P1-million tax-free income: A structural reform for an overtaxed, underserved middle class

By Mon Abrea, CPA, MBA, MPA (Harvard) 

Global Tax Policy Expert and Chief Tax Advisor, Asian Consulting Group (ACGlobal)

In every crisis, governments face the same temptation: act fast, act visibly, and act in ways that feel immediately beneficial. Price controls, fuel excise suspensions, and VAT cuts often dominate the conversation. They are easy to explain, politically attractive, and instantly felt.

But global experience tells us this: the most visible solutions are not always the most effective — and often, not the most equitable.

If the Philippines is serious about protecting and empowering its middle class, the response must go beyond short-term relief. It must be structural, targeted, and aligned with international tax policy standards.

This is where the proposal to increase the tax-free income threshold to P1 million by 2028 stands apart.

At its core is a principle that is both simple and globally validated: economic resilience begins with stronger households. And stronger households are built by increasing disposable income — not merely lowering the cost of consumption.

Today, the Philippine tax system reveals a structural imbalance. Around 82% of personal income tax collections come from salaried workers — those whose taxes are automatically withheld.

Meanwhile, less than 4% is collected from high-net-worth individuals. This is not just a statistic; it is a signal of inefficiency and inequity in the system.

At the same time, inflation continues to erode real incomes. With prices rising and tax brackets largely unchanged, Filipino workers are effectively paying more without earning more. This “bracket creep” is a silent but persistent burden on the middle class.

Globally, the policy direction is clear. Advanced and emerging economies alike are prioritizing direct income support, tax relief for workers, and targeted fiscal interventions over broad consumption-based tax cuts. Why? Because consumption tax reductions — such as VAT cuts — tend to disproportionately benefit those who spend more, which are higher-income households.

In the Philippine context, reducing VAT from 12% to 10% could cost the government up to P339 billion annually. Yet the majority of that benefit will accrue to the top income groups. This is not just inefficient — it is regressive.

By contrast, increasing the tax-free income threshold directly empowers the middle class. It improves take-home pay, strengthens purchasing power, and enables families to save, invest, or spend based on their real needs — not distorted incentives.

The proposed phased approach — from P400,000 in 2026, P800,000 in 2027, and P1 million by 2028 — ensures fiscal manageability while delivering immediate and predictable relief.

But responsible tax reform does not stop at relief — it must be matched with stronger enforcement and better administration.

This is where the Philippines has a clear opportunity to align with global standards set by institutions such as the OECD.

First, modern tax systems require transparency. Rationalizing bank secrecy laws — while ensuring due process — will allow authorities to detect tax evasion and unexplained wealth, particularly among those with the highest capacity to pay.

Second, the implementation of the OECD Global Minimum Tax is no longer optional—it is a necessity. With billions in potential revenues currently lost to profit shifting, the Philippines must assert its taxing rights in a rapidly evolving global economy.

Third, digital transformation is the cornerstone of effective tax administration. Countries that have successfully improved tax effort — from Estonia to South Korea — have done so through full digitalization, real-time reporting, and risk-based audits. The Philippines, with a VAT efficiency of only 35%–40% compared to the ASEAN average of 57%, has significant room for improvement.

These are not theoretical gains. Combined, these reforms can recover up to P1 trillion in lost revenues and generate an additional P500 billion from multinational corporations and the digital economy.

In other words, the country does not lack fiscal space — it lacks structural efficiency.

The choice before lawmakers is therefore not between relief and responsibility. It is between short-term optics and long-term impact.

A P1-million tax-free income threshold is not a populist measure. It is a strategic reform. It shifts the tax system from one that overburdens the compliant to one that is fair, predictable, and globally competitive.

More importantly, it sends a powerful signal — to investors, to workers, and to the world — that the Philippines is serious about building an economy anchored on trust, fairness, and inclusive growth.

In a global environment defined by uncertainty, the countries that will succeed are those that prioritize structural reforms over temporary fixes.

The Philippines has that opportunity today.

The question is: will we choose what is easy — or what is right?

Mon Abrea is a Global Tax Policy Expert and Chief Tax Advisor of the Asian Consulting Group (ACG), the Philippines’ premier tax advisory and investment consulting firm. A graduate of Harvard University, with executive education at Oxford and advanced tax policy studies at Duke, he is widely known as “The Philippine Tax Whiz” and a leading advocate of genuine tax reform. He advises multinational corporations, foreign investors, and policymakers on cross-border taxation, investment strategy, and global tax policy.

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