At last, real tax reform

At last, we have a government that is listening and is bold enough to try something new. The tax reform proposal of President GMA in her SONA is innovative and conceptually, very pro-taxpayer.

First of all, she wants to simplify the tax system, removing the discretionary aspects upon which corruption at the BIR thrives. I was talking with an experienced tax consultant last Friday evening and he said people want to pay the proper taxes and they will do so if they can be protected from harassment by corrupt revenue officers.

The other common sense approach of GMA is her proposal to exempt minimum wage earners from income tax. Our tax tables must be updated to take into account the ravages suffered by the peso through the years. Let us just make sure the level of exemption will cover whatever normal bonuses minimum wage workers make in a year.

Also noteworthy is the proposal to remove the requirement for fixed wage earners to file a return since their tax had already been withheld. This reform should save government a lot of money in paper and manpower costs for a useless activity that produces no additional revenue. As Finance Secretary Lito Camacho told me during The Philippine STAR anniversary party, he can redeploy a lot of BIR employees to more productive units like the large taxpayers group.

The best part of the tax reform passage is the gross taxation scheme. They will lower the tax rates but will apply it on gross income. The first good thing about this is that it will minimize if not eliminate corruption. Taxpayers and examiners will no longer haggle on what expenses are deductible. So far as individual taxpayers are concerned, my tax consultant friend thinks this scheme will increase tax collections.

The second good thing about this gross taxation scheme is that local firms will now be more efficient in the utilization of corporate resources. With representation and travel expenses no longer an important tax deductible consideration, this popular way of having a good time on government expense is eliminated. Business people can still wine, dine and gallivant but to their account. Corporate managers will now be forced to spend only what is absolutely necessary for the business. This will improve overall corporate productivity and enhance shareholder value.

At last, everyone will start to carry his or her fair share of the burden of financing government programs. Many corporations are organized as tax avoidance schemes and, therefore, never make any income that could be subject to tax. They are designed to make luxurious personal expenses, from yachts to expensive foreign vacations, tax deductible. Now, these companies must pay taxes too. That’s only fair. Everyone, even losing corporations, benefit from essential government services. It is only fair that everyone, even "losing" companies, pay too.

Professionals and those in the underground economy manage to dodge the current tax system. If they design the new system so that consumers will find it to their interest to ask for receipts, then the tax base will even be enlarged. The gross tax scheme for corporations may, however, have to be designed to be industry specific for it to work fairly and effectively.

I am not surprised that several big businessmen gave negative reactions to the gross taxation scheme. They have been in cahoots with corrupt revenue officers for too long. Now they have to pay like they never have before.

As for the economists who are saying the new scheme will reduce government revenues, I think it is worth a try. Lito Camacho isn’t stupid to propose a system that will give him headaches by way of raising revenues. There will be an adjustment period. If the rules are crafted well and if GMA takes precaution to prevent the crooks from sabotaging the implementation of reforms, it is entirely possible for government to collect even more.

In any case, the tax reforms proposed by the Macapagal-Arroyo administration may also be just the thing we need to get over this economic crisis. That US Senate Economics Committee report I cited a week ago observes that this "U-shaped" slowdown-recovery condition calls for a fiscal policy that removes the "tax drag" with pro-growth tax and spending policies.

"Tax cuts," the US Senate paper points out, "would help to cushion debt burdens, mitigate balance-sheet distortions, and bolster cash flows."

The US Senate paper also suggests that over time, "capital gains tax relief could aid the equity market." In any case, it rightly prescribes that any tax reform designed to get us out of the economic slump should be "quickly enacted so as to boost near-term economic activity."

In other words, Congress should pass GMA’s tax reform proposal quickly for it to have maximum beneficial effect.

President GMA says she would be happy if she can accomplish 50 percent of the things she told Congress she wants to do. If she manages to reform the tax collection system, she would have the right to be called not just a good President but a great President.

Stock market terms

Reader Orly Morabe sent me this "No Bull Guide to Investment Terms" by Christopher Buckley. We will take the first five definitions. More in future columns.

Bear – Symbol used by brokers to denote fear once the market has fallen by 20 percent. Considered by some illogical, inasmuch as bears are typically seen as lovable creatures. Some scholars think it may be a misspelling of the English word "bare," what many clients are from the waist up after they have "lost their shirts."

Bull – What a broker feeds clients when they ask what has happened to all their money.

Blue chip – Popular brand of tortilla snack. Also, stocks that perform consistently well until you purchase them.

Tip – Advice to buy a particular stock, typically given after the stock has reached the apex of its historical value.

Options – What you had before you invested all your money in the stock market.

(Boo Chanco’s e-mail address is [email protected])