Income tax (both personal and corporate incomes) is one of the clearest proof of the absence of rule of law. Rule of law says the law is above everyone else, no one exempted and no one can grant exemption.
In the income tax system, at least in the Philippines, the following do not pay income taxes:
1. robbers, hold-uppers, smugglers, drug pushers, illegal gambling operators, etc.
2. many informal sector workers like ambulant vendors, jeepney and tricycle drivers, prostitutes, etc.
3. professionals; well mostly pay but highly understated income, resulting in very low income tax payment.
4. officials and employees of multilateral institutions like UN, WB, IMF, ADB, WTO, also staff of foreign aid govt. bodies like USAID, JICA, SIDA, CIDA, KOICA, GTZ, EC, etc. Here, Filipino staff of those agencies are expected to simply declare their income and pay income tax to the Philippine government, but they are not subject to mandatory and automatic income tax deduction, like personnel of private corporations and national/local government agencies.
If you count the above people, they are numbering millions of people. So what is the point of enforcing a law that exempts million of people from its application? Either you enforce the law that it applies to everyone, or you abolish the law that penalizes the honest and productive people.
Another importatnt reason: people hide their actual income and the source/s of their income, so it is very difficult to fully enforce the law on income taxes. But people flaunt their consumptions -- their new house, new car, new appliances, new cell phone, new computer, new jewelries and clothing, new travel, etc. Even the above-mentioned groups of people would tend to flaunt their material possessions. And since those consumption are generally covered by various consumption-taxes, it is much easier to collect these taxes.
Among the consumption-based taxes are:
1. value added tax (VAT)
2. excise tax (for alcohol, tobacco, petroleum products; new cars, mining, etc.)
3. travel tax (international travel)
4. amusement tax (collected by local government units, LGUs)
5. vehicle registration tax (plus mandatory "smoke emission test" fee)
6. real property tax (also collected by LGUs)
7. local taxes on top of VAT for various consumption goods and services.
And there are various transaction taxes and fees, among others are:
1. documentary stamp tax
2. import tax
3. import processing fee
4. forced and mandatory contributions in SSS, PhilHealth and Pag-IBIG
5. franchise tax
6. common carriers' tax
And of course there are dozens of other various fees and duties, collected by both national and local governments:
1. driver's license fee (plus mandatory "medical test" fee and "drug test" fee)
2. passport fee
3. police or NBI clearance fee
4. terminal fee (airports, seaports, some bus terminals)
5. birth certificate fee, death certif fee, burial fee
6. marriage certif. fee, annulment certif. fee, etc.
7. health and sanitation fee
8. garbage collection fee
9. building permit and inspection fee
10. electrical and fire department permit fee
11. residence certificate fee
12. village/barangay business location fee
13. city/municipal mayor's business permit fee
About corporate income tax, well, corporations do not pay taxes. People do. Corporations are just legal entities. People pay the taxes in behalf of the registered corporations. The consumers in the form of higher prices, the employees and managers in the form of lower wages, and the owners and stockholders in the form of lower earnings and equities.
Thus, if we abolish both personal and corporate income taxes government will not go "dry" as there are dozens of various taxes, duties and fees, plus penalties and mandatory contributions, that the government collects.
But a better result of zero income tax regime is that millions of Filipinos working abroad, foreign businessmen and entrepreneurs, and foreign corporations will be rushing to come to the Philippines and do business here. And in the process, create tens of millions of new jobs.
There is not a single country in the world I think, that has a zero income tax policy. Thus, the Philippines will be a unique investment-friendly country that will attract those businesses who want to flee the high taxes countries of the rich world. More businessmen, more employees, and more corporations will be paying more VAT and other consumption-based taxes to the government. This will more than compensate for whatever revenue losses to be created by the zero income tax policy.
I want to start an "Abolish income tax coalition" here in the Philippines. I hope many will join and we will present this single, important agenda to major political parties. Whoever will support this move, we will support in the 2010 elections just 9 months from now.
Interested individuals, email me at email@example.com and we will arrange for initial meetings and actions.
See also Part 4, Ayn Rand and income tax, November 02, 2009