Finding relevance in taxation

Lowering income taxes – both personal and corporate – would always draw a cheer from the obvious beneficiaries; and the antagonists of this move – obviously, the government’s executive branch – would balk at any intention to reduce tax collections.

Of course, resurrecting this old issue at this time does have tinges of politics (read: elections) that could only end up with the current administration losing out – both in terms of credibility and revenue collections – if it decides to concede to reduce income taxes.

A smart answer to this two-sided sword would be to overhaul the entire tax system of the country, which has quite a number of facets that could stand some adjustments to keep up with the times, especially in plugging holes that account for the estimated massive tax leaks.

This could also mean passing four bills the Department of Finance has tagged as urgent, and which the Bureau of Internal Revenue’s chief boss, Kim Henares, has specified as a requisite to opening any discussion on income tax reforms.

These urgent priority measures – the fiscal incentive rationalization bill, the tax incentive transparency act, the mining revenue sharing bill, and the customs modernization bill – are at various stages of discussion in the halls of lawmakers.

Prerequisites

All four proposed laws are expected to significantly help address the current tax collection leaks the government has deemed to be lost chances of revenue.

As in most taxation issues, those adversely affected by this government-led taxation restructuring would be the business sector which will always argue they are being taxed way too high, and any additional taxes could affect their competitiveness.

This is also partly the reason why the four bills mentioned are going through a difficult time in Congress, having continuously been subjected to countless debates by all the stakeholders concerned.

Some say the fiscal incentive rationalization bill is as good as dead, at least with the current administration; while the tax incentive transparency act and the customs modernization bill are at its last legs before submission to the President.

The mining industry seems happy that nothing much is moving on the proposed mining revenue sharing law, preferring status quo than what it deems as harsher terms in the sharing of earnings from the extraction of the country’s mined resources.

Gamble

Going back to the merits of rehabilitating the country’s 19-year-old income tax system, losing revenues – especially if the DOF’s priority bills are not passed – could create a fiscal weakness that would inadvertently affect our current credit rating.

Much of the upgrades the country has been receiving in the last few years has been attributed to just how well government has been managing its finances. Going back to an environment where the operating deficit rises because of lost revenues would strip us of this new rating.

With continued economic growth in the last few years, the government has been collecting more taxes to help shore up its spending. Thus, lowering corporate income taxes could be a big gamble, especially if prospective investors will not be enticed enough to come to the Philippines because of a resulting downgraded credit rating.

This has happened to some of our neighbors, countries that have succumbed to the pressure of lowering corporate income taxes hoping to attract more investors. And yet, the resulting massive deficits in GDP ratios had impeded overall economic growth.

On the other hand, economists agree that high corporate taxes are a deterrent to growing a business at a much faster pace, and consequently contributing more taxes. High taxes also are a disincentive for the informal sector to join the mainstream, therefore depriving them of better chances of growing.

Tax evasion and tax avoidance are also regarded as highest in economies that adopt severe taxation laws. Of course, it also goes without saying that complex taxation structures such as what the Philippines has have contributed to the current huge tax leakages.

Thus, tax management is a huge challenge especially in developing economies like ours. Looking out for the interest of the whole nation is to strike a harmonious relationship among those that create taxes, collect taxes and spend taxes.

Adapting to change

For now, given the timing and limitations of the situation, it would be best to salvage whatever proposed taxation laws are on the table. They will definitely help in rehabilitating some of the antiquated and irrelevant, not to mention inutile, taxation laws we have.

The country needs taxes to fund social programs associated with high levels of poverty in a population that has breached the 100 million mark. More people need to get through school, receive health care, and have good roads and bridges to bring their produce to the market.

Perhaps because it is election time, or perhaps because it is indeed justified and timely, let government earnestly look at reducing personal income taxes. After decades of silently bearing the burden of nationhood through the payment of personal taxes, Juan dela Cruz deserves some reprieve.

On the other hand, business can rest easy that once the economy has reached a point of more sustainable and inclusive growth, there will be other ways the government can help, all with the objective of growing the economy together.

The Philippines is still in the early stages of trying to fly. Let us not rock the boat too much, so much so that we may find ourselves once again in deep waters and struggling to stay afloat.

Tax laws, after all, are meant to keep communities alive. What is important is that these levies are not abusive, are not prone to abuse, and are, on the whole, beneficial to society.

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