By proposing to cut income tax rates for most taxpayers, the Duterte administration’s economic managers have shown a certain boldness in policymaking that goes beyond the tepid parameters of past tax reform initiatives.
Since the Ramos administration’s comprehensive tax reform package in the mid-1990s, most of the tax reforms that followed sought largely to impose new taxes, expand the coverage of existing ones or increase the rates. No comprehensive overhaul of the tax system was attempted to address the country’s extremely burdensome income tax rates, which are one of the highest in Asia.
But tax cuts are not the only bold feature of the new administration’s tax package, called the Tax Reform Acceleration and Inclusion (TRAIN) Act, which is now under deliberation by the House of Representatives. It also proposes a zero tax rate for taxpayers earning a taxable income of Php250,000 or less, which is roughly equivalent to a monthly pay of up to around Php21,000 a month. Under the current system, only minimum wage earners are exempted from paying income taxes. (See infographic for a comparison of the present and proposed tax rates)
How many taxpayers will benefit from the higher threshold for income tax? According to the Department of Finance (DOF)’s estimates, around 83 percent of taxpayers earn an annual taxable income of up to Php250,000. The Bureau of Internal Revenue (BIR) says there were 10 million individual taxpayers as of 2014. The DOF’s estimates mean that about 8.3 million taxpayers won’t have to pay any income taxes at all if the proposed tax package is passed, according to our calculations.
The remaining 16 percent of taxpayers will see reduction in their income tax payers in the next few years, added the DOF. That’s roughly equivalent to about 1.6 million individual taxpayers per our calculations. Only one percent of taxpayers, or around 100,000 individual taxpayers, will be subject to higher income tax rates. An extremely small number of the very wealthy—those earning more than Php5 million a year—will be subject to 35 percent income tax rate, which is even higher than the current top rate of 32 percent. But there are less than 10,000 of these individual taxpayers, per our calculations using the DOF and BIR’s numbers.
To offset the short-term revenue losses from the lower income tax rates, the DOF is also proposing to increase taxes on motor vehicles, petroleum products and sugary drinks, as well limit tax exemptions of certain favored sectors and economic activities. It says that the burden of the higher taxes will fall largely on the well-to-do while the benefits of the tax cuts will be enjoyed mostly by the lower-income and middle classes.