Marcos Jr. Proposes Tax Reforms: Higher Income Tax Exemption, SME Relief

President Ferdinand R. Marcos Jr.‘s fifth State of the Nation Address (SONA) signals the beginning of what could become the country’s most significant tax reform package since the TRAIN Law. The challenge now is no longer whether tax relief should be granted, but how to provide it without weakening the country’s fiscal position. Done right, these reforms can increase the take-home pay of Filipino workers, help MSMEs grow, improve competitiveness, and strengthen investor confidence. Done poorly, they could widen the fiscal deficit and leave future generations with a heavier debt burden. Here are the key questions—and the policy choices that matter. 1. Why is the proposed increase in the income tax-exempt threshold from ₱250,000 to ₱350,000 important? This is one of the most meaningful tax relief measures announced in the SONA. Raising the tax-free threshold to ₱350,000 means more than one million taxpayers earning between ₱250,000 and ₱350,000 annually would no longer pay income tax. Workers earning up to ₱350,000 a year (about ₱29,166 monthly) could save as much as ₱15,000 annually, or about ₱1,250 every month. Those earning above ₱350,000 would also benefit because a larger portion of their income becomes tax-free. At a time of persistent inflation and rising living costs, higher take-home pay translates into greater household spending on food, education, healthcare, transportation, and other essentials—strengthening domestic consumption, the country’s largest driver of economic growth. More importantly, it recognizes that the Filipino middle class has long been overtaxed and underserved. It is a welcome first step toward restoring purchasing power and rewarding honest taxpayers. 2. Is ₱350,000 enough? It is a welcome first step—but it should be viewed as the floor, not the ceiling. The current ₱250,000 tax-free threshold was set in 2018. Since then, inflation, higher food and energy prices, and global economic uncertainty have significantly reduced the purchasing power of Filipino workers. The more important question is not whether hardworking Filipinos deserve greater tax relief—they do. The more important question is when they should receive it. For families struggling with rising costs, relief delayed is relief denied. Congress should therefore consider a phased and fiscally responsible roadmap: increase the tax-free threshold to ₱400,000 immediately upon enactment, ₱800,000 in 2027, and ₱1 million in 2028. A predictable transition would allow workers to feel the benefits without delay while giving government sufficient time to strengthen revenue administration and implement complementary reforms. The key is to finance tax relief through better tax administration, not higher taxes. Government should recover revenues lost by plugging tax evasion and running after those with unexplained wealth; immediately adopt the OECD Global Minimum Tax; and accelerate AI-driven tax administration, digitalization, electronic invoicing, and integrated government data. If implemented responsibly, this could become one of President Marcos’ most enduring economic legacies: a stronger middle class, higher take-home pay, and a fairer tax system that rewards honest taxpayers while preserving fiscal sustainability. 3. Why exempt SMEs from the 2% Minimum Corporate Income Tax (MCIT), and what other reforms should Congress consider? Exempting qualified Small and Medium Enterprises (SMEs) from the 2% Minimum Corporate Income Tax (MCIT) is a sensible reform because businesses should not pay tax based on gross income when they are barely breaking even. The revenue impact is relatively small, but the benefits to cash flow, business survival, and job creation can be significant. The bigger opportunity is to simplify tax compliance. Congress should consider replacing the current 8% optional tax with a 10% simplified tax while increasing the eligibility threshold from ₱3 million to ₱20 million in annual gross sales or receipts. A simpler system would encourage millions of self-employed professionals, freelancers, online sellers, content creators, and SMEs to voluntarily register and comply, broadening the tax base while reducing unnecessary audits and compliance costs. Tax reform should not only reduce taxes—it should reduce the cost of paying taxes. 4. What should guide Congress as it deliberates these proposals? Congress should treat these measures as one comprehensive tax reform package—one that delivers meaningful tax relief while preserving fiscal responsibility and long-term competitiveness. Tax relief should reward honest taxpayers, not habitual tax evaders. Any General Tax Amnesty should therefore be carefully reviewed, considering the limited success of previous amnesties, and should exclude those involved in tax fraud, corruption, money laundering, smuggling, and unexplained wealth. On electricity, policymakers should distinguish between two separate issues. If government removes the allowable system loss charge, the corresponding VAT on that charge is automatically removed. Must Read EXPLAINER: What is system loss, and how does it affect your power bill? Removing VAT on the entire electricity bill, however, is a different policy altogether. Given the country’s fiscal deficit and rising national debt, a blanket VAT exemption would disproportionately benefit higher-consuming households. A targeted VAT exemption or subsidy for low-income or low-consumption households would provide more equitable relief with less revenue loss. Most importantly, every peso of tax relief must be matched by stronger revenue recovery—not higher tax rates. That means modernizing tax administration through AI and digitalization, aggressively combating tax evasion and unexplained wealth, and immediately adopting the OECD Global Minimum Tax so revenues that rightfully belong to the Philippines remain in the country. After all, taxes are the lifeblood of government, but public office is a public trust. Filipinos deserve more than first-world taxes with third-world services. They deserve quality healthcare, education, public transportation, and infrastructure that is visible, durable, and free from corruption. President Marcos has opened an important policy conversation. Congress now has the opportunity to turn it into lasting reform—lower taxes for honest taxpayers, simpler compliance for businesses, stronger enforcement against tax evaders, and better public services for every Filipino. That is the true measure of successful tax reform: not simply collecting more revenue, but earning the trust of the Filipino people. – Rappler.com Mon Abrea, CPA, MBA, MPA (Harvard) is a global tax policy expert and Chief Tax Advisor of Asian Consulting Group (ACGlobal). He advises governments, multinational enterprises, and international organizations on tax policy, investment competitiveness, and fiscal reform. He is the author of Reimagining the World Without Corruption and Why Invest in the Philip