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Needed: The right brew of tax measures

Reforming the tax system has in recent years become a favorite presidential aspiration. President Corazon C. Aquino, barely half a year in office after being installed president by "People Power" on 31 July 1986 issued Executive Order No. 37 known as the "Tax Reform Package of 1986". Her successor, President Fidel V. Ramos, after grappling with a rambunctious Congress, was able to put in place at the twilight of his term his comprehensive tax reform package culminating in "The Tax Reform Act of 1997" approved on Dec. 1997.

President Joseph Ejercito Estrada, despite (or because of?) his noon and midnight cabinets, was unable to espouse any tax reform law. But his constitutional successor, President Gloria Macapagal-Arroyo, in her state-of-the-nation address, was quick to resume tradition by calling for a reform of the tax system, its major component being the institution of gross income tax.

Before we get embroiled in the debate over the details (which my friends at the Bureau of Internal Revenue and the Department of Finance insists are still being worked out), it would be good to put up the parameters of discourse by clarifying just exactly what we want to achieve by tax reform. For this purpose, although it is no longer in favor to invoke the authority of the past, I nevertheless propose to examine what our elders thought of in the past, particularly when they codified our tax laws into what was known at the National Internal Revenue Code of 1939. After all, neither the Filipino nor the stars he used to look up to for guidance changed much since then.

The Report of the Tax Commission of the Philippines in 1939 talked of three basic principles of a sound tax system, namely, (1) fiscal adequacy; (2) theoretical justice; and (3) administrative feasibility.

Taxes are, as repeatedly declared by the Supreme Court, "the lifeblood of the government". In the inspired description of Phil. Guaranty v. Commissioner (13SCRA 775, 780), taxation is "a necessary burden to preserve the State’s sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvements designed for the enjoyment of the citizenry and those which come within the State’s territory, and facilities and protection which a government is supposed to provide".

That enough or adequate taxes should be collected is not subject to debate. How much is enough is the question. The Tax Commission, reflecting the thought of Adam Smith, considered the goal of "fiscal adequacy" to mean "that the sources of revenue, taken as a whole, should be sufficient to meet the expanding expenditures of the government regardless of business conditions…". The implication is that taxes must year after year equal needed expenditures.

Present experts of public finance have all but abandoned the idea of a balanced budget every year and have focused their attention instead on seeking the happy blend of taxes, debt, and other receipts to meet government expenditures. The Supreme Court too has conceded that taxes now are the source of just "the bulk" and not all of public funds. (Sison v. Ancheta, 130 SCRA 654).

The ideal, therefore, of fiscal adequacy has thus turned into the issue of how much we can rightly expect our tax system to collect from its citizens by way of their contribution towards the financing of government expenditures.

The second principle, theoretical justice, is considered by the Tax Commission as well as by well-known tax authorities, such as Supreme Court Justice Jose C. Vitug and CTA Presiding Judge Ernesto D. Acosta, to require that the tax system be not only based on the taxpayer’s ability to pay but is believed by the average taxpayer as fair. Unfortunately, neither the Tax Commission nor any of the tax authorities have indicated what is the best measure of one’s ability to pay. Is it income? Or consumption? Or the store of one’s wealth, net of obligations?

Tax reform legislation must be explicit in its stand on this vital question of what is the best measure of ability to pay because on the people’s acceptance of that stand will depend on whether the tax system will be accorded the third feature of a sound system, namely, administrative feasibility.

Administrative feasibility demands, the Tax Commission said, that each tax is "clear and plain to the taxpayers, capable of enforcement by an adequate and well-trained staff of public officials, convenient as to time and manner of payment, and not unduly burdensome upon or discouraging to business activity".

All taxes cause pain on the taxpayer and even the Supreme Court concedes that there is, on the part of the taxpayer, a "natural reluctance to surrender part of one’s hard-earned income to the taxing authorities". The system, therefore, should be at the very least tolerable and its pain bearable to the taxpayers as a whole, lest, its impositions eventually be the object of taxpayer’s response akin to the emotionally charged gesture of Andres Bonifacio at Pugad Lawin.

To these three principles, a fourth, I suggest, must be added. A good tax system ought to be one that effectively influences social behavior towards activities consistent with the goals of government.

Our Constitution, for good or ill, takes the affirmative position in the much debated issue of whether the tax system should be used to influence private economic and social choices. For instance, exemptions for taxation are granted to real estate used for charitable and religious purposes (Art. VII, Sec. 28(3)). Furthermore, all revenues and assets of non-stock, non-profit educational institutions that are used for educational purposes are exempt from taxes and duties (Art. XIV, Sec. 4(3)). The obvious purpose of these constitutional exemptions is to encourage the activities of the favored institutions.

Going further, the Constitution wants the state to provide the private sector with "incentives to needed investments", which obviously include tax incentives. And it authorizes Congress to "provide for incentives, including tax deductions, to encourage private participation in programs of basic and applied scientific research" (Art. XIV, Sec. 10).

All told, the tax system, under our constitution, is seen, as a tool of government in channeling the flow of private funds to socially desired activities and enterprises.

The trickiest part of tax reform, however, is the inherent contradiction among these principles. Thus, an obsession for fiscal adequacy would have the tendency of making the system too onerous and therefore lacking in theoretical justice. A over-use of the system to favor some activities over others could result in complexity that is anathema to administrative feasibility, not to mention invite complaints of discrimination from the unfavored sectors.

The challenge, therefore, facing our legislature is how to get the right mix of measures that will keep the enough funds flowing into the treasury, in a manner seen as fair by most and therefore inexpensive to enforce, blessing along the way private choices which enhance the public good.

How we are prepared to discuss gross income taxation.

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