What is in a tax rate?

Wfinancing government will fall on very few shoulders.

There are those (including myself) who say that we should tax the wealthy. But there is a limit to taxation. A point is reached when we may kill the goose that lays the golden egg. The disincentive effect of taxation can discourage innovation, and productivity. And since capital is mobile, investments may seek tax shelters and tax havens.

We also believe that the task of nation-building should be shared by everyone lest we promote patronage and mendicancy. As it is, many people already consider that government services should be given for free and do not even think that their production costs money. The other consequence is that public goods and services are not valued as products of the taxpayers’ hard-earned money. They are spent needlessly, wantonly, irresponsibly, and greedily.

And so, we are back to the drawing board again, using numerous Excel worksheets to simulate what would be a good income tax structure. Joyce asks with a smile why we have to “punish” ourselves once more, considering that we are already in the private sector. But I remind her that government is not just DOF, or Congress. It includes us, private citizens who will bear the brunt of badly crafted policies. Thus, we have a great stake in analyzing and participating in the debates especially on how taxes will be raised. After all, these are our incomes that government is taking away. And our trade-offs in the process are quite significant. We could have better food, better health services, better education, among the many others, if we spent them on our own.

mguevara@synergeia.org.ph hile we were analyzing the effects of the Department of Finance (DOF) tax reforms, our Research Assistant Kier, asked how tax rates are determined. He must have thought that tax rates are just plucked from thin air. Well, that is not a farfetched possibility. The DOF staff, especially Joyce and Lina, must have simulated hundreds of tax rates for the many tax reforms that FVR (Fidel V. Ramos) initiated. How the members of Congress came up with alternative rates cannot be explained. The then chairman of the Senate Ways and Means, Senator Enrile was fixated on multiples of five. We had to bring in his Professor from Harvard to convince him that it takes more than a regular pattern to design a tax structure. We have to look at how taxpayers are distributed along the income scale. In addition, there are many other factors to consider. Who would bear the tax burden? How much revenues will the government collect? And how will the tax rates affect prices and growth? And since taxes induce behavioral changes, we need to look at how taxpayers will respond to the tax rate. Will the tax discourage them from working for longer hours, or worse, will the tax rate be considered so harsh that they will be predisposed to tax evasion?

Estimating the initial VAT (value-added tax) rate was a much simpler task. We only had to design a rate that would bring in revenues that equalled the collection from the 75++ taxes which the VAT replaced. In technical terms, the VAT was an “equal yield substitution tax.” But the income tax rate structure is much more difficult to design. More than a quarter of the taxpayers (32%) earn R100,000 a year, or less than R10,000 a month. Their incomes account for only 0.4% of the total. In contrast, only 0.04% of the taxpayers earn 12 million or more a year but they account for 52.4% of total income. This implies that the burden of