Savings, taxes, and the tractor in your backyard

Just as I anticipated earlier this week and wrote on my social media page last Wednesday, some critics of the administration are spinning the 20% tax on the interest of long-term deposits into something designed to provoke public anger.

I said in my post that the government must issue a clear explanation, because if they don’t, some critics, especially the disinformation machinery aligned with a certain political brand, will twist the issue and mislead the public by claiming it’s a 20% tax on the entire amount of your savings deposit, when in reality, it’s a 20% tax only on the interest earned.

It reminds me of the ‘laglag bala’ incidents during the Noynoy Aquino administration, which disinformants claimed were rampant, spinning the narrative to portray the government as heartless and incompetent, even though no verified statements or conclusive findings ever substantiated many of those reports.

On Thursday, the government, through the Department of Finance (DOF), finally clarified misconceptions fueled by ignorant individuals on social media --or by those intentionally trying to mislead others into believing that people’s hard-earned bank savings deposits are being taxed 20%. If people believe in that lie, that will make them angry indeed.

The DOF said, “It’s not the money in your account being taxed, but the interest it earns while sitting in the bank.” It also emphasized that this is not a new tax, but an existing one that has now been standardized under the Capital Markets Efficiency Promotion Act (CMEPA), reports PhilStar.com. “Since 1998, the interest earned from ordinary bank deposits has already been subject to a 20% tax,” the DOF was quoted as saying in its Facebook post.

But the misinformation and disinformation kept appearing in my social media feed, including posts from friends, so I was prompted to write a simple explanation of the tax and share it on my social media page. I reiterated that it’s a 20% tax on the interest earned from your bank savings, not a 20% tax on those savings.=

With that I gave an example. If you deposited ?10,000 and kept it as a time deposit for over five years, earning, say, a relatively generous ?1,500 in compounded interest during that period, then a 20% tax means ?300 goes to the government. So instead of receiving the full ?11,500, you'll get only ?11,200.

“Still a burden, right?” I said. “But you know what’s really the bigger burden? Inflation. When you deposited your money, it was worth ?10,000 in real terms. But when you withdrew that savings five years later at ?11,500 (let's say there was still no 20% tax), its real value may only be around ?9,800, based on average inflation,” I continued.

In other words, your loss from inflation is even worse than the tax on the interest of your savings deposit. It’s not healthy inflation from economic growth; it’s inflation from a broken system of overspending, weak production, smuggling, import dependence, excessive money printing, weak agriculture, and so on.

Does that mean we shouldn’t save money in the bank? No. Bank deposits are insured to some extent and are safe. The only real risk is the so-called structural inflation. And for me, it wouldn’t be wise to put all your money in the bank. If you have no appetite for risk, consider Pag-IBIG MP2 Savings, savings in cooperatives, or the SSS Pension Booster.

If you have excess funds you won’t be needing soon, put it to work. There are many ways you can do so: invest in education, support a scholar, run a business and provide employment, buy an asset that a talented and productive person can rent, or acquire assets that hold or increase in value.

In my tractor analogy, a tractor unused is a wasted tool. And so is money left ‘sleeping’ when it could be enabling education, livelihood, or growth. Put that tractor to good use by letting a hardworking but poor farmer use it, and ask him to give you your fair share after the harvest.

In my previous column, I argued against scrapping K to 12 and instead recommended filling the gaps in the senior high school system, such as through Cebu 3rd District Rep. Karen Hope Garcia’s proposed Basic Life Skills Course Bill, which aims to incorporate essential knowledge and skills that are fundamental for day-to-day living and the personal growth of every Filipino youth.

And I believe one of the most important basic life skills we need to teach our young, and our people in general, is financial literacy.