Belgica's Flat Tax
In ANC’s Harapan 2013, senatorial candidate Greco Belgica of the Democratic Party of the Philippines strongly and bravely espoused the reduction of taxes on incomes through a flat tax system at the rate of 10%.
From its face value, the proposal seems to be simple and palatable especially for individual compensation income earners as it will drastically reduce taxes. Mr. Belgica, however, failed to discuss during the debates (perhaps for lack of time) the details of his proposal and the implications it will have on the current tax regime and the fiscal state of the Philippines. It is best that he articulates his proposal in any opportunity he has for greater clarity.
I believe, however, that the following points should be clearly established and emphasized in order for the voting public to better appreciate his proposal and intelligently weigh whether it is realistic or not, if not an utter rhetoric:
- How does the flat tax rate operate? How does it differ from the current graduated tax rate? What will it take to make the flat tax system implemented?
- Will the flat tax rate apply both to compensation income and business income? Will the proposal disregard existing exemptions and deductions from taxable incomes and apply the flat rate to gross incomes? Or, will it retain them and apply the flat tax rate on net incomes?
- Will this system of taxation contribute to increasing revenue collection, or remedy the problems in the country’s fiscal administration?
The 1987 Constitution declares that the “rule of taxation shall be uniform and equitable” and mandates Congress to evolve a “progressive system of taxation” (Section 28, para.1). When is taxation “uniform and equitable”? When is a taxation system progressive? The Supreme Court said that “uniformity of taxation, like the kindred concept of equal protection, requires that all objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities” (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371; Tan vs. del Rosario, G.R. No. 109289, October 3, 1994i).
The concept of “equity in taxation”, on the other hand, requires that “the apportionment of the tax burden be, more or less, just in the light of the taxpayer’s ability to shoulder the tax burden and, if warranted, on the basis of the benefits received from the government. Its cornerstone is the taxpayer’s ability to pay”ii. A “progressive system of taxation” is one in which the tax rate increases as the income increases; while a “regressive system of taxation” is one in which the tax rate decreases as the income increases.
Mr. Belgica argues that with a flat tax rate, the take home pay of workers will increase which will subsequently increase their ability to purchase goods; incomes from businesses will likewise increase; payment of correct taxes will be encouraged as the tax rate is low; prices of basic commodities will decrease; and the Philippines will become a tax haven for investors which will encourage more investments in the countryiii.
Those who advance the flat tax rate also say that the scheme will avoid penalizing those who persevere and earn more income; hence will promote equality. Those who are opposed to a flat tax system, on the other hand, claim that it will “shift the tax burden from the rich to the poor, those who are most affected by taxes and least able to pay”iv. On the contrary, in a progressive system of taxation that the Constitution requires, “the rich pay more because they have more disposable income and, therefore, have greater ability to pay”v.
The proposal to tax income earners with the same rate, however, appears to run counter to the constitutional limitations of “equitability” of tax rule and “progressiveness” of tax system. The proposal, I believe, would require constitutional amendments. While the flat tax rate seems to promote “equality” where every peso earned will be taxed for the same rate, it is not “equitable” as those who earn less and those who earn more will be similarly taxed for the same rate.
In other words, those who have greater ability to pay will pay the same rate as those who have lesser ability to pay. Moreover, the flat tax rate is contrary to a progressive system of taxation as contained in the Constitution where, as mentioned above, the tax rate increases as the income increases. Obviously, in a flat tax system, one tax rate applies to everyone regardless of income.
Mr. Belgica was not likewise able to clearly mention the scope of the flat tax rate, especially as to whether the flat tax rate will apply only to individual compensation income, or both to individual compensation income and incomes derived from businesses. If it will apply to either class of income, or to both, will deductions and exemptions already allowed by law still apply or altogether eliminated?
For instance, for compensation income tax earners, the law allows certain personal exemption and additional exemptions for dependents. Minimum wage earners are likewise exempted by law to pay income tax. Deductions are also allowed for those engaged in business or those in the practice of their profession. As a general practice, no deductions are available in a flat tax rate system. However, some countries or states implement a modified flat tax rate where certain minimal deductions are allowed; while some apply the rate only on compensation income, excluding business income where different rules apply.
Finally, the flat tax rate of 10 per cent seems to have significant implication on the country’s revenue collection. The proponent could have offered a mathematical explanation that the flat tax system will not considerably affect revenue generation; or if it will, what other revenue measures could be adopted. By merely looking at the difference in the current applicable rates on income taxes and the proposed flat rate, there could be a significant reduction in the revenues that could be collected from income taxes.
At present, compensation incomes are taxed between 5 per cent and 32 per cent, depending on income bracket. Where will the government recoup the deficit as a result of the application of flat tax rate? Will this result in the imposition of more indirect and regressive taxes? Or will the collection from payment of correct taxes as may be encouraged by the flat tax rate sufficient?
The government has been exerting all efforts to increase tax collection, minimize revenue leakages, and rationalize fiscal incentives, all aimed at generating more resources to finance government expenditures and public debts. The introduction of regressive or flat tax rates may not augur well with the government’s fiscal programs and the state of the Philippine economy.
The flat tax rate has its positive effects and consequences. It works in some countries or states. The question now is – given all its pros and cons, will the flat tax rate work in Philippine setting? I am of the impression that it will not – at least not at this stage of the country’s economic condition.
This Fact Check was submitted by Atty. Robert Larga. Atty. Larga is doing his doctoral studies in public administration at the UP National College of Public Administration and Governance (UP NCPAG), UP Diliman, Quezon City. He was formerly connected with the Council for the Welfare of Children. This was submitted as part of his class requirements in a PA 208 (Philippine Administrative System) course.
Atty. Larga started his professional career at the Council for the Welfare of Children as Planning Officer. He served as Senior State Counsel at the Department of Justice. He worked for the International Labour Organization in its country office in Manila and regional office in Bangkok. His areas of exposure include human rights, especially of children, migrants and refugees; anti-human trafficking and all its aspects (prevention, protection of victims, investigation and prosecution, and reintegration); migration and its labour dimensions; forced labour; child labour; child abuse and exploitation; administrative law; and international law. He is proficient in program development and project management having handled national and regional projects.
Chan Robles Virtual Law Library, accessed on 5 April 2013 through http://www.chanrobles.com/article6.htm#.UV9J9pM71Bw
IBON Foundation, “Taxes and Development in the Philippines: Toward enhancing domestic resource mobilization of resources for development”, 21 September 2009, accessed on 5 April 2013 through http://www.oecd.org/dev/partnerships-networks/43801273.pdf
The Free Dictionary by Farlex, accessed on 5 April 2013through http://legal-dictionary.thefreedictionary.com/Regressive+Tax
The LawPhil Project, Arellano Law Foundation, accessed on 5 April 2013 through http://www.lawphil.net/judjuris/juri1994/oct1994/gr_109289_1994.html