TAX in the Philippines

It is not bad, per se, to have the flexibility that the chief executive officer of a country should have in the management of funds to efficiently address real-time needs difficult to foresee in a budget. But the trouble is in the honesty and integrity of the person who has that flexibility -- the DAP can easily morph into the notorious Priority Development Assistance Fund (PDAF) and its corrupt diversions, in the hands of a president less honest than PNoy.

“Savings” has no other meaning than a surplus from necessary disbursements within a resource pool. It is best seen, and most easily recognizable, at the lowest level of personal finance than in its legalistic definition in the Constitution at the macroeconomic level of a country.

For an individual, the purpose of savings is for only one thing: to be there for contingencies like the unforeseen need in times of sickness, calamities, loss of job; or to build up for funds needed for yet-unaffordable investments like a home, car, college education of children, personal luxuries and others.

In prudent personal finance, the usual rule-of-thumb for personal savings is 10% of (annual) income -- very much like the tithing to the Church (also 10% of income) of Catholics, Protestants and other Christian religions who base this on Deuteronomy 14:22-29 in the Bible. Call savings a tithe to one’s self or one’s future.

Yet in a 2012 Bangko Sentral ng Pilipinas (BSP) survey, it was revealed that Filipinos are generally not savers. There is a “high tendency of Filipinos to spend -- rather than save or invest,” according to the survey, and “about four of 10 households do not have any cash on hand to be used in case of emergency, while six of 10 households have very little cash to spare.”

Respondents include the two out of 10 Filipino households who depend solely or partly on the 11 million or so overseas Filipino workers (OFW) remitting some $22.8 billion in 2013 to support their families’ expenditure requirements. Sadly, there is little saved from the foreign exchange-advantaged short-term contracts of these OFWs.

One challenge for the country is its low domestic savings rate, according to a recent study presented by economist Y.H. Kim at the Asian Development Bank. The Philippines is in the “low savings” rate category at 17% of GDP in 2000 and still declining -- along with Bangladesh, Myanmar and Uzbekistan. In contrast, Thailand, Malaysia, and Singapore all have savings rates over 30%.

The most glaring reason that the savings rate in the country is low is that 30% to 40% are living below the poverty line, according to first-term Senator Juan Edgardo Angara. To alleviate this, Angara is pushing for the passage of Senate Bill 2149 that seeks to reduce an individual’s income tax rate, within adjusted income tax brackets, from the current 32% to 25% by 2017.

The Tax Management Association of the Philippines (TMAP) supports Angara’s bill, comparing individual tax rates with ASEAN neighbors, and showing that the Philippines’ 32% tax on taxable income of P500,000 is the highest in the region.

In the Philippines, an annual income of P500,000 and above is taxed at 32%. A worker earning an equivalent P500,000 in Singapore pays only 2% income tax. In Vietnam, the tax rate is 20%, while in Malaysia it is 11%. In Cambodia, the same income gets 20% income tax, while in Laos a 12% income tax is levied, TMAP says. In Brunei, workers who earn the equivalent amount of P500,000 do not have to pay any income taxes.

“[Top individual] income tax rate should, at the very least, be the same as that for corporations (30%) or even lower...within a range of 20% to 30%,” the association said. Some lawmakers agree that lowering income tax rates will increase the purchasing power of the people, but contradictorily, the counterpart committee in the House of Representatives is looking into raising the Value Added Tax (VAT), which is imposed on all citizens (except for senior citizens in some cases). This is apparently in response to the warning of the Bureau of Internal Revenue for there to be a compensation for the revenue loss by lowering income taxes. The Department of Finance said the government would lose at least P43 billion by 2017 if the Angara bill is passed.

It has been found from US state program reviews that “promoting deep cuts in personal income taxes as a prescription for economic growth has not worked particularly well in the past and ... states that enacted major personal income tax cuts in the 2000s, before the most recent recession hit, (lost) economic ground as gain (ed) it.” Budget shortfalls from reduction in tax revenues will have to be made up in other taxes, and public services will suffer from lack of funding. The expected personal savings which will go to banks and the more sophisticated investments in real and financial products will be a small percentage that will be brought back to help the economy.

Yes, the personal savings from individual income tax cuts will ease the day-to-day budget of the Filipino wage workers and rent-earners. But considering the poverty level and the Filipinos’ present unimpressive propensity to save, might it be better to keep the government whole with expected tax revenues at the present level and structure -- for the country to work toward the economic confidence in the global arena for survival?

It depends on how the PDAF scam and the present controversy over the DAP “savings” will be resolved, before the Filipino can have the confidence to continue to give hard-earned income tax tithes to their leaders.

Amelia H.C. Ylagan is a Doctor of Business Administration from the University of the Philippines.