Applied Economics

Taxation

1. Define the following types of tax systems: Proportional, Progressive and Regressive Taxation.

Which do you think would be the best fit for the Philippines?

People can be taxed at the same percentage of their annual income under a

proportional tax. The same is true for low-, middle-and high-income taxpayers. Proportional

taxes are often known as flat taxes. This scheme aims to achieve parity between marginal and

average tax rates paid, while in progressive tax, the taxable amount of an individual's income

is used to calculate taxes. They progress faster than the proportional system, so high-income

people pay more than low-income earners. As an individual's wealth grows, so does his or her

tax liability. Overall, higher-income earners pay a more significant proportion of taxes and more

money in taxes than lower-income ones. This system is designed to disproportionately affect

higher-income persons over lower- and middle-income workers, reflecting the assumption that

they can afford to pay more. Regressive taxes, on the other hand, low-income individuals pay

a higher amount of taxes compared to high-income earners because the government levies tax

as a proportion of the value of the asset purchased or owned by a taxpayer. This tax form has

no link to a person's wages or income level.

Despite being one of the fastest-growing economies, the Philippines still belong to the 3rd

world countries because of extreme poverty. In this case, the tax system that will best fit the

Philippines is the progressive tax system since higher salaries encourage affluent people to pay

higher taxes. It is the fairest system because it lessens the tax burden on the poor. Progressive

taxation improves the poor's capacity to purchase necessities, raising economic demand.

2. Enumerate and explain the limitation of taxation.

We have this idea that the ability to tax entails the ability to destroy. If someone imposes

too many responsibilities on the State's residents, they will destroy both the State and the

residents. However, another countered this notion: the right to tax does not include the power to
 destroy while this court is sitting, and this means that, while the authority of taxes is boundless or

complete, it is subject to its constraints or restrictions. Hence, we have limitations on taxation. In

limits of taxation, we have two classifications: Inherent limitations and Constitutional limitations.

Inherent limitations: These are limitations or restrictions that arise from its inherent strength. While

the taxing authority is inherent in sovereignty, some constraints or protections stem from its absolute

power.

1. Limitation on public purpose - It is a fundamental feature of the power of taxation that the tax is

levied for a public purpose rather than a private one. It should be for a governmental aim — the public

welfare or the common good.

2. Limitation on territorial jurisdiction - The ability to tax is confined solely inside the State's

boundaries or territory. The State's taxing power cannot be exercised outside its borders. If the

subject of taxes is discovered outside of the country, the State cannot tax it.

The State may exercise personal jurisdiction as an exception to territorial jurisdiction. Even though

the subject of taxes is beyond the territory, the State can nevertheless use personal jurisdiction to

impose its taxing power. Prior to the exemption of non-resident citizens, such as OFWs, we used to

tax the income of non-resident citizens or OFWs since we had personal jurisdiction over them.

3. Non-delegation of the legislative power of taxes – The power of taxation is legislative. That

authority cannot be delegated.

When the State delegated taxing authority to another agency, it violated the inherent constraint.

However, there are certain exceptions to this rule:

a. Article VI, Section 28 (2) delegates to the President the authority to set tariff rates, import and

export quotas, tonnage and wharfage dues, and other levies and imposts.

b. Article X, Section 5 - This is the ability of local governments to tax themselves and impose taxes,

fees, and levies. The ability of LGUs to tax is not inherent. It can be provided by the Constitution or

through law. The Constitution grants the LGU taxation power in our framework.
c. Delegation to administrative agencies – for example, in the implementation of tax administration.

d. RA 6735 authorizes a people's initiative and a referendum.

4. International comity - taxing authority is applied solely inside the State. Under the norms of

international law to which we subscribe, the State could not tax another sovereign, and this is based

on Article II, Section 2.

5. Exemption of government agencies - protection from taxation. The government does not tax

itself, which is a self-imposed practical constraint. The government does not pay taxes since it

performs governmental/sovereign tasks. However, taxes are the rule when a government agency

performs a proprietary function.

CONSTITUTIONAL LIMITATIONS

1. Requirement of Due Process (Article III, Section 1)

➢ When the State exercises the power of taxation, the taking of the property should be

subject to due process. There must be a basis for the taking.

➢ If the State exercises its power outside of its territory or when it taxes another sovereign,

it is also a violation of due process.

2. Equal Protection of the Laws (Article III, Section 1)

3. Uniformity and Equity in Taxation (Article VI, Section 21)

➢ There is no more distinction between equality and uniformity in taxation

➢ Equitability or Equity in Taxation – based on one's ability to pay

➢ Valid and reasonable classification

a. The classification must be based on substantial distinctions which make real

differences.

b. It must be germane to the purpose of the law or of the legislation.

c. It must apply not only to present conditions but also to future conditions substantially

identical to those present.

d. It must apply equally to all those who belong to the same class wherever they may be

found within the jurisdiction of the taxing authority.

4. It is said that the taxes of the people not only pay for public goods and services, but it is also a key

ingredient in the social contract between citizens and the economy. Explain how important is the

relationship of taxation to the economy and relate it to the roles of the people and the government

in the economic success of a nation.

Taxes usually add to a country's gross domestic product (GDP). As a result of this

contribution, taxation stimulates economic growth, which has a rippling impact on the country's

economy, such as enhancing the quality of living and encouraging job creation. Collecting

taxes and fees is a vital means for governments to earn public revenues to support

investments in human capital, infrastructure, and the delivery of services to residents and

enterprises. Governments require long-term funding for social programs and public

investments to promote economic growth and development. Health, education, infrastructure,

and other services programs are critical to achieving the shared aim of a wealthy, functioning,

and harmonious community. They also demand that governments increase their revenue.

Taxation pays for public goods and services and plays a vital role in the social compact that

exists between citizens and the economy. How taxes are collected and spent may define a

government's very legitimacy. Holding governments responsible promote effective tax

administration and, more broadly, sound public financial management.

Meanwhile, people typically consider themselves workers and consumers. Our

employment needs us to work hard, keep the economy rolling by purchasing goods and

services, and occasionally act as innovative entrepreneurs, creating new products and

industries, mainly without any contribution from government or policy. The concept of

responsible citizens – ordinary people who willingly see themselves as part of a broader

community and wish to contribute to the standard administration of society, keep an eye on

economic policy, and weigh in on meaningful choices – has been obscured.

Resources:

https://www.investopedia.com/ask/answers/042415/what-are-differences-between-regressive-

proportional-and-progressive-taxes.asp
https://www.thebalance.com/progressive-tax-definition-examples-4155741

https://subnational.doingbusiness.org/en/data/exploretopics/paying-taxes/why-matters

https://www.topospartnership.com/wp-content/uploads/2012/05/Government-The-Economy-and-We-

The-People.pdf

https://sites.google.com/site/lawpinoy/tax1