Tax Data: 92% of Taxpayers Earn 33K and Below! Tax Reform Equals Tax Increase!

Income Tax bracket from the DOF’s Infographic on the Tax Reform and the breakdown of taxpayers from the BIR…

 

I am using the tax data above from the DoF to put into perspective the income distribution of the domestic population

If the data is accurate, then this provides a startling profile of the resident consumers.

A total of 92% of the (taxpaying) population earns a monthly income of Php 33,333 and below!!!!

And such level of income supposedly represents the vaunted consumer economy? The consumer economy whereby waves and waves of shopping malls, hotels and residential housing projects have hurriedly been built for?????????????????

 

In my view, this income bracket would be highly sensitive to rising real economy prices, such as rents, food, transportation and more…, and would unlikely function as a key source of munificent disposable income.

And such group have likely used payroll loans to augment their income. Payroll loans have been growing at a furious rate at 30+% and above, and which growth rate have climbed alongside with CPI from 2015 to 4Q 2016.

More. The Philippine Statistics Authority estimated that for April 2017 the labor force population was at 69.6 million. The population of individual taxpayers as of December 2015 was around 17 million. Let us assume that individual taxpayer grew to 18 million from 2015 to April 2017. The numbers suggest that 51.6 million of the labor force or 76% have not been paying taxes!!!

And have most of the non-taxpayers signified the informal economy where income bracket falls in the range of the DoF’s 33K and below? Grab and Uber drivers for instance?

Also, such numbers imply of a mammoth leakage in the individual taxpayer’s system. No wonder the DoF’s tax reform.

Yet for the spend spend spend ‘spend your way to prosperity’ to happen is if a huge number of high-income earners comprise the informal economy or haven’t been paying taxes.

Now for a short take on the DoF’s proposed tax reform.

With the government’s thrust to undertake Php 8.4 trillion in infrastructure projects along with many other welfare programs, only a buffoon would believe that the DoF’s tax reform would amount to tax cuts.

The government proposes to shift its tax base structurally from income to spending. That would be aside from boosters in the excise tax on petroleum products and on automobiles. As shown above, the government has had a difficult time expanding the base of individual taxpayers.

So desperate for funding, it instead proposes to expand the supply side tax base through an expanded VAT coverage.

According to the DoF, while the Philippines have the highest VAT rate in the region, it has the most exemptions: 59 based on the tax code and 84 additional exemptions in special laws.

Among the proposed VAT exemptions to be removed are those on cooperatives, replacement of franchise tax with VAT for Power transmission, lease of residential units, domestic shipping importation, boy scouts and girl scouts, low cost and socialized housing, indirect exporters and agents and foreign currency denominated sales.

Wow rent prices will soar!

The thrust towards an expanded VAT system comes with a consolation: income taxes will generally fall. The lowest category of taxpayers would be exempt from tax payments. That would look good except that the supply side tax increases or the VAT will more than offset whatever savings from cuts in income taxes.

For instance, the call center agent who earns Php 273K a year (Php 22.75K per month) would see a tax savings of 21,867 or 8%. Great but…

…if the call center agent buys all of his/her requirements from the sari-sari store A which sales have been more than Php 3 million a year, then such store would be subjected to VAT. And since sari-sari A would pass the VAT to the consumers then this translates to 12% increase in prices.

So such magnitude of price increase would more than wipe out the savings from the tax exemptions.

And if call center agent buys from Sari-sari store B which sales is below Php 3 million a year, then the saidsari-sari store will be subjected to Non-VAT taxes of 8%. This tax sleight of hand means again that whatever savings from “exemptions” would only be transferred to as higher consumer prices through an expanded VAT.

At the day’s end, the tax reform represents a general tax increase and that there would hardly be any savings for income earners.

Higher taxes mean a lower standard of living for the citizenry. Higher taxes extrapolate to a bigger payday or a windfall for the government and for their favored private sector patrons.

The DoF’s tax reform essentially signifies the “crowding out” process in motion.