THEORY and BASIS of

TAXATION
Fundamental Principles of Taxation
 THEORY OF TAXATION

• Every government provides a vast array of public services including

defense, public order and safety, health, education, and social
protection among others.

• A system of government is indispensable to every society. Without it,

the people will not relish the benefits of a civilized and orderly society.

• The government cannot exist without a system for funding.

• The government necessity is the theory of taxation.
 THE BASIS OF TAXATION

• The government provide benefits in the form of public services

and the people provide the funds that finance the government.
 Receipt of Benefits is conclusively presume
• Every citizen and resident of the State directly and indirectly
receive benefits from the public services rendered by the
government.

• These benefits can be in the form of daily free usage of

public infrastructures, access to public health or educational
services, the protection and security of a person and
property, or simply the comfort of living in a civilized and
peaceful society which is maintained by the government.
 THEORY and BASIS of TAXATION
1. Lifeblood Theory or Necessity Theory – The power of
taxation proceeds upon the theory that the existence of
government is a necessity.
▪ The power of taxation is essential because the government
can neither exist nor endure without taxation. “Taxes are the
lifeblood of the government and their prompt and certain
availability is an imperious need”.
▪ The government cannot continue to perform its basic functions
of serving and protecting its people without means to pay its
expenses. The state has the right to compel all its citizens and
property within its limits to contribute.
 THEORY and BASIS of TAXATION
2. Basis of Taxation: Benefits Received or Reciprocity
Theory - The basis is the reciprocal duties of protection and
support between the state and its inhabitants. The state collects
taxes from the subjects of taxation in order that it may be able
to perform the functions of the government.
▪ The citizens pay taxes in order that they may be secured in
the enjoyment of the benefits of organized society.
▪ This theory spawned the Doctrine of Symbiotic
Relationship which means taxes are what we pay for a
civilized society.
 MANIFESTATION of the LIFEBLOOD
DOCTRINE
a) Rule of “No Estoppel against the Government”
b) Collection of taxes cannot be enjoined (stopped) by
injunction
c) Taxes could not be the subject for compensation or
set-off
d) Right to select objects (subjects) of taxation
e) A valid tax may result in the destruction of the
taxpayer’s property
 THEORIES OF COST ALLOCATION

❑ BENEFIT RECEIVED THEORY – It presupposes that the more benefit

one receives from the government, the more taxes he should pay.

❑ ABILITY TO PAY THEORY – It presupposes that taxation should also

considers the taxpayer’s ability to pay. Taxpayers should be required
to contribute based on their relative capacity to sacrifice for the support
of the government.
 Aspects of Ability to Pay Theory

▪ Vertical Equity – It proposes that the extent of one’s ability to

pay is directly proportional to the level of tax base. It is a gross
concept.

Ex: A has P200,000 income while B has P400,000. In taxing

income, the government should tax B more than A because B has
greater income. Hence B has greater capacity to contribute.
 Aspects of Ability to Pay Theory

▪ Horizontal Equity – It requires consideration of the particular

circumstance of the taxpayer. It is a net concept.

Ex: Businessmen A and B both have P300,000 income. A incurred

P200,000 in business expenses while B incurred only P50,000 business
expenses. The government shall tax B more than A because he has
lesser expenses and thus has greater capacity to contribute taxes.