I cannot help but become emotional when I discuss the unequal distribution of income and wealth in the Philippines with my students. On-line discussions make it is more challenging to elicit their powerful reaction. I am unable to see whether my students are troubled by the unequal opportunities and the disproportionate concentration of political power in the country on the very few.
And so I use a bit of theology to discuss why income inequality should be reduced. I invite them to reflect on a passage from St Luke, 12:48, “To whom much is given, much will be required.”
The income tax is a buoyant revenue source and raised P1.03 trillion for government and accounted for 36% of our total revenues in 2018. But more than its revenue importance, the income tax is a powerful tool that can promote fairness. It is not only the poor who are exempt from the income tax. Our current law excludes individuals who are earning up to P250, 000 from paying the income tax.
Why is it a fair tax? The income tax is based on an individual’s ability to tax. The income tax due from a taxpayers increases with his/her income. The tax rate range from 20% and the highest marginal rate of 35% is imposed on those with incomes above P8.0 million. There was a time when the highest marginal income tax rate reached 70% with the belief that those who have the ability to pay have greater responsibility in helping the poor. With the advent of supply side economics however, the tax rates came tumbling down, not only in the Philippines, but globally. Steep progressive rates were believed to discourage productivity and work efforts. Worse, high marginal rates predispose taxpayers to tax avoidance and evasion.
The popularity of supply side economics has remained strong. It was used as basis by the Trump administration in lowering the corporate income tax rate from 35% to 21%. The reduction in the income tax was heralded to boost productivity, stimulate production, and incentivize corporations that have relocated abroad to bring their investments back to the US. More investments were expected to generate more employment, increase income, and ultimately, help the middle class and the poor.
However, studies show that such promises did not come true. Instead of benefitting the poor, the reduction in the corporate income tax was a pro-rich reform. It delivered an “outsize share of benefits to the rich and high earners.” The expected renaissance of capital investments” from tax saving did not materialize. A sizeable increase in corporate assets was not experienced.
Although the tax cut stimulated an economic growth of 2.5% in 2018, it was not sustained as growth dwindled to 1.9% in the following quarters. The positive effects were reaped by shareholders as corporations used their tax saving to increase dividends. Wealth was further concentrated as corporations bought more shares to gain greater control of their assets and operations. The Biden administration is thus expected to raise taxes on business and the rich as an “antidote to widening inequality” and to finance the government’s stimulus program. This would be complemented by greater efficiency in taxing the wealthy.
Come now the CREATE program which lowers the regular corporate tax rate to 25% and eventually to 20%. The premise is that it would promote growth. Moreover, corporations can now directly spend their savings to help the poor instead of making government a conduit. The tax program is built on a heroic assumption, which we pray should come true. Otherwise, we have weakened a powerful tool of the state in closing the wide gap between heaven and earth.