By Luis F. Dumlao, PhD
According to Van Parijs and Yannick in Basic Income (2017), the term negative income tax can be traced back to Augustin Cournot, one of the founders of mathematical economics. Cournot once said that the tax bonus invented around his time was the opposite of IT; as a mathematician, he coined the term “negative income tax.” Apart from Cournot, Nobel laureates George Stigler in an American Economic Review (1946) article brought about the idea, and Milton Friedman has been credited to have popularized it in Capitalism and Freedom (1962).
In the present IT law under the Tax Reform for Acceleration and Inclusion or TRAIN, there is no negative IT. Every peso earned up to P250,000 is tax free, every peso earned above P250,000 to P400,000 is taxed 20 centavos, every peso earned over P400,000 to P800,000 is taxed 25 centavos, and so on.
Suppose a negative IT is inserted in the following form. Every peso below P65,000 is subsidized by a peso, every peso earned above P65,000 to P250,000 is tax free, every peso earned above P250,000 to P400,000 is taxed 20 centavos, and so on. So, essentially, if one makes P35,000, his or her income is short from P65,000 by an amount of P30,000. The government would then give a P30,000 subsidy. This equates to a negative IT of P30,000. Every person who works and files a tax would have a guaranteed P65,000 take home income.
What does it have to do with
poverty? The government’s poverty threshold is an income of about P10,500 per
month for a family of five. This translates to P126,000 per year. Assume that
the typical family of five has two employed workers, both file income tax, and
that there is the negative IT. Then each is guaranteed a take home income of
P65,000. The family of five is guaranteed an income of P130,000 per year or
P4,000 over the poverty threshold of P126,000. The family will be technically
elevated from poverty.
But some considerations should be noted. First, does having a peso over P10,500 per month for a family of five make them no longer poor? One can argue that it is insensitive and inhumane to say so. But consider the global benchmark for poverty. The World Bank poverty threshold is $1.25 per day per person. Given an exchange rate of P50/$1, this translates to P62.50 per day per person or P312.50 per day for a family of five. Given a 31-day month, P312.50 per day translates just under P9,700 per month. Hence, by global benchmarking, having P10,500 per month makes the family no longer poor.
Second, would this encourage dependence in dole outs and worse indolence among the poor? Why work to earn P10,500 per month when government would guarantee it anyway? If the family having P10,500 per month is argued to be still poor, then it follows from the argument that the family is still in economic misery. Then it must follow that the poor’s incentive is still to work and earn more. After all, there is so much more if two abled-bodied members of a family work regularly for minimum wage. Hypothetically, doing so would make approximately P500 per day. With 22 regular working days per month for the two, the family stands to earn an income of P22,000.
Third, if government is to use negative IT to totally eradicate poverty, how much would it cost? The poverty incidence is approximately 20 percent. With population rounded to 105 million, this translates to 22 million poor people. If—and this is a big “if”—each family is composed of five members, this translates to 4.4 million families. If each family is to benefit from the negative IT of P130,000, the cost would be P570 billion. It would be expensive but not impossible to reach.
Brazilian economist Eduardo Suplicy once said that “the way out is through the door.” His point is that the solution is not so complicated and obvious. The way out of a room is through the door and the way out of income poverty is to give income. This is not to recommend to full-swing use negative IT to eradicate poverty. Its successful use depends on government’s readiness and government is likely not 100 percent ready. The way out of it is to ease in the use of negative income tax.
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Luis F. Dumlao, PhD., is dean of John Gokongwei School of Management, Ateneo de Manila University.