The Benefits of Sharing the Income Tax Burden: A Possible Scenario

In the my preceding post, i made some suggestions related to taxes, wages and safety nets. Depending on which segment of society you may belong to, chances are, you would have liked some portions of the proposal and disliked others. However, i believe that the proposals have to be taken as a package because there should be an element of give-and-take, where benefits and burdens are widely shared among the various Economic Classes within Philippine Society. A visual summary of the benefits and burdens allocated to each sector is shown below.
Figure 1: Tax, Wages & Safety Nets: Trade-offs Between the Classes (Click on image to enlarge)
To give a more concrete example on the potential benefits of the above, i'd like to walk through a hypothetical scenario in which the above package of recommendations were implemented back in 2006. I chose this year because this was when the most recent Family Income and Expenditure Survey (FIES) was conducted, the results of which i can then use as basis for this scenario building exercise.

A. The 2006 FIES Results

In terms of average individual incomes per segment (classified in deciles), the FIES for 2006 shows the following:

Table 1: 2006 FIES Average Income, Expenses and Savings by Income Decile
Notice that the annual savings of the richest ten percent of Filipinos (at 156K pesos) is bigger than all the other income segments combined. At the other extreme, you have the poorest thirty percent, on average, actually ending up with a deficit, i.e. having more expenses than income.

Consolidating all the individual incomes within each category, we get the total incomes per decile...

Table 2: 2006 FIES Total Income, Expenses and Savings by Income Decile
...which can in turn be represented visually below:

Figure 2: 2006 FIES Income and Savings
(Click on image to enlarge)
The 2006 FIES reveals a situation where one-third of our population is unable to meet its expenses much less save for the future (as represented by the people who are underwater in the above diagram). What then would the situation be if my mix of proposals were implemented? The rest of this entry describes one possible outcome.*

B. The Possible Impact of 12% Flat Tax and 20 pesos per day Food Subsidies on 2006 FIES Data

With the recommended twelve percent flat tax and 20 pesos food subsidy (that comes in the form of vouchers similar to the food stamps in the United States) for all adults ages 18 to 64, the individual expenses** and savings of the different income segments will become as follows:

Table 3: 12% Flat Tax and 20 pesos Food Subsidies applied to the 2006 FIES Average Income, Expenses and Savings
As can be seen above, with the flat tax and food subsidies, even the bottom thirty percent of income earners are now able to have some savings***

The resulting aggregate income would then be...

Table 4: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Total Income, Expenses and Savings
...and the over-all situation**** in terms of savings improves for all segments of society (as represented by the increased number of coins in the diagram below).

Figure 3: 12% Flat Tax and 20 pesos per day Food Subsidies applied to the 2006 FIES Income and Savings
(Click on image to enlarge)
For the Upper Tier of Society, more savings***** means more funds that can be invested in housing, education or business activities.

C. Conclusion

From the above example, we can see that a combination of lowering the income tax to a flat rate of twelve percent and providing food subsidies of twenty pesos for each Filipino adult (18 to 64 years old) may (all other things remaining equal) result in a near doubling of the aggregate savings rate (809 Billion from the original 428 Billion Pesos aggregate savings).

Notes:
*Outcomes depend on factors such as the accuracy of FIES data (which i used as basis for the above), eventual tax collection efficiency as well as the propensity by which people may try to game the system to avoid paying their share.
**Expenses are reduced because taxes are included as part of household expenses. You can refer to the FIES Method of Computing Family Income and Expenses here.
***Given the assumption that the individual income earner does not choose to increase his/her expenses on other commodities and services.
****I am, of course, talking in terms of averages which means that within a given segment, there will still be those who are better and worse off. Uniformly better outcomes is highly improbable.
*****Included in this savings amount is the amount deducted for Social Security, Housing and Medical Insurance which i also proposed to be at a cumulative 12 percent of taxable income.

Towards A New Social Contract on Taxes, Wages & Safety Nets

The recent blog entries* related to VAT and dole-outs have gotten me to thinking of a holistic package of recommendations related to both the Tax burden and Social Safety Nets.

I. Basic Principles

I believe that any such set of recommendations must be based on a set of principles by which we envision Philippine Society to operate under. The principles that i have identified (so far) are the following**:

A. Principles related to Safety Nets

A.1 No Excuse for Hunger. Given our abundance of resources, there is absolutely no reason why any Filipino (employed or unemployed) should go hungry in his own country. For starters, there is absolutely no excuse to have people resort to recycling garbage for food.***

A.2 Fair burden across sectors. In the interest of fairness and social cohesion (essential to building up social capital****), no segment of Philippine Society should be unduly burdened in sustaining the government and its social programs. In particular, the Middle Class has been feeling particularly besieged and consequently alienated. This is in no small part because they see that they are the only ones paying income taxes while the majority poor, do not.

A.3 Social Security before Taxes. A person's income should first be allocated to social security (i.e. retirement benefits, housing and medical insurance) before it is allocated to taxes. Here in Singapore, for example, the amount deducted for Social Security is higher than the amount deducted for income taxes.

B. Principles Related to Capability Building and Demand Generation

The foundation for industrial development is a healthy domestic base.

B.1 Obligation to Give-back. Every recipient of social welfare should have the responsibility to give back to Society by using his capabilities to contribute to social welfare and economic development.

B.2 Subsidies as Stimulus. In the interest of pump-priming the economy, Safety Nets should first be allocated to consumption. A study by the United State's Congressional Budget Office identified direct injections (such as unemployment or food stamps provisions) to the poor as having the biggest effect to propping up consumption which is important to avoiding a recession. In this sense, the much criticized katas ng VAT dole-outs are actually a step in the right direction in terms of its multiplier effect.

C. Principles Related to Development: Investment, Innovation and Technology

The key to economic development is to build up local capabilities to innovate and continuously improve on existing technologies.

C.1 Savings before Consumption. Tax incentives and disincentives should be structured to prioritize savings over consumption.

C.2 Culture of Entrepreneurship and not Dependence. Entrepreneurial activities should be encouraged and dependence of OFW remittances should be discouraged.

The following are the specific recommendations that are based on the above principles.

II. Specific Recommendations on Taxes, Social Security and Income Subsidies

1. Flat tax on income: For all salary and wage earners, impose a uniform income tax rate. The initial rate can be pegged at 12 percent.

Table 1: Existing***** versus New Income TaxesUpdate Oct-18-2008: Just to emphasize, Exemptions not applicable on New Tax Due
As shown on the above table, given this recommendation, any salary or wage earner who receives an annual taxable income of 70,000 pesos or above will receive a tax relief, while those receiving less will have additional tax burden. (Note that in the above, the subsidies for the lower income earners haven't been factored in. The effect of subsidies is shown in Table 2 below.)

2. Equal or bigger Social Security Contributions relative to Income Taxes. Similarly, impose a uniform social security contribution (includes SSS, Pag-Ibig, Medicare and/or GSIS) rate that is equal or higher than the income tax rate, in this case, the cumulative rate could also be pegged twelve percent. This deducted amount will then go into retirement, housing and medical insurance of the employee and/or wage earner's At the same time, the pool of savings can still be made available to extend credit to the contributors or to support the government's socialized housing and health maintenance programs.

The Employer's contributions could be pegged at half of the employee's i.e. six percent. (Additionally, if we want to roughly follow the Singapore model, the total contribution of both employer and employer can be capped at Ten Thousand pesos per month each.)

The benefit of the first two recommendations has to do with principles A.2 and A.3. A flat tax covering all income levels will mean that no segment of the salary and/or wage earning population would feel that they are unduly taking a disproportionate part of the burden and help eradicate the Paano Naman Kaming Mga Middle Class sense of victimhood.

3. Replace tax exemptions with subsidies for both employed and unemployed. The Fair Burden Principle (A.2) above means that the tax base should be widened****** to cover the entire working population. If left as it is, for the lower income groups, this would clash with the No Excuse for Hunger Principle (A.1). Therefore, a survival subsidy, in the form of food stamps, initially pegged at 20 pesos per day per adult (18 to 64 years old) should be provided. Table 2 below calculates the net relief across all the income brackets illustrated in Table 1.

Table 2: Net Tax Relief (Burden)Update Oct-18-2008: Just to emphasize, Exemptions not applicable on New Tax Due
The above table illustrates that the 20 pesos per day food stamp subsidy covers adults (18 to 64) of all income brackets, even those with zero income, i.e. the unemployed. This institutionalizes and systematizes the katas ng VAT and provides a basic layer of social safety net, one that addresses hunger to fulfill Principle A.1 while at the same time, helping sustain consumer demand that drives the economy (Principle B.2). This is also an improvement over tax exemptions on minimum wage earners because it also considers the welfare of the unemployed who outnumber the employed.

4. Eliminate the minimum wage.******* The minimum wage should be eliminated in order to give business enterprises the flexibility to compete in the world market (in support of Principle C.2). Since the problem is unemployment and chronic underemployment, the priority should be given to creating as many jobs as possible. By comparison, the task of increasing the wages of workers who are already employed is secondary. Besides, reducing unemployment is in the interest of labor because fewer people looking for jobs will ultimately mean a stronger bargaining position.

5. Retain VAT. This is in keeping with the principle of prioritizing savings over consumption (Principle C.1). Retaining VAT will also enable continued funding of food stamps (Principle A.1).

6. Tax OFW remittances. OFW Remittances should be included as part of income and taxed accordingly. This is in keeping with the principle of discouraging a culture of dependence (Principle C.2).

7. Implement a National ID. This National ID could be either the SSS/GSIS ID, the BIR's Tax Identification Number or a separate number altogether. Such an ID is needed to facilitate the distribution of subsidies as well as the collection of taxes and social security. To prevent abuse, the introduction of the National ID should be accompanied by increased safeguards on privacy.

III. Conclusion: A Foundation for Investment, Innovation and Technology Improvement

Each of the preceding recommendations will benefit certain segment of Society and impose a burden on another. It is therefore important to take a holistic approach in the spirit of give and take among the different sectors. Below is a visual summary of the complementary roles of Social Security Contributions and Taxes in achieving our objectives in the areas of Survival, Civilized Living, Capability Building and balancing Consumer Demand with Investment.

Figure 1: Taxes and Social Security Contributions as applied to Areas of Nation Building********
While we should not lose sight of the fact that our economic development ultimately depends on our home-grown ability to innovate by continuously improving existing as well as developing new technologies, not having to be preoccupied with matters of survival is an essential first step.

Notes:
*An initial formulation of my recommendations can be found in the comments section of this blog entry over at Manolo's. Blog entries on the VAT issue that i have read include:

• On Oil Deregulation and E-VAT by Cocoy, a defense of Oil Deregulation and E-VAT.
• Scrap VAT on on Ellen Tordesillas, Senator Mar Roxas' recommendation to scrap VAT on Petroleum products.
• Will cutting taxes help the poor? By Cielito Habito, Former NEDA Secretary General Cielito Habito cautions against scrapping VAT.
• obscenely oppressive, that’s VAT! by Angela Stuart-Santiago, an eloquent plea to remove the onerous burden of VAT.

**I'll update the list as and when i think of additional principles.
***Known as 'pagpag', a term i first heard from fellow blogger The EQualizer.
****I realize that, strictly speaking, social capital brings about social cohesion (and not the other way around) but i nevertheless believe that anything that increases social cohesion increases social capital as well.
***** Refer to the BIR Website for existing guidelines.
******See also Solita Monsod's criticism on the recent law granting tax exemptions on minimum wage earners. (Hat tip to Manolo.)
*******This does not mean that Labor Unions should be discouraged. On the contrary, strong Unions should be encouraged in order to have the workers' interests represented in a tripartite partnership between labor, management and government.
********Not all items shown on the diagram are discussed in this present blog entry. Manolo Quezon reintroduced the idea of Victory Gardens to mitigate the effects of the food crisis. I briefly described my version of a large scale implementation this concept in this comment.

Chisato Moritaka: Shiritagari

In the Absence of Empathy or Foresight...

...solving a problem is often a matter of getting the right group of people to feel the pain.

GK's Agenda

Me : Gawad Kalinga is primarily a racket to win converts.
Tony Meloto: No it's not.
Carlos Palad: Yes, it is.

Western Music and Math

In Seed Magazine, a mathematical explanation of how melody and harmony combine to make [Western*] music. Turns out that musicians have been doing geometry all along.

(Hat tip: 3Quarksdaily.)

Update Jan-31-2009: Gary Granada's exposition gives us a tangible example of this.

*The article explains that many forms of non-Western music have melody, but no harmony.

I Have A Dream...

Found via Japundit.

Stop Sulpicio Lines

I join my fellow bloggers in calling for:

1. Justice for the victims and their families.
2. Retribution against the business owners and management of Sulpicio.
3. Accountability for the failure of government agencies in its safety regulation, disaster prevention and relief efforts.

Black and White Movement Resumes Black Friday Silent Protests

The Black and White Movement has announced that it is restarting its Black Friday Silent Protests.

"The Black and White Movement condemns both the callousness of our leaders, and the policy of deception in addressing our problems. To reawaken our people to these stark realities, we will resume our Black Friday Silent Protest actions on July 4, 2008.

We will gather every Friday at a pre-determined location at a specified time, all of us wearing black. There will be no placards or flags, no speeches, and no program. Our presence will be our message of protest. We will quietly disperse after 30 minutes.

This Friday, the designated time and place is the COMELEC Headquarters, Intramuros, Manila, at 5 PM. This is to dramatize where our problems all started – the cheating in the 2004 elections. With 3 commissioners still to be appointed by GMA, we may see the same transgressions being executed in 2010 due to a lack of qualified overseers."

It's time to stop moving on.