Bias against salary earners

IF THE Department of Finance (DOF) and Bureau of Internal Revenue (BIR) can have their way, Congress should not increase the income tax exemption of fixed income employees until it passes a law easing the restrictions on the Bank Secrecy Law.

A bill is now pending in the House of Representatives that seeks to adjust the rates on income tax on salaries that have been in place since 1997.

In substance, the proposed measure exempts earnings that are less than P180,000 a year from income tax. For earnings higher than P180,000 and up to P10 million, the income tax rate shall vary from 5 percent to 30 percent.

Although opposed to the idea, Finance Secretary Cesar Purisima said the reduction in tax revenue that would result from the adjustment in income tax rates can be offset through the relaxation of the rules on bank secrecy.

He said that making tax evasion a justifiable ground to look into the bank accounts of taxpayers under the Anti-Money Laundering Act would make self-employed individuals pay the correct taxes.

By his reckoning, some P300 billion in additional taxes could be raised if bank accounts can be examined on suspicion their holders were less than honest in declaring their incomes.

He, however, did not say how he arrived at this figure or whether it was the product of prior research by the BIR.

Collections

At first glance, the P300 billion that is supposed to offset the possible loss from the proposed adjustment of income tax rates looks staggering and therefore a cause for concern.

But, as the Tax Management Association of the Philippines pointed out in its position paper on the issue, that amount represents only two percent of the BIR’s total collections of P1.335 trillion last year.

This means, the imagined revenue loss can be recovered from other sources or through more aggressive collection efforts. It is not as if the country’s financial system will collapse if fixed income earners were given additional breathing space in their tax obligations.

It is unfortunate, nay disappointing, that the DOF is holding hostage the interests of salaried employees and workers (who represent 80 percent of the BIR’s collections from individual taxpayers) in its repeated efforts to expand its authority to pry into the accounts of bank depositors.

Unable to get its way, the DOF is using the income tax rates adjustments issue as a bargaining chip with the lawmakers.

Rather than work hard to convince Congress on the merits of using the anti-money laundering rules to minimize tax evasion, it is “trading off” the contemplated tax relief for fixed income earners as justification for further impairment of the confidentiality of bank deposits.

Development

It’s time the DOF and BIR do away with the calcified notion that a reduction in tax payments by individual taxpayers will translate into loss of revenues for the government.

Whatever extra money goes into the pockets of the taxpayers that may result from lower tax payments will not go into some piggybank or be stashed under the bed mattress.

If deposited in the banks, the money will find its way in the business stream by way of loans to finance personal and business activities. In the process, the income earned by the banks from interest payments and corresponding banking transactions will generate additional tax revenues for the government.

In all probability, the spare cash will be spent for products and services by the taxpayer. Once spent for this purpose, value added taxes will invariably kick in and form part of revenue collections.

The money flow, in effect, is from the pocket of the taxpayers to the cash registers of businesses to the coffers of the government. This time though, the taxpayer gets the opportunity to enjoy more the benefits of his money before it eventually winds up at the BIR.

Although government spending plays a significant role in national development, economic growth that is induced and nurtured by private initiative is more inclusive and has greater impact.

Legislation

Fixed income earners are virtual sitting ducks in the country’s revenue collection structure. The government gets first crack of their money even before it gets in to their ATM accounts or lands in their hands.

Unlike self-employed persons, entrepreneurs or businessmen, salary earners do not enjoy the privilege of reducing their tax liabilities through permissible tax avoidance schemes.

Their income taxes are withheld outright at the source at specific periods of time by their employers under pain of being penalized for failure to withhold the correct amount of taxes and remit them to the BIR on time.

Since income tax rates are based on income brackets, salary increases sometimes bring misery, rather than joy, if the effect is to put the earner in a bracket that requires payment of a higher income tax that practically eats up the additional pay.

Thus, for fixed income earners, any form of reprieve or opportunity to gain additional benefits from the fruits of labor would have to come only by way of legislated reduction of income tax obligations.

To paraphrase a popular saying, taxation is too important to be left to the executive department to decide alone. Congress cannot and should not lose by default its “power of the purse.”

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