Taxing Self-Employed and Professionals

President PNoy pointed out in his State of the Nation Address (SONA) that many professionals and businessmen understate their income in order to evade taxes. Tax compliance  is difficult to achieve for them because their income is irregular and receipts are seldom given. Most lawyers, doctors, dentists, architects and businessmen pay income tax based on what they declare; and they declare very little.

In the SONA,  PNoy said that 1.7 million self-employed and professionals paid a total of P9.8 billion income tax in 2010.  This comes out to an average of P5783 income paid last year per person, meaning that they earned an average of only P8500/month (which is lower than the minimum wage). There is obviously a lot of tax evasion going on here.

I would suggest that the government take the following steps to enforce tax compliance among professionals:

* doctors, lawyers, architects, businessmen etc. should be required to file a Statement of Assets, Liabilities and Net Worth (SALN). Exempted from this requirement would be General Practitioner doctors who work in 3rd class or poorer municipalities. The SALNs should include all property, including those abroad (including bank balances). If they declare liabilities, they should waive their bank secrecy – so that the government could also check their deposits and investments;

* all professionals should be assessed a taxable income on the basis of the minimum income of a government employee of the same skill level;

* businessmen should be taxed on their personal income from their business.  If their business is a single proprietorship or partnership, the amount they received from the business, as profits (or withdrawals) should be declared as income. The tax paid by the business (divided accordingly if partnership) should then be credited as taxed paid, avoiding double taxation.  If they manage a corporation in which they also own shares in, their taxable income should be their salary from the corporation, or a salary equivalent to a national government supervisory position of an equivalent level (i.e. supervising a similar number of people), whichever is higher.

* conduct regular life-style checks to see whether the SALNs and Income statements are correct;

* exempt the services of professionals (but not businessmen) from other taxes like documentary stamps, receipt tax, VAT, etc. (they are difficult to enforce anyway, so just get rid of the requirement to simplify administration).

The rules have to be changed to encourage tax compliance. If all the government does is to preach about it, and perhaps sue a number of tax evaders, it will not push professionals to pay more taxes.

Tax compliance among self-employed professionals could only be achieved by fixing the rules. With these new rules, full disclosure of income and the payment of proper taxes will become the norm, rather than the exception.

A Four Day Hike

My wife Maya participated in a national hiking event here in the Netherlands. She walked 40 kilometers for 4 days in a row (total of 160 km), in the Nijmegen 4 Day March  on 19-22 July. About 40,000 people participate in this event every year. It is organized by the Dutch National Hiking Federation. There are lots of hiking events organized throughout the year, but the Nijmegen 4 Day March is the most popular of these.

The 4-Day March is a huge event in Nijmegen. The hikers can hike 40 or 50 kilometers per day (or 30 km for those over 60 years old). It started as far back as 1909, and was originally a military event. On each of the 4 days, the hikers follow a different route, bringing them to many of the towns surrounding Nijmegen. This event brings many people together and promotes regional understanding. Those who don’t hike enjoy listening to various bands at podia set up across the city.

The Nijmegen Four Day March comes from a deep-ingrained Dutch culture of walking. There are all kinds of walking events all year round.  People walk or bike to work; I used to walk for 25 minutes (about 2 km) from the train station to my office (and back, of course). I believe that walking (and biking) are part of the reasons why the Netherlands is a country with a comparatively small number of obese people (among developed countries). Hiking is healthy.

Philippines
Hiking events in the Philippines usually involve hiking in nature areas with a guide. There are no massive hiking events that are packaged as such. However, there are various demonstrations and processions that we could actually call hikes.

Running seems to attract more and more people in Philippine cities these days. I think we should expand the ‘menu’ to also include hiking events in the cities. Hiking has a number of advantages. First, it is a good source of exercise, which is relatively cheap since all you really need is a good pair of shoes and functional legs. Second, hiking has the potential of including a lot more people than running, since many people are not able to run, but could walk.  And third, if the event is packaged well, it can lead to more social cohesion, especially if it is part of an annual event like a fiesta.

Just imagine if there is a Holy Week “Visita Iglesia Walk” that goes to seven churches. People should walk between them, riding is not allowed. Or that a 5 kilometer walk is part of the celebration of a town fiesta.  Who knows, it could help to make Filipinos healthier, while also promoting the local economy and even attract tourists.

But walking should also be integrated more into the daily life of Filipinos. We should stop the practice of taking a jeepney or tricycle for a distance of as little as 500 meters.  Schools should integrate short hikes as part of their Physical Education. And there should be more and bigger pedestrian shopping areas.  This will help to keep Filipinos healthy.

Rules on Billboards

The Metro Manila Development Authority (MMDA) took down billboards along EDSA that were considered ‘morally questionable’ (or malaswa, if you asked Mama Dionisia). Interestingly, they say they did this because the billboards were too big. The ad was that of the Philippine Volcanoes, featuring several players of the Philippine Rugby team wearing only their underwear. (Interestingly, the MMDA didn’t do anything about another billboard, featuring Aby Borromeo of the Azkals, the Philippine soccer team, who was also in his underwear. Favoritism perhaps? ) When the MMDA was asked why billboards with bikini-clad women weren’t taken down; they answered that there were no complaints about those ads.

I think that the Philippine Volcanoes ad properly served its advertising purpose. Studies show that wives generally buy underwear for their husbands. So, making an ad which gets a woman’s attention will stimulate them to buy those brands of underwear for their husbands.

The MMDA policy, which is obviously not one about billboard size, is very subjective and inconsistent, It would indeed be to everyone’s benefit if rules could be drawn up and applied consistently. Let’s see what these rules could be.

Safety
Authorities need to ensure road safety, and billboards are part of this concern. No ads should be placed that distract drivers from concentrating on driving especially during critical moments.  They should not prevent them from seeing and heeding road signs.

In Europe, most road signs have a blue background with white letters or a white background with red letters. No ads are allowed near them, nor should they resemble a road sign. I believe that there should be a similar prohibition of distracting ads in the Philippines. And if we want to be really strict about roadside ads not hindering traffic, ads should also be prohibited at intersections or rotondas, because drivers need to concentrate on the road especially at these points.

Then there is the matter of physical safety. Billboards should be able to withstand a sustained 150 kilometer/hour wind, and gusts of up to 200 kph. Otherwise, road users will be in danger of being hit by falling (or flying) billboards during storms.  If a billboard should indeed fall, the owner should be held liable for any damage, and his permit to install billboards should be suspended or revoked.

Content
The Ad Standards Council, an advertising industry self-regulating body, recently announced that it will “adopt stricter standards, guidelines, an procedures in the exercise of self-restraint and self-regulation…”  I am afraid that in their zeal, they will impose prude, homophobic, Catholic standards of what constitutes good taste.

The Ad Standards Council and the MMDA should sit down to agree on clear standards of billboard content, which would then be implemented consistently. These guidelines should be explicit and detailed on what is not allowed on billboards.  I suggest the following:
– explicit showing of ‘private parts’ (defined as sex organs, pubic hair and women’s nipples), or of the sex act (even when no private parts are seen);
– graphic violence (e.g. mutilation, wielding of lethal weapons, etc);
– illegal goods (e.g. drugs) , unless they are part of a government information campaign.
Then, by elimination, everything else should be allowed in principle.  No archaic Roman Catholic principles or values should enter into consideration.

One may expect that advertisements of all kinds would be allowed in the Netherlands, since it is supposed to be a liberal country. In a way, it is true:  condom advertisements are prominent during the vacation period, and bare women’s breasts are seen in some soap commercials (after all, it would not be natural for women to cover their breasts while taking a shower). But, about 15 years ago, there was an uproar about one billboard ad. In the ad, a man was seen drinking coffee, and the text below said: “Is there coffee after death?” It was an ad promoting the virtues of getting a Premium plan for Funeral insurance, which would include refreshments after the funeral service and other things in the package.

The Dutch were shocked. In Dutch society, making jokes about death or funerals is taboo. The Cabinet finally decided to take the ad down after hundreds (perhaps thousands) of complaints were filed.  Being foreign-born, I found the whole incident quite amusing. I feel that the Ad should have remained up; it would have been educational for the Dutch. But that’s just me, of course. This all goes to show how arbitrary ‘moral values’ could be.

The lesson I learn from the Dutch incident is that Ads should be allowed, with only few restrictions. And that even if an Ad may offend the sensitivities or tastes of some (powerful) people, they may be informative or liberating for others.

Beyond the Debt Ceiling

The US is in the grip of the political drama around the raising of the debt ceiling. Economists are worried that if politicians fail to come up with a satisfactory solution, the US will go back into recession even if they finally agree on raising the debt ceiling.

Most Americans do not realize that solving the debt ceiling problem isn’t really the main issue. The main issue that they have to face is that the US economy is designed for the wrong century, and that it is long due for a transition to a more ‘modern’  design. Officials try to avoid the inevitable by artificially propping up the economy, but it won’t work. The transition will come. And it will be much more painful than a mere ‘double dip recession’ – it will make the recession of 2008 look like ‘foreplay’.

Transitions are alright in economics – the market will be able to recover and adjust the distribution of goods and services to adapt to any changes in the patterns of use. However, some transitions take long, and this means that the economy will suffer till the transition is over and the market has made the necessary adjustments.

The US is in the midst of three transitions: that of its housing patterns, the use of resources, and the US dollar. And since the nature of all these transitions is that they take a long time, I believe the US “crisis” will last for some time.

The government will naturally act as if it is only a matter of pushing through certain programs, and then the economy will recover. Perhaps certain programs may result in short term growth or increased employment. But this will ultimately be quite futile, and the longer term trends will overpower these gains.

 Housing
The economic crisis was caused by the housing bubble – specifically, the market for ‘sub-prime’ mortgages was oversold.  And this problem continues to this day, with homeowners continuing to default on mortgages. However, this is only part of the problem.  There is a creeping re-concentration of housing patterns in the US. People are not as willing as before to commute two hours or longer to work every day. This is partly due to the economic crisis – if you’re looking for a job, it is better to do so close to home. And, if your house is foreclosed, you would most likely move closer to the city for new and cheaper housing.

But the crisis only aggravates the problem, it did not cause it. Things like demographics (people getting older – and thus wanting to be nearer health care facilities) and the rising price of gasoline/diesel have a longer term effect on housing choices.

The movement of people from sprawling suburbs to smaller urban hubs means that many houses built in the suburbs will go unsold (or not rented) for a long time, and sometimes will only get sold at a very big discount. And the bad effect of this is that people won’t be that eager to buy houses in an area where house prices continue to go down. So, home building companies will lose money or even go bankrupt, until they completely shift their activities nearer urban hubs.

Expensive Resources
With the development of countries such as China and India (and of course, the rest of the world), there will be a squeeze to divide up all the resources needed. The days when Europe and America  could get away with using 80% of the world’s resources are over; and this means that the resources of the world should be shared more equally. And, this means that the price of most resources will go up significantly.

The resource that Americans  will really FEEL going up in price will be that of oil. From the crisis-level price of around $95/barrel, oil will surely go to $150/barrel by 2012. This is on the logic that if the world’s GDP returns to the pre-crisis level, so will the scarcity of oil, and this means that prices will return to pre-crisis levels. And that is only the beginning: beyond 2012, prices will rise even higher. Oil supply volatility may cause temporary peaks or dips in the price, but the overall trend is still for the price to rise.

For the American automobilist, this means that oil will return to highs of $5/gallon, or higher. This will need a permanent adjustment of living patterns. People will need to either commute less, ride trains or buses to work, or use smaller cars or hybrids.  And since oil is used for making things like plastics and fertilizers, the prices for these will also rise, forcing people to change their consumption patterns.

The rise in the price of grain, particularly that of corn, will eventually spell the end of feeding grain to cows.  At a certain point, the number of cows will be limited by the grass that they can eat. See High Corn Price Will Lead to Lower Beef Production Cheap meat will become a thing of the past.

Increased commodity prices will cause a move away from the throw-away economy. There will be a new emphasis on goods that last longer, and use less energy and other inputs.

The “Fall” of the US Dollar
The days of the US dollar as the international reserve currency are soon over. I would say that it would “fall” from this position sometime in this decade. And that the US economy will feel this change quite deeply. (see Two Years After the Fall )

The fall of the dollar finds its roots in the massive debts that the US has – almost 14.3 trillion dollars, to date. The Fed is even tried to stir up US inflation by ‘printing money’, or Quantitative Easing. And to make the problem worse, total US currency abroad totals $75 trillion.  The resulting inflation and the high amount of debt will be the dollar’s undoing; at a certain point, countries will decide NOT to keep dollars as reserve anymore, and NOT to buy up US treasuries, and this will drive up the interest rates on these treasuries.

Already, the rating agencies are threatening to downgrade the rating for US Treasuries from AAA to AA. While this seems like a small step, it will be the first push down the hill for the dollar.

The strength of the US Dollar rests on the willingness of other countries to keep dollars in their foreign currency reserves. Dollars make up to 80% of Central Bank reserves of many countries. Historically, this has meant that the US could buy more from other countries than it sells to them. If Central Banks’ change their mind regarding the desirability of the US dollar as a reserve currency (especially as a result of a change in Treasuries’ ratings), this will result in a sharp drop in the value of the US dollar. And  this point will happen sometime very soon.

After the Transition
After the decade of transition, the US will face a new period of sustained economic growth. The American people’s  flexibility and the country’s huge resources are sure bases for it to build a new prosperity.  Politicians should hurry the transition instead of trying to deny that it will happen.  They should not be distracted by the call to ‘preserve jobs’ or to ‘preserve our way of life’.

Tax the Church?

There are periodic calls for the government to tax the church. And the church would reply that the government can’t tax it, because their tax-exempt status is guaranteed in the Constitution and the Internal Revenue Code. If we look at the Constitution and actual practice, however, the case is not so simple. The Church is not as tax exempt as they make themselves out to be. They actually pay a lot of taxes: dividends tax,  employee contributions, VAT. But at the same time, there is a lot in terms of property and business taxes that the church should pay, but doesn’t.

Real Estate Tax Exemption
The constitution mentions church tax exemption in Article 6, Section 28(2):
“Charitable institutions, churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all land, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or educational purposes shall be exempt for taxation.”

Thus, it is clear: church buildings are exempt from real estate tax. Note that this doesn’t refer to “the church” as an institution, or its constituent dioceses, parishes and congregations, which are entities that are much more than mere buildings. If we go by the above provision, other church property should be taxed if they are not ‘exclusively’ used for religious purposes. Convents, for example, are subject to property tax. School buildings with a dual purpose – as residence for priests/nuns and as school, since this is no longer ‘exclusive use’ should also be taxed.

The presence of a chapel in a convent does not make the convent a religious building; it is just an ordinary residence with a chapel. It is similar to a chapel in a mall – the mall remains a commercial building.

Schools and Hospitals
There is a constitutional provision covering non-stock, non-profit schools. This is found in Article 14, Section 4.
“(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, or exclusively for educational purposes shall be exempt from tax and duties…”

“(4) Subject to conditions prescribed by laws all grants, endowments, donations or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.”

Under this provision, all income raised by a non-stock, non-profit school should be used for educational purposes. Withdrawals from school funds for use by congregations should be prohibited. If they did this, the school should be stripped of its tax free status; or the congregation should be charged with (technical) theft of the school’s assets.

You would then say: “the school could simply pay the nuns/religious who have school-related functions, and they could donate this to their congregation. True. Actually, this is what they should do. But the salaries of these nuns/religious should be comparable that of to the other teachers or administrative staff in the school. Paying them higher salaries would constitute a ‘withdrawal’ of profits by the congregation, which should not be allowed for a non-profit, non-stock educational institution.

Note that ‘non-profit, non-stock’ covers also schools that are run by private foundations. It would not be right for the head of the foundation running a school to build his residence on school premises, and then get paid a very high salary. So, why should a church congregation be any different?

Then, there is the case of hospitals. Are hospitals included in the term ‘charitable institution’?   For me, charitable institutions would include orphanages, battered women shelters and the like; but hospitals are at best a border line case. There should be clear guidelines made by the Department of Finance to define when a hospital can be classified as a charitable institution. Perhaps it should require that the majority of its patients are poor and that they pay below market-based hospital fees.

It should not be the case that any religious group could simply put up a hospital, run it in a regular manner, collect high fees from patients, and then claim to be a ‘charitable institution’ exempt from real estate and income taxes.

Political Clout
But in the Philippines today, church run institutions often get away with not paying taxes. Mostly, this is due to the church’s political clout; most politicians are afraid of going after the church for back taxes. And there is also the bias in favor of the church by judges. In a recent case filed by the Cebu City government against Perpetual Succour Hospital (run by religious nuns), the city wanted to collect taxes on the pharmacy and real estate leasing operations done by the hospital, because these are not covered by the tax exempt status of the hospital. But the Regional Trial Court ruled that the accounts for these activities are not separate from that of the hospital, and thus no tax could be collected. Actually, if we were to follow the Constitution, it should be the other way around: since the hospital is no longer exclusively used for ‘charitable purposes’, it should be taxed as a whole.

The government, through the Department of Finance,  could and should implement the law when it comes to the income and assets of religious institutions.  The church should not be allowed a creative  interpretation of the tax laws to make themselves tax-exempt. This is especially so when they operate as non-profit and non-stock institutions. There may be some laws that need to be amended, but mostly it is just a question of political will. If the Department of Finance decides to go after the church for back taxes, they will have the Constitution and most of the laws on their side.

I believe it is high time that the government fully collect the taxes due from dioceses, congregations and the like. We should not continue with the myth that the church as a whole is tax exempt. This is effectively tax evasion by the church, and in the present framework of pushing for full tax compliance by everyone, the church should not be an exception. Otherwise, that will be the same as condoning corruption (in this case, tax evasion), and we don’t want that to happen. Or do we?