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.
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.
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.