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As featured on PhilStar:  Are we blowing too hard (into the balloon)?


In an economy, inflation works like blowing air into a balloon. Blowing too softly makes the balloon look limp while blowing too hard makes the balloon pop.

The inflation rate as of November 2022 was recorded to be at eight percent (the highest in 14 years since November 2008) and its effects have been quite difficult to ignore, especially for members of the working class – from the rise of oil prices, minimum fare of public transportation, prices of food, utilities, etc.

When prices rise, the purchasing power of money drops, which means fewer goods and services may be purchased with each unit of money. Most of our kababayans’ just cannot keep up with the rising prices of basic commodities. Recent surveys show that 12.6 million Filipinos consider themselves poor and are struggling to afford basic needs.

The cost of living is, indeed, much higher now, not only in Metro Manila, but also throughout the archipelago. For example, the price of one kilo of onions now ranges from P250 to P300 compared to last year’s average of P98.60 per kilo. It is nothing short of outrageous and disappointing. With that said, how will Filipinos cope when prices continue to rise because of inflation, but disposable income is stifled?

2023 income tax rate schedule for individuals

When the National Internal Revenue Code (NIRC) of 1997 was amended by the Republic Act 10963, also known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law last 2017, two schedules of income tax rates for individuals are to be implemented. The first schedule took effect on Jan. 1, 2018. The second schedule shall take effect beginning Jan. 1 this year and shall supersede the previous schedule and be in effect until further amendments to the law are made. The updated income tax rates are as follows:

Annual income:

• Not over P250,000 - None (zero percent)

• Over P250,000, but not over P400,000 - 15 percent of excess over P250,000

• Over P400,000, but not over P800,000 - P22,500 plus 20 percent of excess over P400,000

• Over P800,000, but not over P2,000,000 - P102,500 plus 25 percent of excess over P800,000

• Over P2,000,000, but not over P8,000,000 - P402,500 plus 30 percent of excess over P2,000,000

• Over P8,000,000 - P2,202,500 plus 35 percent of the excess over P8,000,000

Effects of the lower income tax rate for individuals earning over P250,000

The lifeblood doctrine of taxation stress that taxes are imperative for a government to earn revenue, which will then be used to function and provide for its sovereign people. The TRAIN Law proposed tax reform and aimed to:

a) Enhance the progressivity of the tax system through rationalization of the Philippine internal revenue tax system, thereby promoting sustainable and inclusive economic growth;

b) Provide an equitable relief to a greater number of taxpayers and their families to improve levels of disposable income and increase economic activity; and

c) Ensure that the government can provide for the needs of those under its jurisdiction and care through the provision of better infrastructure, health, education, jobs, and social protection for the people.

With the second schedule imposing lower tax rates compared to the first for individuals earning over P250,000, some argue that this may lead to lower government revenue and in return, increase sovereign debt. For our fellow Filipinos, some say that lower tax rates benefit consumers since it raises disposable income and allows spending, thus contributing to the growth of the economy.

Another probable effect is that lower income tax rates may induce people to work more since the financial reward of working also increases. It may also promote investing and encourage saving since individuals have more margin to embark on these activities.

Minimum wage earners, inflation, and taxes

The minimum wage for Filipinos in the National Capital Region (NCR) effective June 4, 2022 ranges from P533 to P570, which estimates to be P138,580 to P148,200 annually. When compared to the first schedule, the second schedule retains the tax exemption for minimum wage earners or individuals earning less than P250,000, meaning the change in tax schedules does not affect the income of these earners.

Recent studies show that the minimum family living wage for a family of five ranges from P1,100 to P1,900 – more than twice the minimum wage that an individual may earn. Surveys revealed that Filipinos resort to increasing their borrowings to fill the gap between their income and provide for their basic needs. This solution allows families to survive daily, but may become a problem in the long run since the future of this families are built on debt.

With the changes in income tax rates materializing soon and the possibility of the inflation rate continuing its hike, we must find long-term and sustainable solutions to address issues that limit the public’s access to basic needs like food, education, and healthcare. It will not be an overnight fix, but it is better to start sooner rather than later. Thinking about the future and making fundamental changes will help bring a positive impact on the lives of Filipinos. We should not just wait for the balloon to pop.

Aubrey Jayne P. De Jesus
KPMG in the Philippines

Aubrey Jayne P. De Jesus is an analyst from the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as tier 1 in transfer pricing practice and general corporate tax practice by the International Tax Review. For more information, you may reach out to tax analyst Aubrey Jayne P. De Jesus or tax principal Manuel III P. Salvador through ph-kpmgmla@kpmg.com, social media, or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.