Just today I read two news. The government is planning to increase VAT from 12% to 15% while planning to reduce estate tax from 20% to 6%. This move comes at a time where the government is promising many changes and reforms in the government entailing more money to fund public services.
A look at this infographic from Businessworld will show that the government will be incurring deficits/losses in the coming years ranging from P300 Billion to almost P600B per year. This is because revenues from taxes are not sufficient to pay for government expenses. Don’t get me wrong we love Pres. Duterte, this blog just aims to paint the other side of the coin, the effects of increasing VAT and reducing estate taxes which are being planned by the current administration.
INCREASING VAT AFFECTS THE POOREST OF THE POOR
Don’t be fooled it is not the seller who pays for VAT, it is actually the buyer who pays for it. Meaning it is you who will be most affected by this. Value added tax or VAT is a tax on the gross sales of a seller/service provider. It is also an indirect tax meaning the tax is passed from the sellers to the buyers.
Take for example the effect on doctor’s consultation: Say the consultation fee is 1000 pesos, the patient does not pay the 1000 pesos but pays 1000+ VAT or a total of 1120. The 120 will be paid to the government as VAT. Increasing VAT to 15% will mean you will have to pay 150 VAT or 30 pesos more.
This effect may sound small but if you total all the receipts that has VAT in it you will realize that a monthly expense of P20,000 could mean that you are actually paying P2,400 in VAT. Meaning an increase in 3% VAT would entail an addition P600 in taxes paid per month. In essence the government is asking us to pay 25% more in taxes thru VAT.
So practically what expenses do we pay VAT? Practically almost all expenses that we have we pay VAT. This could mean your jollibee meals, your movie tickets, your toll gate, your next house, your shampoo, your noodles and most other basic necessities.
Further rich people who have corporations can lessen paying VAT in the form of Input and Output VAT. If you have a corporation you can deduct the VAT you paid on your purchases provided you have receipts from your VAT payables. That is why increasing VAT will really be shouldered by the ordinary Filipino citizen and not the rich people who use corporations for tax shields.
LOWER ESTATE TAX HAS MINIMAL BENEFITS TO THE POOR
I am not advocating for an increase in Estate Tax but if the government needs to get some revenues, decreasing estate tax from 20% to 6% would mean more losses in revenue from the government. This would mean more deficits and more loans to be incurred by the government and thus more of our tax money will be used to pay for interest expenses for loans by the government.
Why? Estate tax is a tax on the wealth inherited by the heirs. It is different from real estate tax/amilyar which is an yearly tax on property. Estate tax is only paid when a person dies and when that person has substantial assets left behind for the heirs around P2M or more.
While we understand that the government needs money to fund its expenses, and that the government will decrease income tax soon the net effect of decreasing income tax and increasing VAT is as if there is no real benefit to the ordinary pinoy citizen.
Increasing VAT and reducing estate tax does not really benefit the poor. It benefits the rich more. If the government plans to increase VAT and decrease income tax, the effect will be minimal if not negligible. Because even if you are getting more take home pay, the prices of what you buy are actually more expensive. In the mean time the rich people will be paying less tax on their income and passing on more taxes to the buyers (that is you) in the form of VAT. Further there will be lesser wealth distribution effect to the poor in the form of Estate Tax. Note that the Estate Tax was created to redistribute the wealth accumulated by the rich back to the government in order to reduce taxes that will be paid by the people. The essence of the law is that the estate tax coming from the rich will allow government to collect more money and thus need not have higher income taxes and VAT.
Some officials have said that reducing Estate Tax will insure that people will comply and pay the tax. That is a wrong excuse to lower the tax. The estate tax is only 20% versus an income tax of 32% and the people still pay the income tax. Should we lower the tax just because the collecting office is weak even if the essence of the law (that is to redistribute wealth to the poor) is very good in the first place?
My advocacy has always been to help reduce poverty thru literacy. And I believe that the gap between the rich and the poor is getting wider and wider every year. Currently 1% of the world’s population control the 99% of the wealth. If we are to really succeed and grow as a nation we must help the poor rise from the ashes while at the same time encouraging the rich to grow their wealth (not at the expense of the poor).
It may sound tempting, a reduction of income tax to 25% to 32% or an additional take home pay of 7% for an increase in tax of 3%. But take for a moment the taxable base of the income tax and the taxable base used in VAT. A Php 100,000 income less an optional standard deduction of 40% means a 60,000 taxable income multiplied by 7% or a benefit of P4,200 less in taxes. Whereas a P100,000 income multiplied by 3% is an additional tax of P3,000 from VAT. But assume that a person has P1,000,000 invested and became P5,000,000 after 10 years which was used to buy a house. The P1,000,000 gets a 7% tax benefit due to reduce income tax or a total of P70,000 more to the citizen. But the additional 3% VAT will cause you to pay P150,000 more in VAT because the tax is on the amount you paid to buy the house which is P5M.
Assuming the person invested the extra 70,000, the scenario may be different. But not in reality any extra income of a typical Filipino usually goes to fund expenses not savings. Further, if you look at the previous assumption assuming that the person used P1M as a down payment and the person took out a loan of P4M for housing loan. The amount of P4M received used to buy the house will be subject to VAT. Thus you paid VAT on the P5M but paid income tax only at the P1M.
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ABOUT THE AUTHOR:
Mark Joseph T. Fernandez, CPA, RFC, AFA, AWP, AEP, MDRT is the founder and head financial advisor of FinancePH. He has helped thousands of people start saving, investing and insuring. He conducts regular monthly seminars and is a regular TV and radio guest on finance topics.
If you want him to be your financial advisor contact him at email@example.com .