Death and taxes

June 2023
Benjamin Franklin to Jean Baptiste Le Roy (1789)

Our new Constitution is now

established and has an appearance that
promises permanency; but in this world
nothing can be said to be certain,
except death and taxes.
Tax incidence
Equity implications of taxation

STATUTORY INCIDENCE: The burden of a

tax borne by the party that sends the check to
the government

ECONOMIC INCIDENCE: The burden of

taxation measured by the change in the
resources available to any economic agent as a
result of taxation.
Why does it matter?
• The “fairness” of any tax reform is one of the primary
considerations in policy makers’ positions on tax policy. We need
to know who really bears the burden of taxation
• Horizontal equity – same income and assets should pay same
amount of taxes
• Vertical equity – greater ability to pay, higher taxes
• Ability-to-pay principle – tax burden should be directly according
to one’s income and wealth. Those with higher incomes should pay
more taxes than those with lower incomes
• Progressive: tax system in which effective average tax rates rise
with income
• Proportional: tax system in which effective average tax rates do
not change with income
• Regressive: tax system in which effective average tax rates fall with
income
Rules of tax
incidence
1. The statutory burden of a tax does not
describe who bears the tax
2. The side of the market on which the tax is
imposed does not describe who actually
bears the economic cost of the tax
3. Parties with inelastic supply or demand
bear taxes; parties with elastic supply or
demand avoid them
Philippine tax structure
• National taxes - income, estate, donors, VAT,
percentage, excise, documentary stamps
• Local taxes – real property, special taxes, community
tax, provincial, municipal, city, & barangay taxes
• Revenue-generating powers at the local level –
business taxes, service fees & user charges, local
public enterprises, utility charges, toll fees and
charges
• Legal mandates: NIRC & Local Government Code
of 1991 (RA 7160)
Situs of taxation
• Situs – location as basis for tax
• Gross sales (principal office & branches) = 100% tax to
host city/ municipality
• Gross sales (factories, project office, plants or plantation) =
70% tax to host city/ municipality; 30% goes to city/mun
where principal office is located
• Multiple factories = 70% is divided as such: 60% goes to
LGUs which host the factories, 40% to those which host
plants & plantations
• Shares are further computed as follows: 60% / number of
factors X volume of production = city’s tax share
• LGUs with experimental farms & warehouses do not get tax
shares
Re-watch it here: Vox “The 70% top tax rate, explained with potatoes” https://youtu.be/bWRO-M47eCY
Tax the rich! (Read before anything else)
• Matthews, D. (March 19, 2019), “How to tax the rich, explained,” in Vox.
• Wessel, D. (October 15, 2019), “Who are the rich and how might we tax
them more?” in Brookings.edu.
• Karabell, Z. (January 29, 2019), “Why taxing the rich may not save
democracy,” in Wired.
• Pearlstein, S. (October 17, 2019), “Punitive taxes on billionaires are bad
politics, bad economics and just plain unfair,” in The Washington Post.
896
Billion for 50 richest Filipinos

6.8
Billion for poorest 71 million Filipinos
Tax the rich! (Read before anything else)
• Africa, S. (May 25, 2020), “Upon Covid-19: Time to tax the super rich,”
in IBON website.
• Arguelles, M. (July 13, 2013), “Inability to tax the rich blamed for income
gap,” in Inquirer.net
• Ylagan, A. (April 14, 2019), “Poverty and taxes,” in BusinessWorld.
• Cruz, E. (February 7, 2019), “Taxing the very rich,” in The Philippine
Star.
Questions we need to ask
• How exactly do we “tax the rich”? Should we go for income or wealth
(i.e., annual income, estates, current wealth, properties)?
• By how much should we tax them? (e.g., progressive rates vs. flat rates)
• How would this affect welfare in both short term and in the long-run?
(Saez on optimal income tax rates; Piketty & Saez on optimal capital
taxation)
• Philanthropy vs higher taxes
Please still pay your taxes
when you start working!
What is due Caesar goes to Caesar,
what is due to God goes to God.
maraming
salamat!
see you next session!