Instilling taxpayer honesty

All of us have evaded taxes. Some do it big time, others in ways that would hardly make a dent, at least individually. Some do it directly and knowingly, while most of us probably do it more indirectly and perhaps unknowingly.

I have always told my economics students that one does not have the moral authority to fault the government for not collecting the proper amount of taxes if he/she fails to ask for an official receipt when patronizing a formal business establishment. That makes one a likely accomplice to tax evasion, because it permits the business owner not to report the transaction to the tax authorities, and escape any tax liabilities that go with it. It could mean just a few pesos of taxes for an individual transaction, but with millions of such undocumented sales transactions in a day, it all adds up to tens, possibly hundreds, of millions of pesos in revenues lost by the government every day.

That’s just the small change. Think about the income taxes and other taxes deliberately evaded by large taxpayers through misdeclaration of income or value of transactions, or use of fake tax stamps, as in the well-publicized case of Mighty cigarettes. In 2013, the Department of Finance estimated that about P400 billion was being lost annually to tax evasion alone. That’s around 4 percent of the country’s gross domestic product, and could buy us 400,000 new classrooms, or 27,000 kilometers of paved roads — enough to traverse the entire length of the country 13 times!

With the government bent on reforming our tax system to make it fairer and more efficient, the effort must be accompanied by measures to significantly improve tax compliance, or equivalently, curb tax evasion. Otherwise, we would simply fall into the age-old trap of penalizing only the honest taxpayers with a heavier tax burden, while letting those who evade taxes continue to get away with it. How can the government get people to be more honest about paying the proper taxes, and more vigilant about tax evasion when they witness it?

Most basic is the need to show taxpayers that their hard-earned taxes ultimately go to their own benefit. Scandinavian countries tax their citizens heavily — up to 60 percent in income taxes — but they see their taxes return to them in terms of free public services, including healthcare and education, which the average citizen can take for granted. Here at home, not a few rationalize tax evasion by arguing that our taxes are often not spent wisely by the government, and worse, only go to the pockets of corrupt officials and their cohorts. Basic to improving tax compliance, then, is curbing graft and corruption convincingly, and improving public expenditure management to maximize public benefits from the government budget. We need to see our government demonstrate zero tolerance for corruption, and go after all offenders, regardless of political color, with the same assiduousness as with the campaign against illegal drugs.

For tax evasion, as in any other violation of the law, deterrence is key, and the best deterrent is certainty of punishment. But how can we put fear into the hearts of tax evaders when we have periodic (and predictable) tax amnesties that allow them to clean their slates for much less than what they owed in the first place? Worse, our track record at prosecuting and penalizing major tax offenders appears to be nil; we’re all still waiting for a real “big-fish” tax evader to be put behind bars. There is wide perception, justified or not, that they get away because our leaders are beholden to them for their fat campaign contributions, or because too many judges and lawmakers are for sale. This is why the Mighty case is critical. It will be seen as this administration’s test case on its resolve to penalize large-scale tax fraud. I have already argued that if tax stamps have indeed been faked, it should not be treated as a mere indemnity that could be settled; it is a crime that must be punished. Failing on this, how can we ever expect tax evaders, large or small, to be honest with their tax payments?

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