The current individual income taxation structure of the
Philippines signifcantly violates several norms of equity, with
wage and salary workers (wsws) being disproportionately
burdened by income taxes. An important source of inequity is
the phenomenon of “bracket creep” resulting from the failure to
adjust tax brackets by infation. Another is the failure of a large
number of the self-employed to pay the right taxes.
We show that while infation-adjustment of tax brackets
results in revenue losses, an expansion of the tax base, a
simplifcation of the income tax structure, and a reduction of tax
rates can plug this leak. Using data from the merged 2013 Labor
Force Survey and 2012 Family Income and Expenditures Survey,
we estimate a set of tax rates that largely offsets the revenue
losses from infation-adjusted tax brackets. A key behavioral
premise, supported by a multivariate logit analysis, is that the
likelihood of paying income taxes increases with lower effective
tax rates. Under the personal income tax structure proposed
here, 36 percent of the income tax burden would be borne by
the 2 top tax brackets—a seven percentage-point increase over
the current share. Implementing these tax reforms, however,
requires improvements in tax administration to accommodate
the potential expansion in the tax base.