|The proposed tax cut is most unkind
Despite screaming headlines last week proclaiming big tax cuts to be proposed by the President to Congress, officials of the Department of Finance continue to maintain that the rates are still being fine-tuned. And fine-tuned they should certainly be, because, the proposed rate schedules, for individuals as well as corporations, if adopted as they were purportedly bared by Malacanang some time last week are bound to foment dissention among those whose income primarily consists in salaries and wages as well as cause them, as a group, to resent individuals who are engaged in business.
Raising the threshold of taxable income is a good idea considering the current cost of living. But it must be observed that exempting all income not more than Php 75,000 will benefit a worker whose is presently taxed on Php 10,000 only Php 500. An employee who pays tax now on his Php 30,000 will save only Php 2,500 and his supervisor whose Php 75,000 is currently taxable will save only Php 9,500. A year.
On the other hand, under the proposed rates, a lower management executive who is barely at the top bracket of the present rate schedule, at Php 500,000 taxable income, will pay under the proposed rates Php 60,250 less than his present liability of Php 125,000 and his more senior counterparts, who, let us assume, report a taxable net income of Php 1 million will have Php 90,750 more remaining in their pockets after taxes.
Another way of looking at the impact of the proposed rates on the present after-tax income of wage and salary earners is that the proposed individual tax rates will in effect send workers and laborers at the lower bracket of the present rate schedule gift checks in the amounts of Php 500, Php 2500, and Php 9,500 if their taxable incomes are not more than Php 10,000, Php 30,000 and Php 75,000 respectively. At the same time, the bill will give to the executives at the higher echelons definitely bigger checks, e.g. Php 60,250 to one who reports a Php 500,000 taxable income and Php 90,750 to one who is taxable on his Php1 million.
If we accept the observation that those who were at EDSA 3 are those who are at the lower bracket of the tax rate schedule and those who were the leaders of EDSA 2 those at the higher bracket, it is obvious that the proposed rate schedule will not go far in healing the wounds of division between the two.
Moreover, the wage and salary earners as a group, after they realize what their brothers who are in business can do, will resent the tax avoidance concession, probably unintended, given to those whose incomes are not compensation income. The top rate proposed for individuals is 28%, i.e. any taxable income in excess of Php 650,000 will be taxed at 28%. The government, Presidential Spokesman Rigoberto Tiglao is said to have revealed, is thinking of lowering the present corporate tax rate of 32% to either 26%, or to 21% or even 20%. Since the proposed top rate for individuals is 28%, this variance will serve as a powerful incentive for any single proprietor who is earning more than Php 650,000 to incorporate and do business as a corporation. This is a neat way of avoiding 2% percent of the 28% increase in his marginal tax rate, i.e. on all income over Php 650,000. The result is that only the senior executives who cannot, under our present income tax law, shift compensation income away from their income tax return, who will be paying at the top rate of 28%.
Aside from fomenting this frustration among the highly paid executives, the migration of business presently conducted under single proprietorships to the corporate form will in turn generate a host of imaginative ways of siphoning cash out of the corporation, by way of phantom expenses and bloated costs as well as misrepresentation of personal expenses as business costs. Family drivers will be represented as company drivers. Grocery expenses of the missus will be booked as supplies. In effect, a new arena will be opened for the vigorous cat and mouse game between the tax examiner and the taxpayer. We all know how that game ends most of the time. The rats among us are living proof that the cats are not the usual winners.
Giving a tax break to those in the lower income brackets is certainly a good idea. But, giving bigger breaks to those in the higher rungs is not consistent with the idea of reform. If, as the economists tell us, leaving more money in the pockets of the citizenry is an effective measure to pump prime the economy, then there ought to be, in my mind, some measures to ensure that what is left in the hands of the high earners are not spent in taking the family abroad for a vacation, buying another vacation house, and other forms of consumption, conspicuous or otherwise. At the very least, there should be, I submit, some way of ensuring that the tax foregone is kept within the local economy, preferably as long term capital. How about maintaining the present rates for all taxable income in excess of over Php 140,000 (the present top rate on which is 20%) with an option on the part of the taxpayer to be taxed under the proposed rates, provided the savings is invested in a ten-year bond the proceeds of which are to be used exclusively in the governments fight against poverty? Otherwise, the old rates apply.
As for the corporate tax, I suggest that the corporate rate be the same, as the top individual rate, making the tax system indifferent as to the legal form under which business is done by individuals. The present parity between the top individual rate and the corporate aint broke. There is no need to fix it.