HOME    geronimo@ tax Articles    Today Articles     Lectures & Presentations    News & Views     Law and Jurisprudence

Admistrative Issuance    Trust Products and Practice    About the Guru     Links    Email Feedback

Gross taxation will be equalizer

PRESIDENT Arroyo’s call for gross income taxation in her July state-of-the-nation address, if heeded by Congress, would rectify a long tradition of discrimination in the tax system against wage and salary earners and reduce or even eliminate, depending on the final text of the amendatory law, the coddling enjoyed by their counterparts in business.

Since employees earn and receive their income in a unique way, they have always been particularly vulnerable, since time immemorial, to all sorts of measures designed to increase the tax base. Read that to mean all sorts of measures to increase tax collection. As a result, the taxation of salaries and wages has always been, at least for those who had to pay the tax, gross, although it was only during the last two decades that the income tax was on the gross.

Their first strike on employees, but not on those in business, was the withholding tax on wages. The income tax, under the law, becomes a liability at the end of the taxable year, for employees, Dec. 31. Sometime way back when, earlier than when anyone alive at present can remember, some technocrat must have thought it a brilliant idea to start collecting the tax on salaries and wages before the tax accrued. Wouldn’t be nice, the technocrat who must have topped his Finance 101 thought, if before the employees got their pay, the government first took its cut?

So it came to pass that salaries and wages were subjected to tax withholding. The government conscripted the employers into the tax collection service, with the mandate to collect the tax still expected to be due from the employees before paying the salaries already due to them. They were thus given the nice sounding name "withholding agents". The Supreme Court was later say that employers were the common agents of the government and the employees, but he name stuck in deference to reality.

This simple measure of collecting the tax as the income was paid before the tax became a liability, immediately set employees apart from taxpayers who derived their income from business. Whereas the employees were coerced into paying money in advance, taxpayers in business (whose liability for the income tax likewise accrued at the end of the taxable year) were given an additional three and a half months, up to April 15 of the succeeding year for those whose taxable year ends Dec. 31) within which to pay their income tax.

The brilliant technocrat who thought of the withholding tax on wages must have been granted (if not, he should have been granted) some promotion because, aside from enabling the government to collect the employee’s tax in advance without interest, the government was spared the expense of itself collecting the tax from the employees. But lost in the celebration must have been the fact that the employers, to whom the costs of tax collection were passed, themselves deducted those costs from their own gross incomes. This in turn lowered the amount of income taxes collected from the employers. It is not known whether this reduction in tax collection, resulting from the deduction of the employers of the cost of their collecting the withholding tax and remitting it to the government, necessitated an increase in the tax rate, or simply, discouraged the government from passing on the benefits of a more efficient collection tot he taxpayers in the form of reduced rates. What is known, however, is that some employers had become unfaithful agents, not remitting their collection to the government. That, I suppose, is the cost of trusting the employers rather than the employees.

Eventually, the government was to extend the withholding tax system to payments, other than salaries and wages, and, to a certain extent, this affected the taxpayer in business. But the contagion was limited to withholding on passive income, such as the tax on interest on bank deposits, and certain regular payments, such as rentals. But, by and large, the advantage of the business taxpayer over the employee remained intact.

The second strike against employees came, in those days when employees were still permitted to claim certain non-business deductions, such as casualty losses, charitable contributions, bad debts, etc., from the seemingly fair philosophy of allowing, as deductions from gross income, expenses which are incurred to produce income and disallowing expenses which are "personal, family, and living expenses." Acceptable though this may be in theory, it in effect resulted in the same type of costs being considered deductible when claimed by a business taxpayers but personal expenses when incurred by an employee

For example: When an entrepreneur, before launching his business, studies the market, designed his product and sets up his organization, he lumps all these prefatory expenses under an accounting category known as "pre-operating expenses." When he eventually starts doing business, he immediately begins to, using an account’s term, amortizing the capital expenses, i.e. deducting from his gross income at least a portion of this "pre-operating expenses." Over the years, the entrepreneur is able to recoup his initial expenses in setting up his business because he is able to deduct the amount, albeit gradually, from his gross income, thereby avoiding tax thereon.

An employee, on the other hand, who goes to night vocational school or college to acquire a particular skill or earn a degree that would enable him to market himself at a higher price, either to his present employer or to a new one, pays tuition and other fees. Those fees are not different from pre-operating expenses. They have the same purpose. They are incurred before the taxpayer earns as a result of them. But, while the entrepreneur is permitted to amortize his pre-operating expenses, the employee could not, because his tuition and other school fees were considered "personal" expenses.

Another example: when a merchant transports his goods from the place of production to his dealers, his transportation expense (including the return trip of his delivery truck) is deductible against gross income. However, when an employee commutes from his home to his place of work, he could not deduct his bus fare as his transportation costs were considered "personal" expenses.

The final strike called on the employee was when then President Ferdinand Marcos imposed what is known as the modified gross income tax on compensation. If a taxpayer derived income solely from his employment, all of his income was generally taxable income and he had to pay the income tax on everything that he earned, not only of his personal exemptions (which by the way were also available to the taxpayer in business). The taxpayer in business, on the other hand, continued to enjoy the full benefits of a long list of deductions, and was restrained only by a few limitations which, with the aid of professional advisers, he could skillfully skirt. With the modified gross income tax on compensation, the discrimination against the employee was complete. Only recently, did he get some relief. He was permitted by R.A 8424, to claim as deductions, the only ones allowed, premium payments and/or hospitalization insurance against income earned starting 1998.

So, go ahead, Madam President, goad Congress to tax business on gross. When all is said and done, the trickiest part is simply the determination of the cost of producing the goods and the services, so as the tax not capital but only income. The hurdled, then the wage earner and the businessman will, for at least this once, be equal before the law. Then Edsa 2 can share the pain that Edsa 3 had been suffering for so long.

HOME    geronimo@ tax Articles    Today Articles     Lectures & Presentations    News & Views     Law and Jurisprudence

Admistrative Issuance    Trust Products and Practice    About the Guru     Links    Email Feedback