Over-taxing the middle class

Those of us who think we are middle class have always felt that we are over-taxed. We are carrying an unfair share of the burden of financing this government. Our salaries are taxed even before we get our pay slips.

We work four months of the year to earn the income tax we pay the Philippine government and that excludes VAT and other taxes on commodities and services we pay for to survive. They have not adjusted brackets and rates over so many years, decades even, to account for inflation, depreciation of peso buying power, etc.

One of the biggest shocks I remember having is being told I actually belong to the upper class. I simply couldn’t believe it, given the salary I was making compared to the top guys in the organizations I worked for. We are just victims of bracket creep. This is why many in the middle class have this growing sense of over-taxation.

Ronald U Mendoza, associate professor of economics and executive director of the AIM Policy Center has written a paper which confirms how right we are with our perception of being unfairly taxed. Here is how he tried to define middle class:

“In order to be considered part of this group, one’s annual gross income should range from about P64,317  to P787,572. That’s roughly P5,359.75 to P65,631 in income a month.”

Prof. Mendoza is using a study made last year (Virola et al) that provide a handy description based on their statistical analysis of the distribution of incomes in the country.

Mendoza acknowledges that many of us “will find this range too large. But if we take this to be a useful illustrative guesstimate for now, then that study indicates that there are 4.66 million families (roughly 25 percent of the total population) in the middle class. (Compare this with roughly 14 million families (or 75 percent of the population) belonging to the lower class, of which over four million families fall below the poverty line.)”

Prof. Mendoza explains how bracket creep happens: “One way this can happen is if the tax brackets are not adjusted for inflation – over time, this will likely result in rising nominal incomes pushing a growing number of income taxpayers into much higher tax brackets, even as their real (or inflation-corrected) incomes have not increased (or not by as much).”

At just P5,359.75 a month in earnings to qualify as middle class, security guards, drivers, Jollibee frontliners and office messengers will be surprised to find out they are actually not poor but middle class. Unless bracket creep is fixed soon, they will likely be paying more in income tax as a percentage of their incomes as top executives.

Bracket creep is bad not just for the taxpayer but also for the economy. As Prof. Mendoza puts it, “Bracket creep could contribute to what economists call ‘fiscal drag’—a weakening of aggregate demand due to excess taxation of a growing number of taxpayers.

“And as more taxpayers are pushed to the same tax bracket (wherein incomes still have a high disparity even within that bracket), then the progressiveness of the tax system may decline over time. (Note that progressivity is better achieved by imposing higher tax rates on those with greater capability to pay, i.e. the wealthy. This becomes less likely when more and more people fall into the same tax bracket and face the same tax rate.)”

A World Bank economist agrees. World Bank senior country economist Karl Kendrick Chua said there is a need to widen the Philippines’ narrow tax base and lower tax rates if the country is to compete with its Asean neighbors. He said the Philippines’ tax regime bucks that seen across the region where tax rates have gone down.

“The tax system that we have now is characterized by relatively a narrow base and high rates, and what makes the base quite narrow is that we have been giving billions, tens of billions, hundreds of billions of incentives every year to firms that do not need them,” according to WB’s Chua.

What ought to be done? “Once Asean 2015 kicks in, the Philippines would have to compete on a better footing, and so tentatively we are looking at a 25-percent corporate income tax rate. We are also looking at a 25-percent personal income tax rate, down from 30 to 32 percent,” Chua said.

Prof. Mendoza observed that a casual analysis of tax policies in the ASEAN suggests that the Philippines has the second highest average tax rate (after Vietnam and Thailand).

On the other hand, Singapore has the lowest marginal tax rate at both ends of its tax bracket spectrum, at 20 percent for the wealthiest and two percent for the lowest qualifying income tax payers. (Compare this with 32 percent and five percent for the Philippines.) If we also consider the value-added taxes in ASEAN, the Philippines comes on top (or near the top) of the most taxed in the region.

Prof. Mendoza concludes: “Reforms in public finance cannot just focus on the spending side (e.g. shutting down PDAF, promoting bottom up budgeting, and improving transparency and participatory governance reforms in budgeting). Addressing revenue-side issues will go a long way in winning back the hearts and minds of taxpayers. (And yes, that also includes the poor.)”

I say Amen to that!

Call Centers

A reader sent this reaction to my column last Friday.

I was BPO manager for six years and I have to say unfortunately the tier 1 grads never stayed put; while those from tier 2 had always been found wanting not just in English but in all sorts of soft skills. Also the unhealthy working hours just takes its toll on employees.

Training should be a constant but many project contracts (usually one project equals one client or one client task) are structured based on a fixed number of seats. Any spike in costs (such as recruitment costs) at any given time eats up the training budgets.

The work environment can be described generally as emotionally volatile. In this, the managerial focus more often than not shifts into putting out fires and handling people issues. Continuous improvement often takes a backseat.

I would venture to say that even managers generally lack either people skills or the emotional stability to handle troubled agents.

Greed can be a problem yes but it happens both onshore and offshore. Greed from the US consultants and BPO locators selling the services, and ambition of managers who pretend to walk the corporate walk.

This is all unfortunate given that the BPO industry, much like OFWs, generates economic multipliers on several levels.

Sorry to say but kawawa mga OFWs and BPO people. They are buying the country’s leaders time to get their act together in attracting better industries and better work. The high starting salaries in BPO are nothing and would amount to nothing because the social costs will be paid tenfold.

We’ve been sending OFWs for decades and now BPO industry in its second decade. Government is still inutile.

More power Boo

On the other hand, another reader posted this comment on the PhilStar website:

 I’ve dealt with several issues handled by Philippine based call centers. I live in Portsmouth, NH USA. I work for a company that installs undersea fiber-optic cable to allow this communication which puts a roof over our heads and food on our table.

My wife is Filipina. I have never called the Amazon call center, but several others. I find just about every phone call is answered by a helpful, intelligent and kind person, male or female. I would much rather be connected to a call center in Manila than one in India.

And here is another reaction:

Boo, there was a time when Tier 1 graduates did not mind working in call centers. But that was way way way back in the late 1990s to very early 2000s…

As for the Amazon problem or more generally the deterioration of the BPO talent pool in the country, I believe it cuts both ways. In the quest to cut cost, many US companies outsource non-core functions and demand their vendors to supply the service at sometimes unreasonably low prices.

Because BPO companies also have to make money, they resort to cutting corners. I have seen this happen to the tech-support services of Sony, Dell and Microsoft. While there is internal quality assurance to monitor calls, emails and other channels, the sampling at most can only run up to five percent of overall volume. Again, due to cost. Of course, there’s also the problem of limited number of graduates coming out of better schools.

A better approach to outsourcing would be to offshore or set up a captive operations in the Philippines, which the government and the BOI could encourage by offering more perks for ROHQ and COE…Just my two cents, based on my industry study for McKinsey last 2011.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco