Profit and taxes

(Note: And this is my article for "People's Brigada News" last April 16)

April 15 every year is the deadline for filing of income tax returns for individuals and corporations without penalties. If a corporation is delayed by just one day, say it files its taxable corporate income by April 16, there are 3 penalties to pay on top of the taxes on income and profits: (a) surcharge of 25 percent of taxes due, (b) interest of 20 percent of taxes due, and (c) compromise penalty. These are indeed harsh penalties.

But more than the penalties, it is the high taxation of corporate income that is unfair and unjust. In some rich countries, the corporate income tax could be as high as 50 percent, in the Philippines it is 30 percent, in developed Hong Kong and Singapore it is only 16 percent, and in a growing number of countries, it is at flat 10 to 12 percent only.

A corporation’s profit is an indicator of its being useful to society and its being efficient and not wasteful in its operations. An enterprise that sells high prices for its lousy products or services will soon lose its consumers and clients, forcing that company to improve its efficiency or become bankrupt. A bankrupt company is an indicator of its inefficiency, wastefulness, and lack of sensitivity to the needs of its customers.

If people cannot make profit on providing transportation, we shall have no buses, taxis, jeepneys, airlines, shipping lines, etc. If people cannot make profit on cooking and selling food, we shall have no restaurants, food shops, carinderias and ambulant food vendors. If people cannot make profit on selling rice, chicken, meat, fish, vegetables and fruits, we shall have no farmers, fisherfolks, animal growers. If people cannot make profit on education, we shall have no private schools and universities. Government colleges and universities survive only because of the money from taxpayers, including private universities, their instructors, officials and employees.

Profit is good, it is not evil. The important thing is to make the economy competitive, so that enterprises, from single proprietorship to partnerships to corporations, are competing with each other in attracting customers. In the process of competition, they are forced to produce good quality products and services, and not to price their products too high that will turn off their clients, nor too low that will bring them close to bankruptcy. Thus, competition among producers and sellers provide welfare to the consumers, to you and me, because we are empowered to have more choices, we can compare prices, quality, shops’ location, warranty of service, and so on.

Of course, there are profits which are abnormally high because of a monopolistic or oligopolistic market structure. This is the kind of “gargantuan profits” that many people dislike. But almost all monopolies are created by governments via franchising. Thus, certain routes are monopolized by tricycles only because the government did not allow franchise to jeepneys and air-con vans to operate there.

Telecom companies Smart and Globe for instance, were enjoying spectacular profits that the sector has attracted Sun Cellular to join the fray. With about 50 million mobile phone subscribers, a 4th or even 5th player and competitor is still possible and such new entrants will introduce similar services offered by the leading companies at a much lower cost to the public.

There is a proposal by some economists from the University of the Philippines School of Economics, to raise the value added tax (VAT) from the current 12 percent to 15 percent, in exchange for bringing down corporate income tax from 30 to only 18 percent, and individual income tax from the top rate of 32 percent to a flat 18 percent.

Personally, I am in favor of this proposal, to introduce drastic reduction in income taxes, both personal and corporate incomes. Government should not penalize profit and hard work by individuals by imposing high income tax rates and various consumption-based taxes (VAT, excise tax, travel tax, amusement tax, vehicle registration tax, real property tax, and so on).

Government can pursue its social welfare objectives to the people by encouraging the entry and formation of more profit-oriented private enterprises, which create jobs and produce various goods and services needed by society and the people. When people have productive and stable jobs, they themselves can pull themselves and their households from poverty. The government can focus its personnel and other resources at running after various criminals who sow fear and extortion in the minds of the public.