Personal income tax: Anif’s and the Government’s proposal

According to the Government, by 2023, those with a net income of $1,694,000 per month would pay income.

Anif’s proposal would make those who have the capacity to do so pay more and those who do not pay less.

By broadening the base, the Government expects to go from 3.5 million taxpayers to close to 7 million.

In its Economic Commentary of the Day, Proyecto de ley de solidaridad sostenible: análisis de sus principales aspectos y semejanzas con nuestras propuestas, the Centro de Estudios Económicos Anif indicates that the tax reform proposal of the National Government is an important step to achieve sustainable public finances:

Each of the reforms is aimed at improving both the amount and efficiency of collection, as well as income distribution and inequality. On the one hand, it eliminates exemptions, benefits and discounts that do not have any technical support, which necessarily implies broadening the taxpayer base for personal income tax. The reform to the payment of income tax is one of the key points of the bill presented by the Government and one of the most important proposals developed by Anif. Let’s see the comparisons of the two proposals:

Anif’s income tax proposal for individuals.

The two parties fully agree on the structural aspect, on the need to broaden the base of filers and taxpayers. Therefore, despite the fact that there are differences in the details of the two proposals, both the Government’s and Anif’s proposals make the current system more progressive, and the estimated collection figures are similar.

“Anif’s proposal contemplates the reduction of the threshold as from which one starts to declare and a progressive scheme of several gradients.”

Anif’s proposal contemplates the reduction of the threshold from which one starts to declare and a progressive scheme of several gradients; put in simple words, making those who have the capacity to do so pay more and those who do not pay less:

Under ANIF’s scheme our scheme would maintain an exempt bracket up to income close to 2.1 million pesos gross monthly (1.5 million pesos of net taxable income).

The actual contribution would start at a gross monthly income close to 2.2 million pesos with a marginal rate of 5%, which corresponds to an effective rate close to 0.5%, equivalent to a value of $9,100 of monthly tax payable.

From that point on, and up to an amount close to that at which today income tax is payable (4.7 million pesos of gross income), a progressive structure is proposed with low marginal rates ranging from 5% to 15%. From figures close to 6.5 million pesos of gross monthly income, the marginal rates would be between 20% and 25%. Then, up to 13 million pesos gross monthly income, the rate would be 30 %. Finally, for higher incomes, a graduated rate is proposed, starting at 35 % and gradually increasing to 40 % for incomes above 129.7 million pesos gross income.

The effective tax rate increases according to the income, so that what a person with a monthly income of 50 million pesos effectively pays would be close to 22%, while for a person with an income of 200 million pesos that value would be close to 35%.

And this is the proposal presented by the Government in the project.

The national Government, on its part, proposes, in the first place, to set at 25% the limit of deductions on gross income to determine the taxable net income (currently, the limit is at 40%).

The new limit would not apply in the case of payment of retirement, disability, old age, survivors and occupational risk pensions. Secondly, a progressive broadening of the taxpayer base, starting with a transition from taxable year 2022.

In principle, an exempt bracket would be maintained up to a gross monthly income of around 3.2 million pesos, i.e., a rate of 0 %. Contributions would start at a gross monthly income of around 3.3 million pesos, with a very low effective rate of around 0.5 % of the gross monthly income.

By 2023, an additional step in the extension would be taken and those with a gross monthly income of 2.3 million pesos would start paying income, with a low effective rate.

Anif indicates: Although at the end of the transition the threshold from which one starts to declare and contribute is practically the same as the one proposed by ANIF, the structure proposed by the Government has fewer income brackets and is less progressive.

With the gradual expansion of the base, the Government expects to go from approximately 3.5 million taxpayers and 1.6 million taxpayers to approximately 7 million taxpayers and 4.8 million taxpayers. In addition, the Government expects to collect around 0.8% of the GDP in 2022 and 1.2% of the GDP from 2023 onwards.

The Center for Studies points out: ANIF’s proposal would reach about 5.3 million taxpayers and an additional collection of 0.8% of the GDP.