A Tax on Wealth
Posted by butalidnl on 13 June 2015
The news that Pacquiao is the Philippines’ Number One taxpayer was expected, but it is also rather strange. Previously, it was Kris Aquino who was the No.1 taxpayer; but as a result of better tax collection, a lot of celebrities and businessmen are now paying more than her. But why is Pacquiao No.1? Why not the Filipino billionaires who were recently listed by Forbes Magazine (Forbes recently published a list of the world’s 500 richest people, in which 11 Filipinos were listed) ?
The reason for this is that our tax system taxes income, but not wealth. Pacquiao’s earnings are publicly known (as were those of Kris Aquino, to a lesser degree) and this is readily taxed. Billionaires, on the other hand, own shares of stocks that are worth billions of dollars, but they are only taxed whenever the companies they own declare dividends. These companies often declare minimal dividends, and often even none at all..
Billionaires also have formal positions in the companies they own, which entitles them to have a lot of their expenses declared as company expenses e.g. travel, restaurant meals, company cars, exclusive club memberships, etc. These expenses are not counted toward personal income, and thus would not be taxed.
Incomplete Tax System
The unfair situation of billionaires paying less tax than celebrities, and of government employees paying a bigger proportion of their income than millionaires, needs to be addressed. But first we need to take a look at the Philippine tax system as a whole.
We have taxes on consumption, in the form of the Value Added Tax (VAT) and various specific taxes. Then, there are taxes on income, in the form of the income tax, capital gains tax,etc. And there is the tax on real property and an estate tax (on inheritance)..
Consumption taxes fall more heavily on the poor people, because they consume most of what they earn. Income taxes fall heavier on the middle classes, especially those who earn fixed salaries e.g. government employees. Property taxes are paid by those who own land. But millionaires (and especially billionaires) mostly own stocks in companies, as well as bonds and other financial instruments.These are taxed only on income earned from them. Estate taxes are low and the rich can easily avoid them.
In order to have a fair tax system – one which is borne evenly by all layers of the population – there needs to be a tax on wealth, and not merely on income gained from wealth. That way, the rich will bear a more equal share of the tax burden. A wealth tax will make the tax system not only more fair, but also more complete.
A wealth tax could be imposed on all of a person’s property – stocks, bonds, bank deposits, other financial instruments, real estate, vehicles and other valuables (e.g. jewelry, art). Most of these would be valued at the price which they were acquired. Company shares of stock will be assessed at their current book value.
I propose that the first P5 million worth of wealth would be exempted from the tax. From above P5 million to P10 million, the tax would be 0.5%; and above P10 million, 1% per year. This may sound small, but it would mean that Philippine dollar billlionaires would pay hundreds of millions, even billions of pesos a year. Henry Sy, for example, who is worth more than P640 billion, will need to pay P6.4 billion/year. Even Manny Villar (No.11 in Forbes’ list) will pay P720 million yearly in wealth tax.
The reason why the first P5 million should be exempt from wealth tax is to spare many middle income people from it – a person’s house, their car(s), bank accounts and some investments or land could amount to a few million pesos already.
The wealth tax will be imposed on all persons with wealth. Foreign owners of Philippine financial assets will be taxed for the assets that they hold in the Philippines – corporations would pay the tax for their foreign owners. Properties for which real estate tax has been paid, will be exempt from the tax. ( the land tax does not tax buildings, buildings should be counted toward the wealth tax)
A prerequisite for implementing the wealth tax is that the tax authorities would have access to everybody’s bank accounts. There should also be rules to prevent rich people from hiding their wealth in charitable foundations or various fiscal constructs.
In addition to generating tax revenues, the wealth tax will also make it possible to have a complete inventory of property in the country. The ownership of every piece of land, building and financial instrument will be known and recognized. This means that nobody can claim to own anything without having paid a tax for it. The wealth tax will allow authorities to catch dummy constructions or to spot property whose ownership is hidden.
Everyone who owns wealth (e.g. a house or stock investments) will be required to declare it in their wealth tax return, even if they eventually do not need to pay any wealth tax. If they fail to do so, the government will assess their wealth for them.