Middle class tax burden

My two US-based daughters made a side trip to Da Nang in Vietnam two weeks ago in the course of a balikbayan visit here.

They commented that prices in Metro Manila, especially in restaurants, are a lot higher than in Vietnam, just about the prices in the US.

The Philippines and Vietnam were recently upgraded to upper-middle income status. The upgrade is hardly appreciated in the Philippines because it didn’t describe the reality of people’s lives.

Inflation has negated any government claim of an improved economy. The surge in domestic prices has left the Philippines with one of the highest inflation figures in the region, severely affecting everyday expenses.

The cost of living in Vietnam seems generally cheaper than in the Philippines, my daughters observed. Yet, both nations faced the same severe global inflation shocks.

But Vietnam’s stronger infrastructure, logistics and superior agricultural output allowed it to weather inflation much better than the Philippines.

While both countries are being battered by rising global fuel prices from geopolitical conflicts, the average Vietnamese citizen retains higher real purchasing power than the average Filipino, who faces harsher domestic price spikes on everyday essentials.

As a meme observed: in a crisis, the Filipino rich get richer, the poor get ayuda and the middle class carry the burden.

Tax expert Mon Abrea pointed out that as inflation erodes real incomes, tax brackets are largely unchanged.

“Filipino workers are effectively paying more without earning more. This ‘bracket creep’ is a silent but persistent burden on the middle class.”

The Philippine tax system suffers from a structural imbalance. Around 82 percent of personal income tax collections come from salaried workers — those whose taxes are automatically withheld.

Less than four percent is collected from high-net-worth individuals. This is not just a statistic, Abrea says, “it is a signal of inefficiency and inequity in the system. The disproportionately low contribution from high-net-worth individuals highlights severe inequities and compliance loopholes within the system.”

That’s because salaried workers are easily tracked, but the self-employed, professionals and business owners often operate under self-assessment regulations that allow for easy income underreporting or expense inflation.

The Philippines imposes no wealth tax. Heavy reliance on consumption taxes like VAT, critics point out, disproportionately burdens lower and middle-income classes.

The moneyed elite live off dividends from family corporations that are taxed at 10 percent or borrow using their stocks as collateral to avoid the punishing taxes the salaried middle class pay. To live the high life, the elite uses this underlying loophole of low-tax capital income and tax-free debt to avoid high progressive taxes on salaries.

The elite chooses how and when they take their income. The Philippine top marginal labor tax rate sits around 35 percent, whereas the final tax on dividends from domestic corporations is capped at just 10 percent.

Ultra-wealthy families hold their wealth inside private holding companies. Profits are retained or reinvested at the corporate level, entirely avoiding personal income taxes until distributed.

The wealthy rarely liquidate their shares to buy luxury goods because selling triggers a tax. Instead, they borrow from banks with their stocks as collateral.

Borrowed money is a liability, not income. It is completely tax-free. Interest paid on the loan can also be used as tax deductions.

The unfairness of it all has been recognized and has given rise to calls for the imposition of a tax on accumulated wealth. Groups like the G20, backed by research from the EU Tax Observatory, have aggressively pushed for a coordinated international two percent minimum wealth tax on billionaires to stop capital flight.

The Philippines used to have a tax provision that penalized under Section 29 of the National Internal Revenue Code (NIRC) “unreasonable accumulation of corporate surplus” especially prevalent in family-owned or controlled corporations. But it has been repealed by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act 11534).

This shift makes holding money inside family-owned or private corporations easier. Prior to its repeal, Section 29 was a “penalty tax” explicitly designed to stop the wealthy from hiding their income inside corporations to avoid personal dividend taxes.

If a closely held corporation allowed its earnings to pile up instead of distributing them to shareholders, the BIR slapped the company with a 10 percent IAET on top of normal corporate income tax. Stingy dividend declaration by listed family corporations is also why the PSE is finding it difficult to attract retail investors.

If a private family holding firm accumulated cash or bought passive investments (like government bonds or stocks) completely unrelated to its core business, the BIR deemed the accumulation “unreasonable” and penalized it.

But it was repealed by the CREATE Act supposedly to encourage domestic investment. Lawmakers argued that forcing companies to pay out dividends drained capital that could instead be used to expand factories, and hire more Filipino workers. Whether that happens in the real world is something else.

The ultra rich have many public officials defending their interests. No one protects the lowly middle class taxpayer.

The policy direction should be to achieve greater tax equity. We should prioritize tax relief for workers suffering from rising inflation the government can’t fix.

Increasing the tax-free income threshold should be a no-brainer. It directly empowers the middle class. It improves take-home pay, strengthens purchasing power and enables families to save, invest or spend based on their real needs.

As Abrea pointed out, the proposed phased approach — from P400,000 in 2026, P800,000 in 2027 and P1 million by 2028 — ensures fiscal manageability while delivering immediate and predictable relief.

It is obvious that our government is taking the easy way of collecting taxes by focusing on the salaried middle class and on consumption taxes like VAT. But this makes our tax system very regressive and protective of the rich at the expense of the middle class.

In street lingo, trabahong tamad kahit mali.

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco