Wage hike: Is it the only option?

Today, we celebrate Labor Day. As part of the celebrations, we could expect protests -- most common of which are calls for a wage hike -- from different labor groups that will seize the opportunity to voice their concerns. Although some regional wage boards have issued orders for a pay raise, it seems that the increases are still below what were sought by labor groups.

New wage orders were recently issued in six regions -- Bicol, SOCCKSARGEN, Davao, Western Visayas, Southern Tagalog and Cagayan Valley. The increase in daily wage ranges from P3 to P23 depending on the region. For Region IV-A (CALABARZON), a wage adjustment of between P2 and P90 has been granted to workers receiving below P255, while a productivity allowance of P12.50 has been granted to workers receiving minimum wage above P255 up to P337. Such adjustments will be done in tranches over a five-year period.

Some labor groups, however, are still not contented with the approved wage increases as these are below their demand for a P125 pay hike, a proposal backed by some legislators. In fact, a P125 across-the-board legislated wage hike is pending in Congress. But we could expect opposition from employers as this will mean higher cost of doing business.

The proposed across-the-board wage hike may need thorough evaluation since this may translate to higher inflation rate that may further erode worker income. According to the Department of Labor and Employment (DoLE), based on a study conducted by the National Wages and Productivity Commission (NWPC), the P125 proposed increase in wages may translate to P4,081.78 per month per employee. Accordingly, such increase in doing business may result in upward adjustments in prices of commodities.

But other than wage hike, how could the government address the decreasing purchasing power of workers due to soaring prices of commodities?

One of the government’s options is to decrease the personal income tax rate. There were proposed bills a few years ago to grant income tax relief to low and middle-income earners and to implement the proposed simplified net income taxation system (SNITS) for the self-employed. But such bills did not materialize.

Currently, individual taxpayers are subject to graduated tax rate ranging from 5% to 32%. These graduated tax rates have not been changed since 1998. The corporate tax rate was reduced from 35% to 30% effective January 2009 but the personal income tax rate remains unchanged. Consequently, corporate tax is 2% lower than the top marginal rate for individual. Moreover, the Philippines’ personal tax rate is higher compared with some of our neighboring Asian countries. Indonesia’s personal income tax rate is 30%, Malaysia’s is 26%, and Singapore’s is 20%.

Hence, the government may consider reducing the personal income tax rate, not only to be at par with other neighboring Asian countries, but also to increase the take home pay of individuals without increasing the cost of doing business.

Another option of the government is to increase the bracket in computing the personal income tax. There was a bill (House Bill No. 551) authored by Rep. Juan Ponce Enrile, Jr. to reduce the personal income tax due by increasing the income brackets, but the same did not materialize.

Currently, individuals with taxable income of P500,000 or more are subject to the 32% top marginal rate. The P500,000 top bracket, however, was set more than 14 years ago. Hence, there may be a need to evaluate the top income bracket since its value 14 years ago significantly depleted due to inflations. In fact, when the tax law was passed in 1997, the average poverty threshold for a family of five is around P4,100 a month.

But now, based on the estimate of the National Statistical Coordination Board (NSCB), the same family would need around P7,600 per month -- almost double of the 1997 estimate -- to keep out of poverty.

Likewise, the average consumer price index (CPI) in 1997 was 64.02 (2005 as the base year) while the CPI in 2010 was 127.97 (2005 as base year). This means that the P500,000 in 1997 is now equivalent to around P240,000. Hence, it is now time to consider increasing the income brackets in computing personal income tax especially since the current brackets are no longer commensurate with the current situation.

Workers deserve an increase in their purchasing power to offset increasing prices of basic commodities. Wage increase, however, is not a cure-all. It is high time for the government to thoroughly evaluate its options and decide which would most benefit both the labor and business sectors.