Needed: A Wealth Tax

With the increased consciousness about the top ‘1%’ wealthiest, there needs to be a corresponding policy aimed to address the ‘imbalance’.  One aspect of this policy would be a Wealth Tax.  A Wealth Tax is based on the logic that for the wealthy, what counts more is what they have than what they earn.

A Wealth Tax in the Philippines could be levied on all assets (minus liabilities) of persons above 50 million pesos. Assets will be valued at their book value (i.e. the actual price paid for them) and not market value. The wealth tax will be levied on all Philippine residents (defined as persons who have resided in the Philippines for 6 months and a day in the last calendar year) on all their wealth. A Wealth Tax paid to foreign governments for wealth outside the Philippines would be credited towards the Philippine Wealth Tax.

The Wealth Tax will, for those who pay it, replace the Capital Gains Tax, the Tax on Interest and Dividends. All donations to private foundations will still be considered as part of taxable wealth (for a period of five years), unless the donor has no corporate or family relations to the foundation’s board.

Why a Wealth Tax?
A Wealth Tax simplifies tax collection. There would no longer be a need to monitor interest payments or even the present value of assets. Tax loopholes using all kinds of fiscal constructions will be closed. The BIR will simply have a file per person with a list of Assets and their book value.  Wealthy people will be paying roughly the same amount every year.

A Wealth Tax is fairer than an income tax on rich people. Wealthy people don’t necessarily have high incomes, but wealth. It helps to make sure that the wealthy pay a fair portion of their wealth in taxes.

A Wealth Tax stimulates investment. It penalizes just sitting on your money, or having assets that are not productive. Those who make productive investments will be taxed the same as those who don’t; but they will make a lot more money. Those who sit on their assets will find that these diminish in value, literally, every year. Since the Wealth Tax will tax you on the book value of investments; if you make a bad investment and the value of your shares of stocks go down, you will continue paying the wealth tax based on the original investment. Only if you sell the stocks and take the loss, will your Wealth Tax liability decrease.

Prerequisites
Before a Wealth Tax can be implemented in the Philippines, a number of things need to be changed:
Bank Secrecy. In the Philippines, the government is not allowed to look into the bank accounts of citizens and residents. This opens the way for people simply to lie about their wealth. In Europe, the principle is ‘privacy of bank accounts’ which means that people’s bank transactions could not be made public, but that the government could look into them. Before any meaningful Wealth Tax is implemented, it is imperative to change Bank Secrecy to Bank Privacy.

Reform Land Valuation Rules. People regularly register their land, for taxation purposes, at a low value (i.e. at book value, or lower). This makes land ownership a potential haven for people wanting to evade a Wealth Tax. Land assessment values should be adjusted upwards regularly, to keep it in pace with the actual market value of the land.  This could be done by implementing a ‘Zonal Land Valuation System’ that species the minimum value for land in given areas. And government could make a rule that it could buy any piece of land at a maximum of some 20% above assessed value. This would compel rich people to correctly state the value of their land, or risk making a big loss if the government decides to buy it.

Implementing It
A Wealth Tax could initially be set at about 2% of the value of taxable wealth – defined as assets minus liabilities above 50 million pesos.  When it is implemented, the tax on the highest income tax bracket should be lowered from 32% to 25%. Also, if one pays Wealth Tax, a number of taxes will be credited to it e.g. Capital Gains tax, interest tax, tax on dividends.

In subsequent years, the rate for the Wealth Tax could be raised, while the income tax and corporate tax rates lowered to counterbalance the effect. This should stimulate the economy while maintaining the level of tax income.

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.

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?

Proposal for a carbon tax

I think that a carbon tax would be a good idea to implement in the Philippines. A carbon tax is a tax based on the amount of carbon dioxide that is produced by various fossil fuels.  In order to lessen the impact of such a carbon tax on the people, we should make it “revenue neutral”, that is, that the tax is not aimed at making more money for the government. Thus, the amount it raises should simply offset the amount that is freed as a result of lowering income and other taxes.

My proposal is to have a substantial carbon tax – something in the tune of increasing gasoline prices by 50% or so. At the same time, income taxes on individuals and corporations should be lowered accordingly. Of course, the effect this would have per individual will vary, but it should not vary too much. The tax will be on the amount of carbon dioxide produced – thus, coal will be taxed the most, while LPG the least.

The advantages of this carbon tax will be:

Facilitate Tax Collection
There is no escaping a carbon tax – so in this sense, everyone will have to pay this tax. And it is easy to implement – simply tax the oil and coal importers. The cost will then be passed on “downstream” through the electricity cost, transportation cost, etc.

While the aim will be for it to be revenue-neutral, it may end up taxing people who do not pay income taxes at the moment. Take the case of the families of Overseas Filipinos – they will have to also pay for this tax.  A problem with the carbon-tax will be that poor people may pay disproportionately more tax than those better off.   In order to offset this effect, minimum wages should be raised a bit.

Lower income taxes
The income tax on individuals and corporations will be lowered, freeing money to be used in paying the carbon tax.  People will have more disposable income, and while they will probably use most of it to pay for transportation, they still have a choice to lessen this in various ways. The money freed would also be used on other things, thus stimulating the economy.

Stimulate service industries
Service industries, particularly those that use comparatively little carbon, stand to gain from this scheme. Take for instance the business process outsourcing industry, which spend more on salaries and less on carbon, will gain from this. Of course, the carbon tax will fall heavily on industries such as metal processing or even fertilizer manufacturing; but this will be partially offset by the decrease in corporate income taxes.

Lesser Carbon
As a result of the carbon tax, there will be a noticeable reduction in electricity and gasoline/diesel expenses by the population. Since it will cost more, it will pay to economize in the use of vehicles; and it will pay to buy more efficient vehicles, such as electric or hybrid vehicles. Also, things like airconditioning would be made more efficient. In general, people will consider economizing on electricity, since it would be count as a more significant expense. Alternative energy will also become cheaper when compared to traditional fossil-fuel generated energy, and this will in turn facilitate the installation of alternative energy sources, such as wind and solar energy, all over the country.

Taken together, all of this will reduce the carbon dioxide emissions of the country.