Tax cuts likely to unleash spending power of middle-class Filipinos

TAX CUTS implemented this year could spur faster spending and increased savings by middle-class Filipino consumers, as well as lead to higher government revenues from indirect taxes, analysts said.

“I believe the new tax rates will help unleash the power of the middle class to drive the economy through consumption spending, savings, and investments. The spending power of a burgeoning middle class can create sizable output, income, and employment multiplier effects,” University of Asia and the Pacific (UA&P) Senior Economist Cid L. Terosa  said in an e-mail.

Under the Tax Reform for Acceleration and Inclusion (TRAIN) law, personal income tax cuts are being implemented starting Jan. 1.

Taxpayers with annual taxable income below P250,000 are still exempt from paying personal income tax, while the rest with income above P250,000 but less than P8 million will have lower tax rates ranging from 15% to 30%.

Meanwhile, the top individual taxpayers earning more than P8 million have a higher tax rate of 35% from the previous 32%.

“While direct tax revenues could be affected, indirect tax revenues levied on consumption spending could rise as middle-class households have more disposable income to spend,” Mr. Terosa said.

An example of indirect tax is the value-added tax (VAT). An increase in consumer spending may drive VAT collections higher.

The BIR is tasked to collect P2.67 trillion this year, of which P463.3 billion will come from VAT collections.

The Bureau of Customs (BoC) is targeting to raise P901.3 billion this year, of which P570.3 billion is expected to come from VAT on imports.

“The tax reduction will be diverted to consumption given higher disposable income,” John Paolo R. Rivera, an economist at the Asian Institute of Management, said in a Viber message.

Victor A. Abola, an economist at UA&P, said the tax cuts may encourage consumers to spend more.

“I think we should see increased spending, since the tax cuts directly benefit the middle- and high-income classes, which already have more savings during the pandemic,” Mr. Abola said in an e-mail.

In the third quarter, household consumption was one of the main drivers of gross domestic product (GDP) growth on the demand side.

Household consumption rose 8% year on year, faster than 7.1% a year earlier. Quarter on quarter, household final consumption grew by 5.7%.

Mr. Terosa said taxpayers may also be able to pocket more savings.

“The rise in the absolute amount of savings of middle-class households could be channeled to various forms of investments. In my opinion, the new tax rates will support middle-class households to achieve their aspirational goals,” he said.

Ateneo de Manila University economics professor Leonardo A. Lanzona said that revenues from top individual taxpayers can be utilized by the government as part of its recovery from the pandemic.

“TRAIN seems to be on the right track. Raising tax rates on the higher income individuals can bring in more revenues that the government can use for its post pandemic recovery plan. Lowering taxes on the lower income individuals who were most likely affected by the pandemic also seems appropriate,” he said in an e-mail.

Mr. Abola said the boost in government spending will benefit the lower income households more, especially in terms of public health and education programs.

“When combined, the benefits to the lower income groups outweigh the slight increase in taxes. The highest income groups do not benefit much from government spending,” he said.

Under TRAIN, 70% of its incremental revenues will go to infrastructure programs while the rest will go to social services. – Luisa Maria Jacinta C. Jocson, Reporter