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CAREFUL WITH THOSE TAX MEASURES

The State of the Nation Address did not provide the details of the President’s tax package but the broad strokes were there to give us an idea of the direction she would like Congress to take: gross income taxation and increase in the number of wage earners not subject to income tax.

It is easy to see why net income taxation has fallen out of favor. To arrive at the net, you are permitted by law to deduction certain items from the gross. The taxable base, i.e. the amount actually subject to tax, is thus subject to two discretions: first, the discretion of the taxpayer whether to claim an item or not; and second, the discretion of the tax examiner who, upon verification of the taxpayer’s income tax return, may or may agree with what the taxpayer has decided to deduct. The result is a bargaining session between taxpayer and tax examiner and everyone knows what that situation generally leads to.

The obvious solution is therefore to impose a tax on the gross. It does not totally eliminate taxpayer discretion, since the taxpayer will still have the opportunity to decide which items of income to report or not. But the tax examiner’s discretion on how much to allow by way of deductions is removed.

As in many cases, what is obvious is not necessarily what is correct. While gross taxation does away with tax examiner’s discretion on what deductions to allow or not, it will not prevent a tax examiner from looking into whether or not the taxpayer reports everything that he is required to include in his gross income. That area of tax examiner’s discretion remains despite the shift from net to gross taxation.

But the more fundamental objection to taxation of income on the gross is its inherent indifference on whether the taxpayer had any income left to enjoy after paying for all the costs of producing his income. It is not at all certain that anyone who generates gross income ends up with some net. Some make money and others don’t and it is simply not fair to impose the same rate of tax on both.

I therefore propose that Congress instead give the taxpayer the choice of whether he will be taxed on the net or on the gross. If he decides to be taxed on the net, then he should be required to substantiate, without any shadow of reasonable doubt, all the items claimed as deductions. If he instead opts for gross income taxation, he should be free from audit unless the income he reported is way off the income reported by the industry he is in. In that way, no tax is collected from those who legitimately did not make money. At the same time, discretion of the tax examiner is limited to the bare minimum.

 The second direction from the President is increasing the number of individuals not subject to income tax. This is usually done by raising personal exemptions. With less taxes to pay, there will be more money in the pockets of the taxpayer which will can then be expected to go back into the economy in the form of consumption or to the banks, by way of savings deposits, which are then let to those in need of capital. Increasing personal exemption benefits both the low income as well as the high income earner, everyone is entitled to at least one personal exemption.

It is important, however, to raise the reminder that an across-the-board increase in personal exemptions benefits the rich more than it benefits the poor. As quick look at the personal income tax rates under Section 24(A) brings this out. Increasing the personal exemptions of a person who has a net taxable income of Php 10,000 by, say, Php 1000, results in saving him only Php 50. But an executive who is earning over Php 500,000 a year will be saving, on account of the same personal exemption, Php 320.00. That is because the tax rate at the bottom of the income ladder is only 5% but is 32% at the top. Therefore, he who is at the top benefits more if everyone’s personal exemption is raised.

We suggest therefore that instead of an across-the-board increase in personal exemption for all, a low income deduction be permitted to the rank-and-file workers. This will be in addition to the premium payments on health and/or hospitalization insurance of individual taxpayers which is the only deduction presently allowed to be taken against gross compensation of workers. In this way, only the lowly wage earner and the low income-earning entrepreneur will be benefited.

This column is and will always be for tax reform. "Reform" taken in its basic "re-formatting" sense, a re-orientation of the tax collection system so as to finance the needs of government from enforced exactions made on a progressive manner based on ability to pay from those who really have ability to pay, and only from them. That is the vision of this column and its advocacy is its mission.

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