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.