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Publication Detail
TRJ 2010 Vol XXII No 2: Taxation Reform as a Measure to Bridge the Gap Between the Rich and the Poor, March - April 2010

The need to redistribute income and/or bridge the gap between the rich and the poor cannot be underscored. The lessons of history, both past and present, are quite obvious in this connection. Countries with a predominantly poor population have not grown considerably or have become potential tinderboxes. It is noted that poverty incidence in the Philippines is one of the highest in the Association of Southeast Asian Nations (ASEAN). The gap between the rich and the poor remains high, as indicated by the rising Gini coefficient (a measure of the inequality of income distribution (income and wealth), with values of zero for perfect equality and one for perfect inequality) from 1994 to 1997 and which slightly dropped in 2000. Government provisions of social services are generally aimed at helping the poor to attend to their needs and at enhancing their economic status. To ensure the continuity and sustainability of such provisions, the government needs to generate revenues, which for the greater part, are sourced from taxes. Tax compliance is, thus, imperative and a social responsibility on the part of those who are subject or liable to tax. Put it another way, any instance of tax leakage or abuse counters this social responsibility. However, it is not only the taxpayers who have a significant role in bridging the gap between the rich and the poor. Equally important is the role of the government which must see to it that tax collections are adequate to support the funding requirements of its social service programs and that the same are sustained over time. Equally important, too, is that its tax policies are viable in this regard. For instance, while the income tax exemption of minimum wage earners and their counterparts in the government sector is going to help many workers in the low-income group, it is also possible that some of these workers are in a position to share in the national income tax burden. Needless to say, any share in the national income tax burden is likely to augment the amount of funds available for purposes of social services. It may be necessary, therefore, to review this blanket type of exemption and limit the same to a certain income level. While the levels of personal and additional exemptions have already been adjusted to free a bigger amount of income for consumption purposes of low-income earners, it may be noted that recent increases in prices of many consumption items have again rendered these levels no longer practical and realistic. The adjustment of personal and additional exemptions relative to the cost of living index may have to be considered. The tax regimes applicable to passive income are quite straightforward since the taxes pertaining to this income are imposed at source. However, if there are no mechanisms to check on the amount of reported passive income, the effectiveness of the tax thereon may be diluted. A similar observation may be made for the fringe benefits tax. The observation that compensation income earners have a higher ETR compared to business/profession income earners raises the need to devise more effective and efficient ways for taxing the latter group. Resort to tax mapping, benchmarking, use of standardized deductions, among others, has to be given emphasis. Efforts should also be exerted to completely reverse the proportions of direct and indirect taxes currently obtaining in the tax structure. Direct taxes should be relied on more heavily by the government as these taxes promote progressivity and are more consistent with the objective of income redistribution. With respect to tax incentives, a comprehensive review of their implementation has to be made to insure that the benefits of such incentives filter down to their targeted beneficiaries. As an example, the benefits of the 20% discount to economically marginalized/senior citizens can only be had if an income threshold requirement is imposed as it was with the original enactment on the subject matter. If the income threshold is no longer realistic, then its adjustment should be automatically made.

National Tax Research Center
Authors Keywords
National Tax Research Center; equity; taxation; Philippines; Tax reforms;
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Published in 2010 and available in the NTRC library or Downloaded 218 times since November 25, 2011
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