Taxes in OG-PHL

Taxes in OG-PHL#

The government is not an optimizing agent in OG-PHL. The government levies taxes on household income, corporate income, and value added. With these resources, the government provides transfers to households, spends resources on public goods, and makes rule-based adjustments to stabilize the economy in the long-run. The government can run budget deficits or surpluses in a given year and must, therefore, be able to accumulate debt or savings. The spending and debt parameters are discussed in Chapter Calibration of Macroeconomic Parameters. Taxes are discussed in this chapter.

Personal income taxes#

The government sector influences households through two terms in the household budget constraint (13)—government transfers \(TR_{t}\) and through the total tax liability function \(T_{s,t}\), which can be decomposed into the effective tax rate times total income as shown in the OG-Core documentation.[1]. In this chapter, we detail the household tax component of government activity \(T_{s,t}\) in OG-PHL.

(13)#\[\begin{split} c_{j,s,t} + b_{j,s+1,t+1} &= (1 + r_{hh,t})b_{j,s,t} + w_t e_{j,s} n_{j,s,t} + \\ &\quad\quad\zeta_{j,s}\frac{BQ_t}{\lambda_j\omega_{s,t}} + \eta_{j,s,t}\frac{TR_{t}}{\lambda_j\omega_{s,t}} + ubi_{j,s,t} - T_{s,t} \\ &\quad\forall j,t\quad\text{and}\quad s\geq E+1 \quad\text{where}\quad b_{j,E+1,t}=0\quad\forall j,t\end{split}\]

The total tax function, \(T_{s,t}\), is a function of personal income taxes, taxes on bequests, and wealth taxes. In the default calibration, wealth taxes are set to zero in OG-PHL. The bequest tax \(\tau_{bq}\) is set to 6%, matching the statutory estate tax rate established by the TRAIN Law (Republic Act No. 10963), as published by the Bureau of Internal Revenue (source).

Personal income taxes are modeled as linear taxes and set to average effective and marginal tax rates. The OG-Core documentation details more sophisticated ways to match the progressivity of the tax system. But given limited data for the Philippines, we start with simple linear tax rates: a 20% effective tax rate on personal income (etr_params, calibrated to equal the marginal tax rate on labor income), a 20% marginal tax rate on labor income (mtrx_params, calibrated using Department of Finance data), and a 6% marginal tax rate on capital income (mtry_params, set to the flat capital gains rate established by the TRAIN Law per the Bureau of Internal Revenue).

The mean_income_data parameter, used in tax function estimation, is set to ₱353,230 — the mean family income from the Philippine Statistics Authority’s Family Income and Expenditure Survey for 2023 (source).

Corporate income taxes#

OG-PHL uses the top statutory rate of 25% for the corporate income tax rate.

Value-added taxes#

A value-added tax rate of 12% is applied with the tau_c parameter.

Footnotes#