and directed by the late Marilou Diaz-Abaya.
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Mid-April each year is the deadline for filing income tax payments made the previous year for both individuals and corporations.  A friend, a local movie director, commented in his Facebook wall, “April, buwan ng pagbabayad ng tax. Personally, it's like throwing my hard earned money into a toilet bowl. Wala naman itong silbi sa buhay ko.”

This sentiment is common, especially among fixed income earners. For them, surrendering up to 32 percent or nearly a third of their monthly income to the government through the mandatory withholding tax is a painful reality that they have learned to accept. That is why a proposal for a low flat income tax is worth looking into, and for the following reasons:

One, a flat tax rate of 15 percent or lower would attract many investors from the rich countries of Asia, North America and Europe to do business and create jobs in the Philippines. The country's two dynamic neighbors -- Hong Kong and Singapore -- benefit from a low flat tax rate.

Table 1. Top marginal income tax rate for selected countries

 

Source: Economic Freedom of the World (EFW) 2012 Report

The investors in Europe and North America are already paying high taxes and yet their governments are still heavily indebted. Which means that taxes there will rise further, or new taxes will be created to generate the revenues required to pay off debt. Many investors want to jump ship, looking for attractive economies abroad where they can put invest their money and talent.

Two, Philippines' 32 percent top tax rate for individuals and 30 percent for corporations appear to be in the region of declining revenues on the Laffer curve. This curve shows that as tax rates rise, actual revenues decline as people either reduce work and rest more, or find various loopholes to avoid paying more taxes. In Table 1, note that countries that reduced their income tax rates since three decades ago have some of the world's most dynamic economies. Their governments realize that very high income tax rates are not good.

Three, a cut in the Philippines' income tax to a flat rate of 15 percent or lower can be compensated by raising the value-added tax (VAT) from 12 percent to 15 percent. Many rich people either pay very small taxes or none at all. Like many professionals, businessmen, showbiz stars, corrupt government officials, drug lords, gambling lords, land grabbers and other criminals. But these people flaunt their wealth -- their new house/s, cars, watches and jewelries, laptops and cell phones, clothes and shoes, travel and so on. All these things usually are captured by the VAT system.

Government has many other sources of revenue, which apart from VAT also include excise tax, vehicle registration tax, travel tax, real property tax, to name  a few. Then there are various transaction taxes like documentary stamp tax, franchise tax, common carriers tax, bank earnings withholding tax, capital gains tax. And there are various fees: passport fee, driver's license fee, terminal fee, business permit fee, and so on.

Table 2. Philippine Government Revenues, in Billion Pesos

Sources: Bureau of Treasury and BESF 2012-2013

Four, a low flat (or single-rate) income tax is not a novel idea, having existed in many countries. For instance, those that have 10 percent flat rates are Albania, Belarus, Bulgaria, Kyrgyztan, Kazakhstan, Macedonia, Mongolia and Serbia. Macau imposes 12 percent and Russia, 13 percent. Those that have 15 percent rates are the Czech Republic, Georgia, Iraq, Mauritius, Montenegro and Ukraine. Hungary and Romania impose 16 percent, while Estonia and Slovakia, 18 percent and 19 percent, respectively.

At least two Senatorial candidates in next month's elections -- Senator Ralph Recto and former Manila City councilor Greco Belgica -- are proposing to cut the country’s income tax rate.

Recto was the main author of Republic Act No. 9337 or the Expanded Value Added Tax (EVAT) Law. When he ran for re-election in the 2007 elections, he lost mainly because of a political backlash against his role in pushing that law. This time, Recto is playing a “taxpayers’ friend” role by proposing an income tax cut -- to what rate we have yet to divine.

Belgica proposes a “flat tax of not more than 10 percent of individual or corporate income only.” His proposal makes sense but his chances of becoming a senator next month, like many lesser-known candidates, are nil.

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See also:
Fat-Free Econ 15: IMF and Freedom From Debt, July 01, 2012

Fat-Free Econ 38: Jobless Growth vs. Jobless Non-Growth, February 12, 2012

Fat Free Econ 39: P57,000 Public Debt Per Filipino, February 25, 2013 

Fat-Free Econ 40: IMF Irrelevance, March 16, 2013

Abolish Income Tax 6: Income tax and VAT trade-off, February 08, 2010
Abolish Income Tax 7: Rene Azurin, Peter Wallace, John Mangun, August 19, 2011
Abolish Income Tax 8. From low flat tax to zero income tax, September 30, 2011

Tax Cut 12: Removing Taxes on Foreign Airlines, April 02, 2012
Tax Cut 13: Remove the Excise Tax on Oil Products, July 04, 2012, 

Tax Cut 14: APTU Meeting in Bangkok, March 1-2, January 22, 2013