The Philippines has one of the highest tax rates in the world, whether for corporate, personal, or total percentage of tax paid. However, collection efficiency is well below how much the government should be collecting theoretically.
Without getting into a lot of data and convoluted explanations, I would rather posit conventional wisdom and common sense to explain why this is so:
1. People don’t want to pay taxes
2. People cannot pay taxes
For purposes of simplicity, let us define “people” as organizations and individuals who are required to pay tax. For this article, we will not also get into the second reason, because it is rooted mostly in poverty, which is a larger discussion.
People don’t want to pay taxes because the government makes it too difficult to file your income tax AND people think that they are not getting value for their money.
Furthermore, even if people don’t pay their taxes, the government is ill equipped to catch tax cheats. This leads to selective and unjust application, and likely corruption. Thus, the tax system should be overhauled, along with the tax organization in the country.
The burden of complexity
The average citizen finds it difficult to follow tax laws precisely because the task is arduous, time-consuming and is a costly exercise. Even lawyers and doctors have to get advice from accountants for them to be able to figure out how to pay the government a share in their hard-earned income.
If intelligent professionals have a hard time figuring out how to accomplish and submit the proper tax forms and attached documents, what more the street vendors and farmers who are most likely not as educated? The argument can then be made that the tax system is actually anti-poor.
The complexity of compliance actually makes any individual or company more likely to be guilty of non-compliance. Thus, the tax authority can reliably expect that there is a 90 percent chance that they will find fault with the taxpayer’s compliance. Should a taxman want to give anyone a hard time, he is likely to be able to do so.
By making tax compliance difficult, the government is, in effect, incentivizing non-compliance. This encourages the status quo, which keeps a thin veil between tax avoidance and tax evasion. Just take the example of the commonly accepted practice of the tax shield. It may be legal or illegal, depending on who views it (the regulator or the taxpayer), but it is a gray area and the regulators generally look the other way. Why? Because apart from giving us a hard time to comply (with all those forms and procedures), they are also taxing us too much, not just relative to other countries but because of the low-value proposition.
Let me touch on paying taxes as a commercial proposition, which involves value for money.
The BFO reason
I propose the BFO (blinding flash of the obvious) reason: people know that the tax rate is too high and they feel justified in minimizing it. According to an article from MoneyMax.ph, there have been at least three bills (House Bill 4829, House Bill 5401, Senate Bill 2149) pushing for lower income taxes and easing the process to encourage tax compliance among Filipino taxpayers.
Why do they find the rates “too high?” Another BFO: People expect value when they pay for a product or service. When people pay taxes, the service they expect in return is an effective government. But people are more likely to find the government lacking in its delivery of effective services, so they feel they are not getting value for their money.
I think that the tax authority is doing the Filipino people a disservice when they assume that we are a nation of tax cheats. I believe a reasonable person will pay reasonable tax, an idea that may even be applied to a great majority of our taxpaying population. If a particularly wealthy cultural segment of society is prone to tax avoidance practices, it is likely because they do not see value in paying their dues. This does not justify the illegal act of non-compliance but gives consideration to the context of what is actually happening and the reason for it.
So what is the consequence of not paying taxes? Let us first accept the premise:
There are scant resources to actually execute the laws in taxation.
Given that the tax rates are too high, compliance is, thus, minimal as people resort to illegal means to lessen or avoid their tax liabilities (misreporting double books, tax evasion, bribery). If compliance is minimal, that means many people are not paying the correct taxes, or are not paying any, at all.
Theoretically, the tax authority can go after and prosecute all tax evaders. However, this would (in my assessment) involve the overwhelming majority of the population. The bureau of internal revenue does not have the number of people and systems to go after all of them (not even a majority). Thus, they resort to random audits and selective methods. That is where bribery, politicking, favoritism and other forms of corruption can come in.
As a finance educator, we have an old saying: If a few of the students fail, then there is a problem with those students. If most of the students fail, then there is a problem with the teacher.
If most citizens cannot comply with the tax requirements, there is something wrong with the system.
Conclusion: we should change the system so that taxes are brought to a level where people are willing and are made capable to pay them in a simplified manner that can be monitored effectively by the government.
How? Well, here are some of my off-the-cuff recommendations:
1) Lower tax rates and grant exemptions and incentives.
2) Simplify the laws and regulations to make them more easily understood and complied with.
3) Make them transparent (technology can make this happen) to minimize corruption.
4) Craft a strategy in the intermediate timeline – because government funds will be low due to lower tax rates (government bonds will have to be issued to offset the lower tax collections, parallel to the overhauling of the tax organization).
5) Low-income members of society should be given significant tax exemptions and tax cuts. It costs the government more money to collect from low-income earners than the actual revenues collected.
6) In fact, the entire paradigm of the tax code should be converted; it should move to voluntary tax compliance, which is based on trust, instead of the current system, which is based on distrust.
7) Further, penalties should be rationalized so as not to incentivize corruption and bribery. It might be a good idea to include community service and projects to penalties for non-compliance (in addition to penalties of cash, shutting down of businesses, or confiscation of assets).
8) As part of the solution, the government should embark on a national finance information campaign to ensure that the citizenry will not only understand the tax processes but acquire a positive mindset regarding taxes (case in point: South Korea, whose youth are introduced to tax payment at an early age. Kids in school are told they should be responsible citizens and pay correct taxes on time so that the government can provide services that will help improve the quality of their lives).
These solutions could take 5-10 years. However, even if the tax revenues of the government suffer in the near future, that will be offset by the benefits of a lower tax regime, which in the long term may be expected to boost tax collection because it will encourage tax payment from a wider tax base, as well as foreign investment, and will have a huge multiplier effect on the economy.
With these reforms, we can start traveling on the long road to transforming our country from an image of a nation of tax evaders into a nation of responsible taxpayers.
Anton Mauricio is the Country President of the Chartered Institute for Securities & Investments (CISI), the largest certification authority in financial services, headquartered in the UK. He is a board trustee and a two-term director of FINEX. He is the convenor of the Financial Literacy Partners, the largest group of professionals, educators, and students of finance in the country, and the first Filipino and only Asian in the board of AIESEC Alumni International (AAI).