Tax Articles

There is a bill introduced by Senator Bam Aquino which seeks to amend the income tax rates for individual taxpayers. The measure aims to revisit the current rate schedule and provide relief to individuals, many of whom earn purely compensation income. The proposal is a welcome development and deserves serious consideration, particularly in light of the continuing rise in the cost of living.

Currently, under Section 24 of the 1997 Tax Code, as amended, individual taxpayers are subject to a graduated income tax system with a tax-exempt threshold of P250,000 annually and a maximum marginal rate of 35%. While the TRAIN Law (Tax Reform for Acceleration and Inclusion) previously reduced rates for individual income earners, the structure still reflects a low threshold for exemption and relatively steep progression at the higher brackets.

Under the bill, the personal income tax exemption is being proposed to increase from P250,000 to P480,000 annually. The progressive tax rates are retained with slight adjustments, starting at 15% for the lowest bracket, gradually increasing to 20% and 30% for higher earnings, while the maximum rate of 35% remains for the highest income bracket.

While the proposal will provide a sigh of relief particularly for lower-income earners, in my view, the reform can go further. Perhaps, we can consider increasing the tax-exempt threshold to P600,000, and the maximum marginal rate reduced to around 25%, or at least aligned more closely with the corporate income tax rate of 20–25%. The progressive rates on the other hand could start from 5–10% and increase gradually up to the maximum. Such a recalibration would, to my mind, better reflect current economic realities.

A 600,000 tax-exempt threshold, which is equivalent to a monthly income of 50,000, would at least provide income earners and their families a more decent standard of living, closer to the quality of life seen. more advanced economies. If taxed at the current rates, or even with the proposed rates, an earner would probably still struggle to maintain such a standard. While this income level may be sufficient for basic commodities, this would likely fall short of meeting a more decent housing needs and other essential needs for a good quality of life.

Individual compensation earners should be treated with greater leniency because their income is primarily for family consumption. Unlike corporate taxpayers, individuals earning purely compensation income have virtually no deductions available to them. Corporations may deduct ordinary and necessary business expenses before arriving at taxable income. Individual employees, on the other hand, are taxed largely on gross compensation, with limited available deductions, mostly on mandatory contributions to the government’s social security and healthcare system. They shoulder housing costs, education expenses, healthcare bills, transportation, and daily subsistence, which are not deductible for individual income tax purposes.

The cost of living in the Philippines continues to rise. Hospitalization and healthcare expenses are substantial. Quality education, particularly private education, remains costly. Even basic utilities and transportation expenses have increased significantly over the years. In many high-tax jurisdictions, elevated individual income tax rates are balanced by robust social benefits such as accessible public healthcare systems, subsidized or free tertiary education, reliable public transportation, among others. In contrast, Filipino taxpayers often shoulder these expenses directly. If the government does not provide comparable public services, it is reasonable to be more generous at least on the tax burden imposed on individual earners.

Increasing the exemption threshold and lowering the maximum rate would, in fact, stimulate consumption and economic growth. When individuals retain a larger portion of their income, they spend more on goods and services. This additional purchasing power circulates through the economy, benefiting businesses and ultimately, the country’s economy.

Further, aligning the maximum individual rate closer to the corporate rate promotes equality in tax policy. At present, the maximum individual rate of 35% is significantly higher than the 20% to 25% corporate income tax rate. Such disparity may appear inequitable. Entrepreneurs and professionals who operate as individuals may be taxed more heavily than corporations, even though their economic capacity may not be greater. A more balanced rate structure would enhance fairness and equitable taxation.

It is worth noting that some jurisdictions around the world impose no personal income tax at all, relying instead on consumption taxes and other fiscal mechanisms. While such models may not be applicable to the Philippines, we can at least adopt an alternative approach by lowering tax on individual income.

Understandably, lowering rates would reduce government revenues. However, tax policy must balance revenue needs with economic growth and taxpayer equity. A tax system should recognize that individual income - particularly compensation income - represents the livelihood of families. It funds food, shelter, education, healthcare, and other basic needs. A tax system that leaves individuals with more disposable income not only promotes fairness but also strengthens domestic demand that will ultimately fuel economic growth.