Taxes Hurting the Middle Income Group

Government Needs to Rationalize Tax Policies

May 27, 2009 Mary Anne Velas

The Philippine government may need to further rationalize tax structure as the middle class could be hurting badly in the light of low wages.

The current Tax Code reveals that the middle-income groups are being taxed roughly from 20 to 30% of their income. The Code specifically mandates the following tax schedule for those with income from P70,001 to P500,000:

• Over P70,000 but not over P140,000 - P8,500 + 20% of the excess over P70,000
• Over P140,000 but not over P250,000 - P22,500 + 25% of the excess over P140,000
• Over P250,000 but not over P500,000 - P50,000 + 30% of the excess over P250,000

Under this Code, a sole breadwinner with three dependents who is earning about P20,000 (about US$416.67) monthly, would need to pay an income tax of about P1,792 (about US$37.33) per month. If the mandatory deductions (i.e. social security benefits, PhilHealth, etc.) would be factored-in, the take-home pay of this breadwinner would amount to about P17,058 (about US$355.37).

If his monthly rent or amortization cost is about P4,500 (about US$93.75), he is only left with P12,558 (roughly US$261.62) to spend on food, clothing, education, transportation, medical and other personal needs. Clearly, there is not much left on savings, if any, at all.

Worse, the P12,558 disposable income left after tax and rent/mortgage may not even be enough to allow this family to live decently. For example, P12,558 divided in 30 days leaves this breadwinner only P418.60 a day (about US$8.72) to spend on his family’s basic needs. Assuming that a person needs about P150 a day (roughly US$3.12) to live decently (a very conservative estimate), this breadwinner will have a deficit of P181.40/day or P5,442/month (US$113.37).

Current Efforts in Revising Tax Laws

There are efforts in Congress to revise existing tax laws. Last June 2008, Republic Act 9504 (An Act Amending Sections 22, 24, 34, 35, 51, and 79 of RA 8424 or the National Internal Revenue Code of 1997) was enacted into law. This law gives tax exemption to minimum wage earners or those who receive a daily wage of P350 (roughly US$7.30) and increase in personal exemptions of other taxpayers (i.e., instead of using different personal exemption rates for different categories, the personal exemption rate is now fixed at P50,000 per taxpayer).

However, even with such a law, the middle-income earners may still be suffering in silence as what the computation above will reveal. Incurring a deficit of P5,442 a month definitely needs a closer scrutiny.

Obviously, giving higher wages seems to be the clear solution. However, the Philippine economy simply cannot afford it. More and more Filipinos are leaving to seek greener pastures abroad because wages in the Philippines are way too low compared with, say, wages in countries such as Saudi Arabia, Australia, Canada, and Hong Kong. For instance, a public school teacher will earn about P12,000 (roughly US$250) in the Philippines while he can earn as much as US$1,500 teaching English in Hong Kong or Korea. Even with the disparity in the cost of living between the Philippines and host countries, overseas Filipino workers still manage to realize substantial savings and higher disposable income if they work abroad.

Need to Further Rationalize Tax Structure

Rationalizing the tax structure may prove to be a workable solution in the face of low wage levels. For example, if the rate tax is reduced at 50% from the current rate, the middle income group may experience a relief. Using the example above, the breadwinner earning P20,000/month will still have P436 (roughly US$9.08) a day to spend on his family’s daily needs. There may still be a deficit but not as much as when his tax rate is at 20%.

The consequential loss in tax revenue can be compensated by more efficient tax collection, improvement in government spending, and curbing of corruption.

The middle income group is a potent source of talent, spending power, and social change agents. The sector, given the right economic support, can push the country towards genuine development.

The copyright of the article Taxes Hurting the Middle Income Group in Personal Budgeting/Finance is owned by Mary Anne Velas. Permission to republish Taxes Hurting the Middle Income Group in print or online must be granted by the author in writing.

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