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Thinking Straight about Personal Exemptions

(Article published in the Jan 18, 2006 issue of Manila Standard Today)

             I wanted to start, by way of opening sentence for this item dealing with the personal exemptions in the income tax law, with, “Our Congress, like God, writes straight in crooked lines”. I decided not to, however, for holy fear that I be misunderstood and offend both Congress and God.  Our Congress for my broadcasting that, in my fallible view, it does some things (like writing straight lines) in crooked ways and God for likening Him to our Congress.

  God, though not to be tempted (as the Sunday readings ushering Lent are soon to remind us), is always forgiving. But since my six-hour sojourn at the Senate Sergeant-at-arm’s office last March continue to be reason for friend and foe to accuse me of legal naiveté for translating a Senator’s call for “restitution” into “in aid of collection”, I, in great awe of Parliament (may I be put on record as the first to refer to our Congress thus) in imitation of Cicero, categorically state that I am not saying that.

What I am really saying, and so hereby thus begin this item, is that the current Congressional reaction to Revenue Regulations No. 1-2006, though just focused initially on increasing the level of personal exemptions, provides a welcome impetus to the need to relieve subsistence income earners from the burden of taxation.

       Personal tax exemptions, as they are now found in Sec. 35(A) and (B) of the National Internal Revenue Code of 1997 (Tax Code), were granted by law to cover the amounts needed by the individual and his family to keep body and soul together.  By exempting that amount from income taxation, the law implicitly recognizes that Government really is not entitled to any portion of that amount which an individual and family need to live.  Corporations and other juridical entities have no bodies and souls and thus, unlike individuals, they are not granted personal tax exemptions.

Because no tax is expected to be due from one who earns only enough to keep himself and his family alive, he is not required by law to file an income tax return (Sec. 51(A)(2)(a), Tax Code).  Likewise, since there is thus no point in asking the employers (who are conscripts to the tax collection service by the withholding tax law) to withhold any amount from their salaries in anticipation of zero tax liability at the end of the year, no withholding is required of the employer (Sec. 2.83.4, Rev. Reg. No. 2-98).

Recently, Finance Secretary Margarito B. Teves, upon recommendation of BIR Commissioner Jose Mario C. Buñag, issued Revenue Regulations No. 1-2006, dated 29 December 2005 and by its terms effective 01 January 2006.  Amending the withholding tax regulations in effect since 1998, the new issuance simply included in the list of amounts exempted from withholding “compensation income of individuals that do not exceed the statutory minimum wage or five thousand pesos (Php 5,000) per month (sixty thousand pesos [Php 60,000] per year) which ever is higher” and “compensation income of employees of the Government of the Philippines or any of its political subdivisions, agencies or instrumentalities with salary grades 1 to 3”.

Effectively, Rev. Reg. No. 1-2006 just relieved the minimum wage earner of the pain of the withholding tax on his salary and does not exempt his earnings from tax.  In fact, the regulations emphasize that the minimum wage earners “shall remain liable for income taxes and shall continue to file their income tax returns and pay the income tax due thereon, if any, not later than April 15 of the year immediately following the taxable year.”

It is not, mind you, a cheap trick of the Arroyo administration to attract the votes of the minimum wage earner in any election or non-election in 2007.  The exemption of withholding of wage earners has been in the law since 1998 (Sec. 79(A) Tax Code).

To this grandiose gesture of the Arroyo administration to show its concern for the minimum wage earner, our legislators showed no more than token appreciation.  In a unanimity known rarely in recent days, the Ways and Means heads of both the Senate and the House of Representatives expressed the need to legislate enhancements.  Senator Ralph Recto is quoted to have wanted to “chisel in stone”, meaning write into law (as if a law passed by Congress is granite) the exemption of wage earners not only from withholding but also from taxation.  Obviously he did his homework and read tax professor Edwin Abella’s comment in his annotation of the Tax Code that the legislative intent of Section 79(A) was merely to exempt from withholding and not from taxation.  Congressman Jesli Lapus agreed and is said to have added that Rev. Reg. No. 1-2006 is likely to impose hardship on the minimum wage earner by expecting him to pay in lump sum on 15 of April instead of the regular deductions under the old regulations.  To these, I may add the incongruity of asking a minimum wage earner to file a return which others earning more, but from which tax was withheld, not to.

Both Sen. Recto and Cong. Lapus seem to be attracted to the idea of pushing the intent of benefiting the minimum wage earner incipient in Rev. Reg. No. 1-2006 to its logical conclusion by raising the personal exemptions in Section 35 of the Tax Code.  I beg to raise a word of caution:  Increasing personal exemptions will benefit the rich more than the poor.

Let me illustrate.  Assume a single individual without dependents, named “A”,  earning the highest minimum wager of only Php 92,500.00 a year, all told.  Under present law, since he has a Php 20,000.00 personal exemption, his net taxable income is Php 72,500.00 and the tax thereon is Php 9,000.00.  If the personal exemption is increased to Php 92,500 (which is his minimum wage), then he saves, and the Government loses, exactly Php 9,500.00.

Compare him with “B” who is A’s executive boss, also a single individual without dependents, earning Php 1,000,000.00, all told.  He pays, on his net taxable income of Php 980,000 the income tax of Php 278,600.00.  If the personal exemption is increased to Php 92,500 (the minimum wage), then he pays only Php 255,400.00.  He saves Php 23,200.00 or 32% of the increase in personal exemption from Php 20,000 to Php 92,500. 

The practical impact therefore of increasing the personal exemption is to give a check to A, minimum wage earner, in the amount of Php 9,500 and to B, his executive boss, another check, this time in the amount of Php 23,200.00.  That simple arithmetic demonstrating more money being returned to the rich will not, I think, convince A and the rest of the minimum wage earners to vote in favor of Mrs. Gloria Macapagal Arroyo’s candidates or proposals.

          The better approach, in my view, is to maintain the present level of personal exemptions but, to alleviate the lot of the minimum wage earner, grant him a special deduction of the difference between his income and his personal exemption.  To make up for the reduction in government revenues, the top levels of the tax rate schedule in Section 24(A) can be adjusted upwards in the same manner that the corporate income tax rate was increased when the VAT law was amended.  That last mentioned provision, I must say, again to save my skin, was not a rider.