Equitable taxation

It’s the season of the taxman and a busy season as well for accountants whose job it is to assess how much their clients ought to pay the government or to figure out ways to lessen their clients’ tax burden.

The wealthy and self-employed—and most companies, for that matter—are lucky to have accountants who can subtract a few thousand pesos here and there from their taxable incomes. However, members of the working middle class are a captive lot because their taxes are withheld at the source. But are the self-employed (mainly professionals like lawyers, doctors, actors, basketball players and other athletes) paying the correct taxes? The government does not think so. As President Aquino said in his State of the Nation Address last year, it seemed likely that most of the Philippines’ self-employed were not paying the right taxes.

Finance Secretary Cesar Purisima provided a convincing statistical explanation to prove this. Citing data from the Bureau of Internal Revenue, he said that for 2010, a total of P9.8 billion in income taxes was collected from 1.7 million professionals. This would mean that each of them paid the government P5,783, translating to monthly earnings of just P8,500, or below the minimum wage.

Purisima noted that businessmen and professionals should be the epitome of a good taxpayer. He said the government was not asking them to pay more income taxes than they should, just the right amount commensurate to their income.

Starting late in 2011, professionals such as lawyers have been included in the growing list of tax evaders being sued by the BIR under its Run After Tax Evaders program. The BIR is seeking to collect P40 billion from about 100 tax evasion cases it has filed since the start of the Aquino administration. This year, the BIR is also targeting to raise taxes from professionals to at least P95 billion, expecting each of them to pay an average P100,000 in taxes.

Meanwhile, what do the members of the working middle class get for the billions in pesos in taxes they pay? Many of them use private hospitals or medical care services and send their kids to private schools, and for their taxes they want safety in public places, affordable goods and services, and an efficient public transport system. But the government is sadly lacking in these areas, as shown in the horrendous traffic on Edsa and the sardine-packed MRT trains, the daily crime reports in the newspapers, and the costs of consumer goods and services that have been rising along with the prices of oil products.

Equitable taxation is also needed for the “sin” products—cigarettes and alcoholic drinks. The current excise tax system on tobacco products dates back to 1996. While the law was amended in 2004, its major features were retained. The biggest weakness of the current system is that the excise classification of cigarette brands present in the market in 1996 was frozen at the 1996 price levels. The law provides that these classifications can only be changed by an act of Congress. The consequence was that while the 1996 brands kept raising their prices through the years, their excise classifications did not change.

For example, a 1996 brand classified as “low-priced” remains a low-price brand and pays a very low tax rate, even if its current retail price should actually bring it to a higher excise classification with the corresponding higher tax rate. This anomaly in the law has resulted in the government losing tens of billions of pesos annually in foregone revenues. It has led to the Philippines having one of the lowest cigarette prices in the world—a fact that surely does not aid the anti-smoking campaign. It also discourages the entry of new players because new brands are classified based on current prices and become subject to higher tax rates than 1996 brands.

It’s time to change the current system, which should entail, at the minimum, removing the classification protection given to 1996 brands, raising the rates to increase government revenues and address the country’s health concerns, and instituting a system that levels the playing field in the tobacco industry. The Department of Finance estimates that the reform bills now pending in the House of Representatives will yield additional taxes of P44 billion a year, despite a projected 30-percent drop in demand.

If only the government taxes professionals and “sin” products correctly, the perennial problem of the state having to borrow so much and crowd out the private sector from the loan market can be eased. And perhaps the members of the working middle class will not complain as much if they see that others who earn more than they do are paying the correct taxes.