The abused middle class

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MANILA, Philippines — Based on most recent data and projections, a majority of our people are poor.

The upper class (rich and upper-income) constitutes about 1.4 percent of the population. This small group controls a significant portion of national wealth.

Middle class (lower to upper-middle) accounts for 40 percent of the population. This sector is growing but remains vulnerable to economic shocks like inflation.

The low income and poor sectors compose 58 percent of the population. The majority of Filipinos fall into these categories, with roughly 15.5 percent living below the official poverty line as of 2023.

In more specific numbers, the rich are high-net-worth individuals with a monthly family income of P402,500 and above. If you are a top professional, a doctor or a lawyer with a good practice, it is easy for you to be considered rich, even if you don’t feel like an Ayala, a Gokongwei or a Ricky Razon.

Top management and some entrepreneurs are supposed to be in the next category of upper income or those earning from P201,250 to P402,500 a month. This looks more like middle management to me.

Senior professionals and managers are considered upper-middle class, earning P134,167 to P201,250 a month.

Those considered middle class are mid-level professionals or established business owners earning a monthly income of P80,500 to P134,167.

Skilled workers and entry-level professionals earning P40,250 to P80,500 are considered lower-middle class.

Service workers, often just above the poverty line, earning P20,125 to P40,250, are considered low income but not poor.

The rest, households with monthly income of below P20,125, constitute the poor who are struggling to meet basic needs. Together with low income, almost poor, these are the majority of Filipinos.

Outside of the high-net-worth families, everyone from upper middle class down to the low-income non-poor, is in constant danger of becoming downright poor, or new poor as some people call it. A serious medical issue that requires hospitalization is enough to become a new poor.

A new PIDS paper written by Dr. Toots Albert and other PIDS scholars cited this serious vulnerability of the middle class to become instantly poor. The COVID-19 pandemic, the Albert paper pointed out, exposed the fragility of recent gains and the vulnerability of many households to economic shocks.

“Understanding the middle class is crucial for several reasons.

“First, a ‘middle-class consensus’ determines development success and is associated with better outcomes: higher income, faster growth, more investment in human capital such as education and health, infrastructure accumulation, better economic policies, greater political stability, peace and more democracy… middle-class expansion signals underlying economic progress based on wealth creation rather than redistribution.

“Second, the middle class represents a segment of society that bridges the gap between the poor and the wealthy, serving as a stabilizing force in economic and political systems.

“A large prospering middle class fosters accountable governance by advocating for political stability that promotes fair competition, supports pro-market reforms, protects private property, encourages private investments and contributes to taxes that finance public goods.”

And what has our government been doing all these years? Abusing the middle class.

Based on tax data and analysis, the Filipino middle-class sector bears a disproportionately heavy tax burden relative to their income, while the upper-income class often pays less tax in proportion to their actual wealth due to tax structures and loopholes.

While the TRAIN Law made income taxes more progressive (higher rates for higher earners) on paper, the middle class is often considered “overtaxed” compared to the top one percent and the lowest-income bracket.

The middle class is milked by the system, carrying a large portion of individual income taxes because their income is easily tracked through withholding tax by employers.

Additionally, the middle class pays a large amount of value-added tax (VAT), as they spend a significant portion of their income on basic, middle-class amenities.

Thus, the “New Poor” phenomenon enters the picture. Due to stagnant incomes, high inflation and tax obligations, many in the middle class have shrinking disposable income. They often do not qualify for government aid (ayuda), which is typically targeted at the lowest-income households.

The wealthy class pays less taxes in proportion to its income. The wealthy often gain their wealth through capital gains, dividends or stock options, which are frequently taxed at lower rates than ordinary income tax.

The ultra-wealthy use tax shields, often use holding companies, tax incentives and legal loopholes to lower their tax liability.

Although top earners pay a higher top marginal rate (up to 35 percent under TRAIN), their effective tax rate (actual tax paid relative to total wealth) can be lower than a middle-class manager, due to deductions and lower-taxed investment income.

Then, there is the bracket creep. The failure to adjust tax brackets for inflation means middle-income workers are pushed into higher tax brackets faster than their purchasing power increases.

On the other hand, minimum wage earners and low-income households (earning P250,000 or less annually) are generally exempt from income tax, making the middle class the primary contributors to income tax revenues.

The middle class badly needs a tax break, like a reduction in the VAT rate applied to everything we buy. But the government’s fiscal planners complain this will reduce income the government needs to pay the political scammers behind the ghost public works projects.

But we can’t go on like this. The more digitally savvy among the young middle-class workers will find ways of circumventing what they see as unfair tax laws. The “gig” economy will increasingly go underground.

Then too, remember political upheavals are normally nurtured by dissatisfied middle-class professionals and entrepreneurs. The spark of EDSA was definitely middle class.

The embers of dissatisfaction growing out of the failure of the government to punish the corrupt politicians behind the ghost projects are already there. Real tax reform will show that things are not hopeless yet. Sige… kayo rin!

Boo Chanco’s email address is [email protected]. Follow him on X @boochanco