The Ministry of Finance is proposing two revisions to the progressive personal income tax brackets, aiming to reduce the number of brackets and widen the income gaps between them. In both proposals, the minimum tax rate of 5% corresponds to a monthly taxable income of 10 million VND (after deducting family allowances and other deductible expenses). The maximum rate is 35% for taxable income exceeding 80 million VND (proposal 1) and 100 million VND (proposal 2).

Associate Professor Pham The Anh (National Economics University) argues that a top tax rate of 35% discourages highly skilled individuals from working and companies from hiring them due to the high cost.

He believes a 30-35% rate should only apply in countries with well-developed social welfare systems, where quality healthcare, education, and social security services are readily available. He cites Singapore as an example, where the average per capita income exceeded 87,000 USD last year, and the highest tax rate is 24%.

"If Vietnam wants to develop like Singapore, it should follow their model, not compare itself to less developed or similar countries," he said.

Anh proposes a maximum tax rate of 20%, instead of the current 35%. This aligns with the current corporate income tax rate, reflecting the principle that "every citizen is a business, 50 million adults are 50 businesses for double-digit growth".

Workers at the 29/3 Textile and Garment Joint Stock Company, Da Nang, 6/2024. Photo: Nguyen Dong

Workers at the 29/3 Textile and Garment Joint Stock Company, Da Nang, 6/2024. Photo: Nguyen Dong

At a recent seminar, Associate Professor Phan Huu Nghi, Deputy Director of the Banking and Finance Institute (National Economics University), also suggested a maximum tax rate of 25%, considering Vietnam's average income and the economy's need for savings and investment. He added that the policy should incentivize workers, while the corporate income tax rate is currently at 20%.

"Vietnam can increase the personal income tax rate later when per capita income reaches a higher level," he stated.

Vietnam's GDP per capita has been steadily increasing in recent years, reaching 4,700 USD last year. The country aims for high growth of 8% or more this year and double-digit growth in the coming period to join the high-income group by 2045.

Professor Vu Minh Khuong, Lee Kuan Yew School of Public Policy, National University of Singapore, estimates that if Vietnam's GDP per capita grows by 6.5% annually for 20 years, it will reach 15,000 USD by 2045 – the lowest threshold for the high-income group. If this rate is maintained, Vietnam could achieve a per capita income of around 20,000 USD by 2050.

The progressive tax system is based on the principle of horizontal equity: higher earners pay more taxes. However, this system has been in place for 15 years since the Personal Income Tax Law took effect. The maximum rate of 35% applied to income over 960 million VND annually (80 million VND monthly) is no longer appropriate due to inflation, increased average income, and rising living costs.

Nguyen Thi Cuc, President of the Tax Consultants' Association, pointed out that the 35% maximum rate leads to some individuals paying over 30% of their income in taxes. This means many high-income earners, but not the super-rich, are still subject to the highest tax bracket.

Proposed tax bracket adjustments by the Ministry of Finance:

Regarding the 35% maximum tax rate, Nguyen Quang Huy, CEO of the Faculty of Finance and Banking (Nguyen Trai University), suggests applying it only to those earning over 100 million VND monthly, aligning with the Ministry of Finance's proposal 2. This corresponds to the top 2% of earners.

"This ensures social equity and reduces the negative impact on the middle class, which plays a leading role in the economy," Huy commented.

Experts have repeatedly pointed out the issue of closely spaced tax brackets at the lower income levels. According to Associate Professor Phan Huu Nghi, this causes tax rates and amounts to increase significantly even with small income adjustments.

"Those with moderately increasing incomes are quickly pushed into higher tax brackets, creating financial pressure and reducing work motivation," he said.

The Ministry of Finance's proposals would reduce the number of tax brackets from 7 to 5. Nghi believes this simplifies the tax system while ensuring reasonable revenue for the budget.

"This promotes fairness and encourages workers to increase their income without fear of excessive taxation," he observed.

Concerning the gaps between brackets, Nguyen Quang Huy advises authorities to avoid abrupt jumps in tax rates. The gaps shouldn't be too large, preventing situations where a slight increase in income pushes workers into significantly higher tax brackets, potentially leading to tax avoidance or income underreporting.

Nghi suggests widening the gaps between tax brackets using a reasonable coefficient (e.g., a factor of 2) to create a stable and flexible tax system that encourages income growth. This also prevents middle-income earners from facing unreasonably high tax rates.

Nguyen Van Duoc, General Director of Trong Tin Accounting and Tax Consulting Company, echoed this suggestion. He supports proposal 2, as the adjustments would benefit many taxpayers, including those earning between 30 and 100 million VND. Widening the income gaps in brackets 3 and 4 would benefit many workers.

However, he recommends an additional option: widening the income gap in brackets 1 and 2, perhaps extending bracket 1 to 15 million VND. The extent of widening should be carefully calculated to support middle and upper-middle-income earners while offsetting increased revenue from high-income earners.

Personal income tax is the third-largest revenue source in the tax system, after value-added tax (VAT) and corporate income tax. Last year, total state budget revenue exceeded 2 quadrillion VND for the first time. Personal income tax revenue was estimated at 189 trillion VND, a 20% increase from the previous year. This tax type accounted for over 9.3% of total budget revenue, up from 5.3% in 2011.

From a macroeconomic perspective, Associate Professor Pham The Anh suggests revising and reducing the personal income tax burden to stimulate domestic consumption, contributing to economic growth.

"Reducing this tax increases disposable income for citizens, encouraging them to spend more on domestic goods and services," he said, adding that this would create new growth momentum from domestic demand and reduce Vietnam's over-reliance on exports, especially when major markets might impose trade barriers.

Phuong Dung - Quynh Trang