* This is my article in BusinessWorld last Thursday.
BWorld 135, On reducing the distribution system loss, June 9, 2017
“The income tax created more criminals than any other
single act of government.”
-- Barry Goldwater (US businessman and five-term senator)
“The difference between death and taxes is death doesn’t get
worse every time Congress meets.”
-- Will Rogers (US actor, humorist, columnist)
The tax reform plan of Dutertenomics known as Tax Reform
for Acceleration and Inclusion (TRAIN) is composed of (a) overall personal
income tax (PIT) cut, (b) hike in excise tax for cars and oil products, (c)
hike tax for sugar-sweetened beverages, and (d) hike in number of sectors
covered by the value-added tax (VAT).
This paper will focus on the income tax reform:
Minimum-wage earners and those earning P250,000/year and below will pay zero
income tax. The 13th month pay and other bonuses not exceeding P100,000 are
also exempted from income tax. The number of tax brackets has been reduced from
seven to six. And the top PIT rate of 32% for taxable income of P500,000/year
or higher has been increased to 35% for taxable income of P5 million/year or
higher.
To better appreciate the current PIT and proposed changes
in the policy in the Philippines, let us compare the rates with our neighbors
in the ASEAN.
The proposed PHL-TRAIN indeed deserves compliment because
current PIT policy is highly confiscatory and makes Barry Goldwater’s statement
so accurate. Imagine earning an annual income (net of some deductions) of only
$10,000 and the Philippine government automatically confiscates one-third of
that.
But what the Department of Finance (DoF) and Congress did
is to adopt the “increase tax rates elsewhere to compensate for lower PIT rate”
philosophy. This is wrong and there are four reasons why.
First, it is possible to abolish income tax, zero, and
yet government will still survive and prosper via other revenue sources.
Currently there are 10 countries in the world which have zero income tax
policy: Bahamas, Bahrain, Bermuda, Brunei, Cayman Islands, Kuwait, Oman, Qatar,
Saudi Arabia, and United Arab Emirates. Their governments rely and thrive on
selling petroleum, natural gas, lands, and/or earning from consumption-based
taxes and financial transaction taxes.
Second, lower PIT rate can expand the tax base and can
potentially increase overall tax revenues. More entrepreneurs and professionals
from abroad as well as Filipinos working abroad will be encouraged to do
business here to take advantage of lower income tax rate and hence, bigger take
home pay.
Stated in a simple equation: Tax revenue (T) is a product
of tax rate (t) multiplied by the number of taxpayers (N). Or (T = t x N). A
decline in t can encourage the increase in N so that overall T can potentially
increase, not decrease.
The DoF and Congress leaders have taken the linear and
simplistic argument that lower tax rate means automatic lower revenues. They
did not consider potential increase in N and T when income tax rate is
significantly reduced.
Currently, Asian economies with low, flat income tax
rates are Mongolia with only 10%, Macau with 12%, and Hong Kong with 15%.
Third, lower PIT even for high-income people means more
take home pay, more domestic consumption which are captured by other consumption-based
taxes like VAT, excise tax, property tax, motor vehicle tax, entertainment tax,
travel tax and so on.
And fourth, the politics of envy is wrong. The philosophy
of “demonize and overtax the rich, subsidize the poor forever” creates moral
hazards problem. The implicit message is: Be careful when you become rich
because the government will silently demonize you and explicitly overtax you.
Aspire to remain poor, poor forever if possible because (a) your minimum wage
income plus bonuses will be tax-free, (b) you get lots of freebies and
subsidies, and (c) these are no timetable, forever subsidies and transfers.
When there are plenty of poor people, the government is
silently saying two things: “Congratulations” and “Thank you.” Here’s how:
a. “Congratulations -- you are entitled to many subsidies
and freebies: free cash transfer, free health care, free education until
university, free or highly subsidized housing, free or highly subsidized
e-tricycle, tractor, etc. No timetable, for life, can extend to your children
and grandchildren, so long as they continue to be poor.”
b. “Thank you -- we have more justifications and alibi to
harass and confiscate more from the income, wealth, properties and inheritance
of the rich and super-rich (especially if they are not friends of the
administration).”
Therefore, instead of raising the top PIT rate to 35%,
Congress should bring it down to 25% to be more comparable with Malaysia;
better if it is only 20% to be more comparable with Singapore rate.
Society should reward people who become rich and wealthy
via entrepreneurship and efficient professional work, not demonize and overtax
them. We should have more millionaires and billionaires, not less; we should
have more super rich people, not less.
Bienvenido S. Oplas, Jr. is the head of Minimal
Government Thinkers and a Fellow of SEANET and Stratbase-ADRi.
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See also:
BWorld 133, Dissecting Dutertenomics' overspending plan, June 01, 2017
BWorld 134, PPP vs ODA, June 08, 2017 BWorld 135, On reducing the distribution system loss, June 9, 2017
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