Long-held economic doctrines that favor regressive taxation have been debunked by empiricism and evidence. That was the favorable environment, the ideal context, under which the Tax Management Association of the Philippines (TMAP) wrote a draft tax code, which the association had promptly forwarded to the Senate and the House of Representatives.
Needless to say, taxation as a policy tool to ease the pains of the working class and compel the rich to pay their fair share of taxes is now gaining momentum on a global scale. Governments can perfectly do that without jeopardizing their fiscal health and expenditure programs.
One of the discredited orthodoxies is the one which holds that tax cuts for the rich are good for the broader economy. The optimal tax rate, this is the belief, is one that is achieved by encouraging business to produce, without the nuisance called progressive tax rate. An equitable tax rate is one that favors the “makers” and the “ job creators.” The two are code words for Big Business.
The Laffer Curve, supposedly drawn by a middling American economist (he has not written an economic paper of real significance) named Arthur Laffer on a napkin during a meeting with Ford administration officials Dick Cheney and Donald Rumsfield (who both became George W’s fair-haired boys ), is now considered a joke by most serious economists.
Supply side economics, as a macro school of thought and a guide of conservative politicians, has been trumped by evidence as well. This holds that all barriers and impediments to the supply of goods and services should be reined in by government. This and lower taxes for the rich undergirded Reaganomics, the core policies of the Reagan administration. Most Republican leaders still subscribe to these two doctrines.
Also, the marginal utility of wealth in enhancing public welfare has been generally found weak. There is now solid evidence–and cases–to back up progressive taxation. Indeed, the TMAP wrote the draft tax proposal with much of the case for tax cuts for the rich debunked.
The TMAP proposal has these salient features:
•Tax exemptions for incomes in the range of P300,000 a year or lower
• A 30 percent maximum income tax rate
• An increase in the capital gains tax, to make the rates at par with rates in and around the region
• Put into order the current tax deductions with the aim of taking out “disguised compensation” from the list of deductible items
• Reforming the current tax rates on fringe benefits to achieve uniformity between bosses and peons
There are many more items in the reform package. Definitely, the TMAP proposal is better, and more equitable than the current system, in which ordinary employees are taxed 32 percent and corporate incomes are taxed lower.
And, it is also in the Philippine revenue context that a measly income of P10,000 a year is already taxable.
But then, this question should be asked. Did TMAP propose a tax reform package that would get the nod of our pro- poor pastor, Pope Francis? The House and the Senate ways and means committees will make the final decision on the TMAP draft code after a series of public hearings and consultations. But there is a useful frame of reference: The government’s plan to incentivize pioneering economic ventures with a 15 percent tax on corporate income good for 15 years. It makes no sense taxing ordinary income earners at the maximum rate of 30 percent while handling out incentives in the form of a 15 percent tax rate that would last 15 years.
This is another useful reference for the TMAP—what Mr. Obama said in his recent State of the Union Address, the part that covered his ideas on tax reforms.
“Let us close the tax loopholes that led to inequality by allowing the top one percent to avoid paying taxes on their accumulated wealth. We can use that money to help more families pay for child care and send their kids to college. We need a tax code that truly helps working Americans trying to get a leg up in the new economy, and we can achieve that together.”
The short version is this: Mr. Obama wants to raise taxes on heirs to large fortunes, big banks and wealthy investors to help middle class and working Ame-ricans. The rise of patrimonial wealth in the US and elsewhere is one reason why President Obama favors higher taxes on inherited wealth.
Like the TMAP’s version, Mr. Obama also favors the simplification of the tax code to remove loopholes in the deduction system.
I am not second guessing Pope Francis but I know of a tax scheme that he would approve of. Something similar to the US Revenue act of 1935, which was also known as the “Soak the Rich “ tax.
Would the TMAP be bold enough to venture into that progressive taxation territory?
Would Congress dare rework the tax code to truly pass a progressive tax rate?
If they do, it would be for the good of the broader society.