Tax reform
DEMAND AND SUPPLY - Boo Chanco (The Philippine Star) - March 13, 2017 - 12:00am

During the election campaign, Donald Trump promised tax reform. Unfortunately, the “reform” he had in mind will benefit the rich. The middle class will get some trickledown effect, but nothing much to celebrate.

America, like us, has a rather complicated tax code. Through the years, politicians have passed amendments and additions that benefit their political donors and supporters. It is so complicated that a normal taxpayer must hire an expert to prepare his tax return.

It is the same thing with us. I used to be able to prepare my own tax return even when I was just 19 years old and earning taxable income as a reporter for the pre-martial law ABS-CBN.

Today, the tax form itself baffles me. Even if I choose the pretty simple 40 percent optional tax deduction route instead of going for itemized deduction, it is still too complicated. No longer salaried after retirement, anything I earn, including what I get for writing this column, is covered by VAT. So I must file a VAT return every month.

I hope the tax reform that Congress will eventually pass simplifies the system considerably. A gross income tax scheme that covers all incomes for individuals like me and other stand-alone professionals should encourage more religious tax filing.

The other thing that tax reform must address is equity. Simply, the rich must carry a larger burden of taxation than the middle class. But the rich have good tax accountants and lawyers who utilize every loophole in the tax code, every possible scheme to frustrate this equity intention.

That is also the problem being debated in the US today. In particular, they are looking at how to encourage corporations to invest in job creation. Lowering the corporate tax burden is an obvious strategy, but the tax loss must be covered somehow. That’s why they are thinking of making individual investors cover the difference.

The Wall Street Journal reports that one scheme is “to cut taxes on corporations while raising them on shareholders. Both are ways to tax capital, but corporations find taxes easier to elude because they are more mobile than their owners. Raise taxes on Apple Inc. or Berkshire Hathaway Inc., and they will try to shift income or operations abroad. Raise taxes on Tim Cook or Warren Buffett and neither will leave America.”

 The Wall Street Journal reported that Ron Johnson, a Republican senator from Wisconsin, is pushing that idea. Johnson cited studies which found out corporate taxes are partly borne by a company’s workers. “Rather than make the employees pay the tax, let the owners pay the tax.”

Mr. Johnson would like corporate shareholders to be taxed at the same rate as “pass throughs”, where “profits are taxed in the hands of the owners at individual rates. Corporation itself wouldn’t owe tax. Instead it would notify each shareholder of its share of annual profits and then forward that shareholder’s estimated tax to the Treasury.”

Another proposal, according to the Journal, by the think tank American Enterprise Institute would cut corporate tax to 15 percent and pay for it by taxing dividends and capital gains at the same rate as ordinary individual income.

“That helps rectify many flaws in the current tax code: it reduces the double-taxation of corporate profits, the bias for companies to issue debt rather than equity and wide spread special breaks that distort the allocation of capital.”

The Wall Street Journal reports “some countries have already done it: Ireland combines the rich world’s lowest tax on corporations with its second highest on dividends. Britain recently lowered its corporate rate while raising the rate on individuals…

“But raising the capital-gains tax discourages shareholders from selling shares. Rather than waiting to tax shares when they are sold, it is proposed to “tax them annually based on their market value, using a formula to smooth market gyrations.”

The Wall Street Journal further reports “however it’s done, shifting the corporate tax burden to shareholders may meet the toughest test of all: politics. Some reformers have proposed combining corporate rate cuts with a value-added tax or carbon tax which are nonstarters with most Republicans. Democrats recoil at corporate tax cuts as a giveaway to the rich.”

Whichever way we go in our own Duterte administration’s tax reform agenda, we have to consider certain principles: the tax scheme must be progressive, it must give incentives for job creation and it must be easy to implement.

Loopholes now used by the elite must be plugged. Single person corporate entities for tax purposes must no longer be allowed or its income taxed at individual tax rate. Income, whether earned by sweat or through dividends must be taxed at the same personal rate… after taking care that double taxation is minimized or eliminated as some of the American proposals suggest.

Of course indexation to inflation is a must. What we have now is tantamount to our government stealing from us since the value of the peso is now way below the value of the peso when the tax rates were last set.

I suggested to Finance Secretary Sonny Dominguez that much of the objections to raising taxes on diesel can be addressed by putting the burden of higher taxes on premium diesel used by the BMWs, Benzes and SUVs.

 Ordinary diesel used by jeepneys and fishing boats can remain low. There may be a temptation for dealers to adulterate products but that should be addressed by oil companies and the energy department through stricter monitoring and the use of color marker dyes.

One thing is certain: we need tax reform urgently. This is one big test of political will for the Duterte administration. Sec. Dominguez is giving this reform measure his all. The least President Duterte can do is fully back Sec. Sonny, who is after all, having all those headaches he doesn’t need at his age. Sonny is bearing it all out of a lifelong friendship with Digong.

Boo Chanco’s e-mail address is bchanco@gmail.com. Follow him on Twitter @boochanco

TAX REFORM
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