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Publication Detail
TRJ 2009 Vol XXI No 1: Buoyancy and Elasticity of the Income Tax: 1998-2007, January - February 2009

The paper measures the responsiveness of income tax to increases in income and to discretionary changes from 1998 – 2007, using buoyancy and income elasticity. The results of the study may serve as inputs to policy makers in considering tax proposals that will have significant effects on both the taxpayers’ tax burden and government revenue collections. The income tax is a major revenue source of the Bureau of Internal Revenue (BIR), contributing more than half of the Bureau’s total revenue over the period 1998 to 2007. Total income tax collections grew from P 183.9 billion in 1998 to P 427.2 billion in 2007 with an average rate of 9.97% annually. Corporate income tax collection showed a robust increase from P 77.6 billion in 1998 to P 241.2 billion in 2007. Its highest growth (27.96%) was recorded in 2006 due to the increase in the tax rate from 32% to 35% starting November 2005, pursuant to RA 9337. Likewise, overall collection on individual income tax increased at a respectable pace from P 63.6 billion to P 141.7 billion, or an annual average rate of 9.44% during the period. In particular, compensation income tax went up by 10.72% annually on the average, while business income tax registered a lower annual average growth rate of 7.43%. Capital gains tax collection, on the other hand, continuously decreased from 1998 to 2001 but grew substantially by 30.68% in 2002 but went down again in 2003 and 2007. Lastly, taxes on interest income likewise showed an up and down trend with the largest slump in 1999 (21.49%) and the highest increase in 2001 (32.25%). Within the period under study, almost half (47%) of the collection on income tax came from corporate income tax; 29%, from compensation income tax; 17%, from tax on interest income; 5% from tax on income from business/profession; and 2% from capital gains tax. The buoyancy coefficient of the total income tax system is 0.93 for the period 1998 to 2007. Taking into account the effects of the discretionary changes, the elasticity inched up to 0.94 which means that for every 1% increase in GNP, total taxes grew by 0.94%. This reflects an inelastic structure where income taxes grew less proportionately with that of GNP. Moreover, a comparison of the two coefficients shows that the elasticity coefficient is higher than the buoyancy coefficient for the total income tax system. This means that the legislated tax measures during the period had caused a reduction in the over-all growth of the income tax collection. These legislated measures resulted in a 1.08% reduction in the total income tax revenue, since for the period covered, revenue losing measures were adopted. The total income tax system is found to be inelastic as its elasticity coefficient is less than unity. Taking into account the discretionary changes, the income tax system as a whole is still unable to grow at pace with GNP. By type of tax, only the corporate income tax is elastic with a 1.19 coefficient. The individual income tax is inelastic which means its growth in collection has not been responsive to changes in GNP. Non-responsiveness to GNP changes however, is more remarkable for business/professional income tax collection. This indicates a need for tax authorities to focus more on improving the tax collection from this group of taxpayers. An identification and close monitoring of high profile businessmen and professionals as is currently being done for large corporate taxpayers is recommended.

National Tax Research Center
Authors Keywords
National Tax Research Center; Philippines; income tax; tax; tax buoyancy coefficient;
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Published in 2009 and available in the NTRC library or Downloaded 197 times since November 25, 2011
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