The President signed into law Republic Act 10963, or more popularly known as the Tax Reform for Acceleration and Inclusion (TRAIN), on December 19. The measure is the first of a series of reforms to align the tax system to current realities. This first tranche is expected to bring in about P130 billion for 2018 largely for infrastructure (about 70 percent) and social spending. The main focus of TRAIN was to reduce personal income taxes while taxing consumption that affects health (some sugar-sweetened beverages and tobacco) and those that are largely consumed by the rich, such as cars, fuel and cosmetic surgery, among others.
The Department of Finance estimates that about 6 million workers earning P273,000 per year or about 21,000 a month and below will be exempt from paying personal income taxes. This represents about 83 percent of all compensation workers. This is essentially giving additional freedom of choice to these consumers on how to manage their income. Data from the Philippine Statistics Authority on the 2015 Family Income and Expenditure Survey reveals that about 80 percent of families earn on average P320,000 and below per year. The same data set provides a clear distinction on how these families spend in comparison with the upper 20 percent of earners. There are marked differences on how the lower income families spend more on food, alcohol and tobacco while spending less on other items. The tax on some sugar-sweetened beverages and related products will also help lessen their consumption of these as they can lead to higher health risks in the future. It is expected that the lower income families can now use the additional resources to improve their consumption patterns and, hopefully, to allow for higher savings. Half of families only saves an average of P15,000 per year.
According to the Quarterly Consumer Expectations Surveys of the Bangko Sentral ng Pilipinas, about 40 percent of households with income P10,000 to P30,000 have savings as of fourth Quarter 2017. Half of them claim that they could set aside savings this quarter even if it is the Christmas season. However, only 10 percent have actually allocated 10 percent of their income for savings. Thus, the exemption from personal income taxation can now help these families add into their savings or for buying other human capital building expenditures, such as health and education.
The challenge, however, is how the actual implementation will reflect the behavior of the affected population. As it is, people usually spend expected earnings way ahead of actual receipt. In colloquial language, this is called “leveling up.” Notice that since most people expect a 13th month pay in December, there is already an allocation for its expenditure even as early as January of the coming year. Worse, when people expect an inflow will come, they usually overspend considering that this can be paid for in the future by the coming income. This is the reason people hardly feel an income increase since psychologically one has already factored said increase in future expenditures. Anecdotally, there is also a large segment of the lower income population accessing payday loans or in fact are indebted. Consider the recent news about some public-sector employees unable to pay their debts and loans despite the increases provided for under the Salary Standardization Law. This January 2018, salary grade 10 (possibly the equivalent of entry level in most private-sector regular jobs) will have an entry level of P18,718 per month, almost P4,000 higher than private- sector counterparts. Combined with the personal tax exemption, the take-home pay will increase by at least P1,200 per month.
The additional “freedom” therefore does not necessarily mean that people will reap fully the marginal benefits it provides. There is a need for a corresponding improvement in how people manage their finances. As we come into a new year, it is a good time to go back and review our expenditure patterns. For most of us, it is important much like a company to record and review how our spending was in 2017. Beginning January 1, we should start recording our income and expense flow daily and regularly. We should be able to segregate what are expenses that cannot be postponed and what are wants. When things are clear, it is important to get debt out of the way. That should be the first beneficiary of the increase in purchasing power. It does not make sense paying 30 percent on interest and then saving a portion that earns lower. After paying debt, ensure a fixed percentage of savings that is affordable, say 5 percent monthly. Allocate the remainder of the increase for health insurance or buffer for unforeseen expenses. These are just some ways that we could fully benefit from the TRAIN.
Wishing you a Merry Christmas and a Blessed 2018 from the Ateneo Center for Economic Research and Development.