1. Economic
activities by productive individuals and enterprises always (a) create jobs,
and (b) expand production of food, housing, clothing, transportation, other
human needs. Hence, they already serve welfare functions to society, and they
should not be penalized with income taxes and bureaucratic licenses and permits.
2. There are plenty of consumption-based taxes already in place. In particular:
(a) value added tax or VAT, (b) sales tax, (c) excise tax, (d) import tax, (e)
vehicle registration tax, (f) real property tax, (g) percentage tax, (h)
amusement tax, (i) travel tax, among others.
3.
In addition, various bureaucracy-generated taxes, like (a) documentary stamp
tax, (b) franchise tax, (c) bank earnings witholding tax, (d) insurance premium
tax, (e) business permit tax, (f) fire code tax, and so on.
4.
Very bureaucratic, discretionary, costly and corruption-prone to fully enforce
income tax collections since people do not want to divulge their true income;
cheaper to hire good accountants and lawyers and bribe revenue collectors than
pay the full income tax liability. What the current income tax laws only affect
are the fixed-income earners like teachers, office employees, soldiers, and so
on.
5.
Welfare loss to society = income taxes paid + cost of compliance (hiring
accountants, lawyers, other business consultants) + cost of bribery (to avoid
paying taxes or bring down their tax liabilities).
6.
In addition, many people who live off on taxes, like those working in
multilateral institutions (UN, WB, IMF, ADB), in other governments’ foreign aid
bodies and embassies, are exempted from mandatory witholding income taxes. The
more reason that those working in the private sector, those who derive their
income not from taxes of other people but on business sales, should be spared
from paying income tax.
B. The Numbers
1. Collections
from income tax (P Billion, except %)
* Not
included here are (i) “non-tax revenues” like various fees and charges, Bureau
of Treasury (BTr) income, privatization proceeds, and (ii) local government taxes
and fees.
(Source:
Budget of Expenditures and Sources of Financing (BESF), 2007)
2. GDP
computation
Gross
Domestic Product (GDP) is the sum of household consumptions (C), government
consumption (G), private and government investment (I) and net exports (X-M).
Alternatively, GDP is also computed as the sum of gross value added (GVA) of
agriculture, industry and services sectors. Or:
GDP = C + I + G + (X-M), or
GDP = GVA Agri + GVA Industry + GVA Services.
Nominal
GDP figures were:
2003,
P4.316 B; 2004, P4.859 B; 2005, P5.419 B; 2006, P6.025.
3. Assumptions
when income taxes, at least personal income tax, is zero:
(a)
informal or underground economy will fall from 43% ** (WB estimates) to around 20%
of GDP (or 80% formal economy); and
(b)
GDP growth will be higher as household consumption (C) will increase. And C
comprises nearly 75% of GDP; and
(c)
VAT to be augmented by a national sales tax, composite consumption tax of 12%; and
(d)
all other consumption-based taxes are retained; exemptions to VAT retained.
(**
Note: Main culprit for the high incidence of informal sector is the high and
multiple taxes and fees, the many permits and licenses to secure with various
government agencies, both national and local government units)
4.
Projected revenue collections under zero income tax, expanded consumption taxes,
on a P8 trillion GDP:
(a) Taxable national income = (nominal GDP) x (formal economy)
= (P8 trillion) x (0.80) = P6.4 trillion
(b) Projected collections from VAT & sales tax alone
=
(taxable income) x (12% VAT & sales tax)
= (P6.4 trillion) x (0.12) = P768 billion.
This
is equivalent to projected collections of (i) income tax + (ii) general sales
& VAT. Projected revenue from (i + ii) in 2007 is P628 billion. As
discussed earlier, there are other tax revenues which will not be affected by
this initiative, like proceeds from excise tax, franchise tax, property tax.
C. Conclusion
1.
One major impact of zero income tax, especially on personal income, is
large-scale job creation. A household with combined witholding tax of say, P6,000/month
will experience an equivalent “wage increase” of the same amount. That amount
will be used to hire a “yaya” (nanny) or housemaid, or increase food
consumption if the family size is big, creating new jobs in the food production
sectors.
2.
In addition, many employees who dream of becoming employers and job creators
someday will make it easier to realize their dreams. They do not have to borrow
much money as they can save their de facto “pay rise” in the form of zero
income tax, for bigger equity in their entrepreneurial project someday.
3.
Society’s human resources will be reallocated to more productive use. There
will be lesser tax collection bureaucrats, lesser demand for tax consulting
services (accounting, legal, PR, etc.) as the taxation system is more simple.
If those bureaucrats and income tax consulting guys are into productive
enterprises instead, then society’s production of more goods and services will
expand, further creating more job opportunities.
4.
People often hide their source of income, or how much they’re earning. But they
flaunt their consumption – big house, big or fast cars, expensive clothes and
cellphones, throwing parties, frequent travels and vacation, and so on. Taxing
people on their consumption is much easier to administer because they give
clear hints of what are their consumption preferences.
5.
Low-income people who paid no or low income tax and low consumption tax before
will not be worse off in a new situation where consumption taxes are higher. With
plenty of job opportunities around, moving to high-paying jobs should be easier
if one has sufficient ambition and industriousness.
6.
Ultimately, consumption tax and other taxes must come down; some will have to
be abolished too (as income taxes remain zero) – in a regime of small
government, and bigger personal responsibilities and bigger role for voluntary
organizations and civil society.
D. Timetable
1.
The main goal of this taxpayers’ movement is a law that will abolish income
tax, and shift revenue collection to consumption-based taxes.
2.
To lessen drastic revenue adjustments, that law need not provide outright drop in
income tax rate from the current 32% to zero in one year. A phase-in period of
gradual reduction from 32% to zero in a period of 5 to 10 years as sales tax
increase is being worked out will be instituted.
3.
Meanwhile, the immediate task is to expand the number of individuals and
organizations who will support this single goal. Existing organizations can
affiliate with PTU. Or individuals who do not belong to any organization can
form their own local taxpayers association or union (say, Pasig Taxpayers
Association) and affiliate with PTU.
4.
If we are strong enough, we can push a bill this year, and expect a law within
2 to 3 years (2008 or 2009).
---------------
See also:
Abolish Income Tax 6: Income tax and VAT trade-off, February 08, 2010
Abolish Income Tax 7: Rene Azurin, Peter Wallace, John Mangun, August 19, 2011
Abolish Income Tax 8. From low flat tax to zero income tax, September 30, 2011
Abolish Income Tax 9: Tax Revolt Against Government Corruption, September 29, 2013
