The (almost) two decades old graduated tax table that defies inflation

Back in 2008 (7 years ago!), I called for a major revamp of the ‘then’ decade old and obsolete tax law, specifically for the part pertaining to individual income taxes. Since then, minor revisions were made, like the exemption of minimum wage earners and adjusting the 13th month pay and other benefits ceiling excluded from the computation of gross income.

[Read: Rappler—Aquino signs law raising tax exemption cap for bonuses.]

NIRC of 1997
National Internal Revenue Code of 1997 book July 2009 Edition by Danilo A. Duncano. This book may need revisions, but not as much as that of the law itself.

Yet, the gist of individual income taxation remains, that is — the (almost) two decades old graduated tax table that defies inflation. The economy has gone through at least two financial crises, but the tax brackets are unable to keep up with rising consumer goods (and services) prices since 18 years ago. The Philippines’ Consumer Price Index (CPI) has increased by 119% from 1997 to 2014—for crying out loud!

But unlike 7 years ago, there are now bills lodged before the Congress that purport to lower income taxes for individuals, which Pres. Benigno Aquino III deemed a bad idea. Luckily, Sen. Sonny Angara carries on and is pushing for government to prioritize public needs over credit ratings.

Apparently, we have a president who’s an economics graduate, who fails to recognize that increased government spending and lower tax collection can bolster economic growth by putting more money into people’s hands, which eventually will stimulate more economic activity in order to collect more taxes in the future.

Above all, we have a president who doesn’t believe that income taxes should be commensurate to the level of earnings vis-a-vis the standard of living of individuals. (Let alone the comparative effective individual income tax rates in our neighboring countries.)

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Ed DB October 5, 2015 Reply

Oh yeah, it’s about time to revise internal revenue code. But the current proposals are myopic and the true intention of some of those pushing for change is questionable. I don’t agree how they’re bringing the discussion to the public.

First, changing tax rate is tricky. It is very easy to say we have one of the highest tax rates but that doesn’t necessarily mean we are paying the highest tax. We should be looking at effective tax rates. Proposals to change tax code should look at changes with long term and high impact e.g. deductions. Why not focus on deductions that targets specific taxpayers, tax rules on personal deductions against salary (e.g. family planning deduction which allows salaried taxpayer with less than 3 children to deduct tuition fee of kids). This type of tax changes will reduce tax burden of individuals by putting incentives on family planning. There are lots of similar cases to explore. They can look at how tax deduction works in developed countries. Perhaps they can also talk about putting into law automatic adjustment of personal deductions so BIR can automatically adjust deductions without going to congress.

Second, we need to balance government budget. Recto and Angara know this and I believe they’re putting some good proposals. But others e.g. Colmenares etc seems to thinks that the government doesn’t need money so it’s OK to simply reduce revenue. Obviously that’s irresponsible.

So I agree that we need to update our tax code. We need a more reasonable, flexible, easy to implement tax code. And this should go through thorough studies and consultations with experts and economists.

Of course every Juan De la Cruz wants less tax and more take home pay. And politicians want more “pogi point” votes. Yan ang mga traydor, inuuna ang sariling kapakanan kaysa sa bayan! Lol

deuts October 6, 2015 Reply

With that long comment, it could have been worth another post! hehe

Anyway, honestly, I don’t know which way you were going with your arguments there. hehe

But let me stress out my point: let’s try comparing a newly promoted manager in say 1997 vs. today 2015.

A newly promoted manager in 1997, we can guess, used to earn P15,000 per month. To simplify, that’ll be P180,000 per year (let’s ignore 13th month and personal exemptions for illustration purposes). His total tax for the year will be P32,000 (you may refer to the tax table here), or an effective tax rate of 18.1%.

A newly promoted manager of today (2015) could be earning P40,000 per month, or P480,000 per year. Applying the same tax table would yield a tax of P119,000, or an effective 24.8%.

So, therefore, a newly promoted manager of today pays relatively more tax than the one who was promoted in 1997. That’s where the adjustment should be in our tax code.

Ed DB October 6, 2015 Reply

I said I agree we need to update tax code. I could have stopped there. But the biggger topic here is HOW. And I don’t like politicians overly simplifying the issue just to get public support.. Or vote.

deuts October 7, 2015 Reply

You’re right. Proponents of the revision to the tax code need not beat around the bush. The real issue here is inflation since the currently applicable tax code was formulated. They have to directly address that. Thus, I am of the opinion that the issue about the loss in tax revenue for the government is irrelevant.

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