View
56
Download
1
Embed Size (px)
DESCRIPTION
by Dr. Stella QuimboUniversity of the PhilippinesSchool of Economics22 September 2014Presented at the Public Hearing of the Committee on Ways and Means , Senate of the Philippines
Citation preview
A Comment on Raising the Ceilings on Tax-free 13th Month Bonuses
SA. Quimbo22 September 2014
Presented at a Public Hearing of the Ways and Means Committee
Senate of the Philippines
How do salary and wage earners fare in terms of horizontal equity?
• Horizontal equity: similarly situated taxpayers should pay similar taxes
• Salary and wage earners:– Shoulder 85 percent of all individual income
taxes (excluding capital gains)– Pay more taxes than the self-employed
professional and non-professional, for the same income decile• Not horizontally equitable
PROFILE OF THE PHILIPPINE LABOR FORCE(in 000)
Source: 2013 LFS
Average Income Tax Payments, by type of worker
First Decile Second Decile
Third Decile Fourth Decile Fifth Decile Sixth Decile Seventh Decile
Eight Decile Ninth Decile Tenth Decile -
5,000
10,000
15,000
20,000
25,000 Salary and wage earnerSelf-employed (non-prof)Self-employed (prof)
Source of Basic Data: 2012 LFS-2013 FIES (N=76,405 workers from 40,171 households)
Gains in horizontal (and intertemporal) equity
• Primarily, salary and wage earners gain from the the proposed increase in ceilings for tax-free 13th month pay from 30,000 pesos to 70,000 pesos
• 30,000 pesos in 1994 is equivalent to 70,633 pesos in 2014
• The effect of increasing the ceiling to 70,000 pesos is to reduce taxable income by at most 40,000 pesos (= 70,000 – 30,000) for workers with monthly pay of at least 30,000
How many workers gain?
• Using data from the 2013 Labor Force Survey, 1.99% of all salary and wage earners have a basic monthly pay of at least 30,000 pesos:
22,212,000 S&W earners x 1.99%
~ 442,000 workers
Back-of-the-envelope estimates (maximum loss)
442,000 workers (earning at least 30,000 per month)
x 40,000 pesos (assume that all workers earn at least 70,000 per month)
x 32% (highest tax rate)
________________________
5.6576 Billion Pesos
• Decompose total individual income tax collections as reported by BIR by bracket
• Use income and household characteristics from the merged 2012 FIES-2013 LFS to estimate taxable income and tax payments due Assume income underreporting 15% - 25% Limitation: maximum income is 10M only
• Use tax payments reported by BIR for the top 500 tax payers for individuals with at least 16 M pesos
• Tax payments for those with income 10M-16M are treated as a “balancing figure”
• All relevant tax rules applied to estimate taxes due (for Self-employed, we used standard deductions, not the 40% optional standard deductions)
Estimating the Revenue Effects (1)
BASE SCENARIO
Estimating the Revenue Effects (2)
• Re-computed taxable income assuming various ceilings (40,000; 50,000; 60,000; and 70,000)
• Assumed that 68% (1-proportion of professionals to all workers) of top 500 taxpayers (plus all those with income in excess of 10 million pesos) have a 13th month bonus
Simulations
Can be partially recovered from VAT
(77% of expenditures are subject to VAT)
Distribution of Income Tax Payments, by ceiling amount
30K tax-exempt bonus
40K tax-exempt bonus
50K tax-exempt bonus
60K tax-exempt bonus
70K tax-exempt bonus
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
17.23% 16.81% 16.64% 16.57% 16.52% 1000 individuals earning at least PhP10M - 16M (assumed)From TOP 500 (over 16M)ProfSelf-employedOver PhP500KOver PhP250K but not over PhP500KOver PhP140K but not over PhP250KOver PhP70K but not over PhP140KOver PhP30K but not over PhP70KOver PhP10K but not over PhP30KNot over PhP10K
A concern: will firms be strategic?Strategic behavior
makes sense only for workers earning 30,000
– 70,000 pesos per month:
These are 407,000 workers.
Assume a 20,000 peso loss in taxable income
per worker.
Estimated total loss from strategic behavior
= 20,000 x 407,000 workers x 32% =
PhP2.6048 B
Worker's Annual Basic Compensation 1,200,000
OPTION 1 (straight)
OPTION 2 (strategic)
Monthly Pay 100,000 50,000Annual Basic Pay 1,200,000 600,000 13th Month Pay 100,000 700,000 TOTAL Annual Compensation 1,300,000 1,300,000
Taxable Income 1.2 M - deductions + (100k-70k)
600k – deductions + (700k - 70K)
Assume: 100k deductions Estimated Taxable Income 1,130,000 1,130,000 Worker's Annual Basic Compensation 600,000
OPTION 1 (straight)
OPTION 2 (strategic)
Monthly Pay 50,000 20,000Annual Basic Pay 600,000 240,000 13th Month Pay 50,000 410,000 TOTAL Annual Compensation 650,000 650,000
Taxable Income 600K - deductions + 0
240k - deductions + (410K - 70K)
Assume: 100k deductions Estimated Taxable Income 500,000 480,000
Concluding Remarks• I support the proposal on grounds of horizontal equity
– Protective of salary and wage workers
• Improved equity comes at small price: 1.7 B
• Strategic behavior can be curbed with ceilings on the ratio of 13th month pay to monthly basic pay or limits on frequency of payments of the 13th month bonus (e.g., at most twice a year)– Estimated loss of 2.6B under the extreme (but unlikely) scenario that all firms
will undertake strategic behavior
• Whether back-of-the-envelope estimates or more careful estimates using population-based surveys and the roster of top taxpayers, the maximum potential loss ranges from 4.3 B (=1.7+2.6) to 5.6 B