Growing the middle-income class

(Part II)

The PIDS studies cited above were partly responsible for making the Philippine Government aware that it has been the middle-income class that have borne the greatest burden of supporting public finances through the income taxes they pay. Since middle-income households earn their incomes predominantly through salaries, their income taxes are withheld by their employers. There is much less chance for them to evade taxes as do the rich whose incomes come mostly from non-salary sources. Almost fifty percent of income taxes comes from the middle-income households while the rich pay a measly ten percent. The authors recommended that “in order to strengthen and increase the size of the middle-income class, it will be important for government to reform the current Progressive Income Taxes (PIT). Through a more progressive taxation, the government raises the income share of the middle class to support growth. However, the PIT reform should only be a part of a larger reform of taxation policy in order to address projected shortfall in revenue generation. It may be important to examine the effects of removing PIT altogether, and instead only collect consumption taxes (as the wealthy find too many income tax loopholes) with heavy consumption taxes on luxury items, especially cars, and minimal consumption taxes on basic items (especially those consumed by the poor).” True enough, under the first package of the tax reform (TRAIN), the approximately 9.4 million households belonging to the lower and middle income-class households pay no or very little income tax. No tax is withheld from those who earn 120,833 and below while the increment above this minimum income is gradually taxed from 20% to 30% as the monthly salary reaches the maximum level for the middle income class, which is 178,900 monthly. To illustrate the savings or increase in take-home pay, prominent tax consultant and columnist Raymond Abrea offers the following example.

An ordinary employee such as a call center agent earning a monthly salary of 121,000 had a take-home pay under the previous tax regime of 118,167.15. Under the TRAIN, he would have a monthly take-home pay of 120,029.95 resulting in a monthly increase of 11,862.80 or a total of 122,353.60 annually. This would mean a 10.25% increase in take-home pay annually more than compensating for the annual inflation rate expected this year of about 4.5% Considering that the number of households (lower middle and middle income) is about 9.4 million (about 47 million individual consumers), such increase in take-home pay will go a long way in stimulating consumption spending or increase in savings, both beneficial to the economy.

For households that have multiple sources of income (increasingly the trend among middle income families), Mr. Abrea presents the following example. For mixed income earners such as a call center agent whose family has a sari-sari store, there is the choice to consolidate the compensation and business income subject to the revised personal income tax table, or use the optional 8% flat rate if the gross sales of the sari-sari store do not exceed the 13 million value-added (VAT) threshold. Assuming a gross sales of the sari-sari store of 1500,000 and the earnings of 121,000 monthly from the call center, this household can have an increase of take-home pay of 150,585.96 under the revised personal income table of TRAIN or even a higher 191,775 increase in take-home pay if the optional 8% flat rate on gross sales is used. These are significant increases in household take-home pays that can further stimulate the growth of the economy either through increased consumption or investments.

Another way of pinpointing who the middle income households are is to relate the income segments of the lower-middle income and middle income households to the Overseas Filipino Workers and the people who work for the IT-BPM (Information TechnologyBusiness Process Management) sector. Studies of the average remittances coming from OFWs indicate that their families receive some $300 to $400 monthly or at present exchange rates about 115,000 to 120,000 monthly which would put them at the lower middleincome segment, assuming that those members of the household who remain in the Philippines have other sources of income. It can be assumed, therefore, that the families and relatives of the more than one million OFWs belong at least to the lower middle-income households. The professionals and the seafarers, who receive higher compensations (about $500 to 1,000 monthly average) already belong to the middle-income households. The same can be said about the families of the 1.1 million workers of the IT-BPM who receive a minimum of 121,000 monthly with many of them getting double or more of that amount in the Knowledge Processing sector.

These are the two engines of growth of the Philippine economy that are contributing significantly to the growing of the middle class and the consequent lessening of income disparities among the various social classes in the country. The most important measure that can further increase the number of those who belong to the middle-income households is the improvement of basic and technical education through the new K to 12 curriculum and in the case of the knowledge processing industries a continuing improvement in the quality of tertiary education.

Those families that defied the contraceptive mentality being promoted in the 1970s and 1980s must be happy that they have several children who are now young professionals and are among those being employed by the IT-BPM industry. Just two of these yuppies working in the sector automatically bring the families to even high middle income levels since a good number of them remain unmarried till their 30s and contribute to the family incomes of their parents. These millennials (ages 22 to 36 in 2018) are a solid foundation of a consumption-led growth as well as the source of founders of start-ups that can grow into the digital enterprises of the future. Fortunately, there are ongoing efforts of both the Government (especially the Department of Trade and Industry) as well as civil society (such as the Go Negosyo movement of Joey Concepcion and company) that are incubating small and medium-scale entrepreneurs who augur well for the expansion of the middle class. As more of the young people succeed in their respective entrepreneurial ventures, more households will no longer depend exclusively on salaries for their incomes.

There will be more families that can supplement the salaries of those who are employed with entrepreneurial incomes, thus bolstering the size of the middle income-class even more. In fact, the Kapatid-Young Entrepreneur program of the Go Negosyo movement has the double benefit of nurturing entrepreneurship among the youth as well as generating employment in the countryside through the growing of high-value crops such as vegetables, fruits and livestock. Until and unless we involve people in the rural areas with our development programs, we will fail in eradicating poverty since the vast majority of the poor are in the rural areas.

For comments, my email address is bernardo.villegas@uap.asia.