Taxing day

A Facebook meme asks: If cigarette taxes are meant to discourage smoking, wouldn’t income taxes discourage working?

The meme was meant to be tongue-in-cheek. After all, people had the ordeal of spending the Holy Week rushing the computation of their income tax that must be paid today.

Yes, the thought must have occurred about the futility of working. It is normal to feel cheated because we are turning over to the government as much as four months worth of money we invested a lot of sweat on last year.

What makes us feel so aggrieved is the realization that many rich folks avoid paying the right amount in taxes all the time. It is not surprising to find instances when middle class folks pay more than them in absolute terms. President Trump is a case in point.

Then we also know a good part of our hard earned money is stolen by corrupt officials or lost by incompetent bureaucrats. We also know we are paying more than we should because the tax rates are outdated. They should have adjusted rates to inflation, at the very least. Government is effectively stealing from its citizens.

What really makes us scream a bunch of Duterte type expletives on tax payment day is the difficulty of filing and paying. The tax forms have become more complicated through the years. It is no longer possible for many of us to compute, file and pay our taxes without professional help.

This is why we are justified to use President Duterte’s favorite profanities as we perform our solemn duty as a citizen to support this government on tax deadline day. We deserve more respect from government as taxpayers, something we never get.

The Duterte administration promised change. To the credit of Finance Secretary Sonny Dominguez, he did work to deliver a comprehensive tax reform bill. Sonny’s proposal will update the rates, adjust for inflation, make the system friendlier by simplifying revenue collection procedures.

But Sonny’s proposal is languishing in the House of Representatives. The Senate cannot begin to take the measure up until the House deals with it. If President Duterte puts in some of his political capital behind the measure he calls Sonny’s tax reform bill, maybe package one can be passed by year-end.

At the very least, Sonny’s tax reform proposals will clear the cobwebs in the tax rates and tax brackets. Here is how former NEDA chief Ciel Habito described the benefits of that tax reform proposal:

“It will correct a longstanding injustice to middle- and low-income taxpayers by reducing income tax rates to regional norms. It will do the same with income taxes on firms, making it more attractive to create even more jobs and further invigorate the domestic economy. It also proposes a well-studied way to recover revenues to be lost from such tax cuts, by updating excise taxes and narrowing value-added tax exemptions.”

But it seems President Duterte is lukewarm to the tax reform measure or he doesn’t really understand it and how important it is. He keeps on referring to it as “Sonny’s tax reform.” Just before he left for the Middle East last Monday, the President said: “There’s no need to increase the tax laws. All we have to do is to collect.” No wonder the congressmen are not moving.

Beyond Sonny’s tax reform proposals, there is still work to be done to review and propose more drastic revisions, including the philosophy behind our tax system. Not only must taxes be fair… taxes must also not discourage job creating investments.

As I reported in a previous column, they are having similar arguments in the US. One proposal they are looking at deserves our attention too because our corporate tax rate is among the highest in the region. We need to make our economy more competitive.

The Wall Street Journal reports that one scheme is “to cut taxes on corporations while raising them on shareholders.”

The proposal was brought out because of the massive tax avoidance strategies employed by big American corporations. Corporations find taxes easier to elude because they are more mobile than their owners.

“Raise taxes on Apple Inc. or Berkshire Hathaway Inc., and they will try to shift income or operations abroad. Raise taxes on Tim Cook or Warren Buffett and neither will leave America.”

The Wall Street Journal reported that Ron Johnson, a Republican senator from Wisconsin, is pushing the idea.

Mr. Johnson would like corporate shareholders to be taxed at individual rates.

The corporation itself wouldn’t owe any income tax on total reported profits. Instead it would notify each shareholder of its share of annual profits and then forward that shareholder’s estimated tax to the Treasury.

The American Enterprise Institute has proposed to cut corporate tax to 15 percent and tax dividends and capital gains at the same rate as ordinary individual income. “That reduces the double-taxation of corporate profits, the bias for companies to issue debt rather than equity and widespread special breaks that distort the allocation of capital.”

According to the Wall Street Journal, “some countries have already done it: Ireland combines the rich world’s lowest tax on corporations with its second highest on dividends. Britain recently lowered its corporate rate while raising the rate on individuals…”

I had been saying we should have no distinction in the tax rate imposed on individuals on account of where the income comes from. Passive income from investments in stocks or bonds should be taxed the same rate as sweat income from salaries or individual consultancy fees.

This is specially true in the Philippines where even listed companies are virtual single proprietorships controlled by a single family. The low public float assures that. Going public is just a way of raising cheap money to finance the corporation and minimize taxes paid.

The claim of double taxation if we tax dividends like personal income can be dealt with easily. Have dividend income due to individual stockholders taken separately from the income tax the corporation must pay. The higher tax on individuals should take care of lower corporate taxes meant to keep corporate investments within the country.

There should also be a conscious plugging of tax loopholes that significantly reduce the income tax liabilities of high income individuals. Personal corporations meant to shelter incomes of high net worth individuals should be banned.

Making the tax system a lot more equitable will reduce the resentment of the working class at this time of the year. A more equitable tax system that is easy to comply with will encourage better tax compliance.

In the meantime, we are justified to feel bad. After all, we sweat it out to support government’s ineffective and profligate ways of running this country. We are within our rights to scream a barrage of Duterte type expletives as we file our tax return. Why should the privilege of cursing be reserved for the President? We are paying for that right today.

Boo Chanco’s e-mail address is [email protected]. Follow him on Twitter @boochanco.