Friday, September 9, 2011

Taxes: Without Reason

President Aquino has been criticized for not setting forth a comprehensive vision for development of the Philippines. What seems to be happening is that his administration has numerous constructive initiatives underway, and from the haphazard collection of these achievements, a well-organized SONA can be articulated. That SONA reads as if all had been done under a brilliant master plan.

But no one has seen that plan.

To me, this smacks of the traditional lack of organization that is seen everywhere in the Philippines. Activities are reactive and transactional rather than proactive and strategic.

For example, Philippine tax policy is bizarrely erratic.

Tax policy is apparently made by royal decree rather than economic logic. It is driven by an extension of the royal thinking of kings that the peasants must pay taxes into the castle even if it drives the reign bankrupt. There are few value-based principles that say taxes should be levied where wealth is created, or that taxes should be higher for rich people and lower for poor people.

Taxes are levied simply because "I need money and have the power to grab it."

Many taxes are levied in the form of government fees. Customs duties. Court fees. School exam fees. They are not called taxes, but they have the same goal: get money from the public to pay for government services. And in many cases, it would seem they are little more than ways for individuals to skim extra money for themselves. I read about the blatant abuses from Customs agents, and see the charges assessed against my inbound shipments, and am just stunned at the disregard for value: P1,200 custom fee levied for sandals purchased for US equivalent of P1,200. And, just the other day, I paid P548 to Customs to receive tax documents from the US government via DHL international mail. Documents. Paper. Already printed. Zero resale value.

P548 is a day's wages for a paid staffer. It took Customs a day to open the package and inspect the documents?

These fee taxes destroy value rather than create it. It is like the royal robberies of old feudal days. But it is 2011, way past several enlightenment ages that evidently forgot to shine in the Philippines.

Customs duties suppress international trade. Court fees block access to the courts. School exam fees push the poorest students out of the educational system.

These are taxes that destroy value. They are royal taxes. Feudal taxes. Unenlightened taxes.

Indeed, the charter for Customs is to raise money, not promote robust, safe trade. It is one of the main sources of taxes for government operations, contributing something like 22% of all revenue.

Never mind that the Philippines, once the thriving heart of Asian Trade, maintains a shipping infrastructure that languishes as an old, broken-down collection of rusting ports that are used mainly for smuggling. Red tape and fees suffocate earnest effort that could build a vibrant trade economy.

Never mind that Philippine courts cannot be used as a corrective force against corruption because poor people cannot afford to file cases. So redress of harm is limited to those with money. And, to top it off, some judges are corrupt. People who are addressed as "your Honor" have none. People who swear an oath to take care of the public well-being instead take care of themselves.

Honor has a strange definition hereabouts.

And never mind that some children, wholly innocent of any misdeed or political leaning, are denied the opportunity to have their intellect nourished. They go to work at age 11 because their parents can't afford the exam fees or uniform costs to keep them in school.

I find interesting that, in the Philippines, there is a clear awareness of the importance of road infrastructure. Infrastructure is the foundation upon which commerce is built, and convenience and hypothetically safety for travelers. Missing is the follow through. Enforcement of traffic regulations is almost non-existent, so public safety is not what it might be.

Similarly, regarding taxation, it is recognized as important for funding this expense or that. But what is missing is the principle as to WHY taxes are levied. In the US, the principle is that if value is created, a portion should go to the public good. Thus, taxes are levied on income, property and sales. Government fees are generally small in relation to these value-based taxes. And the fees are properly scaled to value. The cost of auto registration is small in relation to the value of having a car.

In the Philippines, it seems that there is no concept of value-based taxation, or taxes that are small in relation to value.  Rather, taxes are levied because officials have the power to assess them.  And the levies become perverse.

  • Taxing the kids away from education.

  • Taxing people away from justice.

  • Taxing to undermine trade rather than promote it.

The solutions, of course, are to make education free, to make court access free, and to change the charter of Customs away from being a taxation agency and toward promoting the safety and global competitiveness of Philippine importers and exporters.

And to be disciplined in the assessment and collection of value-based taxes.


  1. What is funny in Philippine taxation is "CAPITAL GAINS TAX". This tax is goofy funny and very comical. Of course, the Philippine congress and Senate are either comedians, boxers, actors, actresses, or, they were likely educated abroad in ivy-schools.

    I may be wrong or maybe I got lost in translation with their convoluted goot lawyerly englsichtzes.

    A real property bought today and sold tomorrow will be taxed 12% on the full selling price not on capital gained.

    Therefore, the moment a real property is bought it instantaneously lost 12% of its value.

  2. University of the Philippines requires Individual Income Tax (ITR) return to avail of socialized tuition. It's easy. Very easy. All one has to do is type a low income in the ITR. Go to BIR. Have a friend stamp it "received" without really filing it. Or, just go down BIR, the rubber stamp "received" is there for the asking and taking. Stamp it and submit it to University of the Philippines.


    That is why graduates from University of the Philippines are crooks. Their parking lot is full of gleaming brand new cars. So much for socialized tuition !

  3. Mariano, both times I have bought property here, buyer and seller simply agree on two selling prices, one which is paid, the other which is recorded. The recorded price is about 1/10 of the actual money transfer.

    This was done with the advice of attorneys in both instances. The seller agrees because he doesn't care, and wants to unload his property. The buyer does not want to pay capital gains on a property he is just buying.

    So you are correct, it is good comedy, play acting all the way to the bank.

  4. Joe, we went shopping for house. "Price negotiable" on three of three occassions. These are negotiated:

    Two deed of sales. One shows the cost we actually buy and one at a negotiated price for BIR purposes. Plus, we are to pay the capital gains tax which is not stated in the deed.

    I see problems here. Two deed of sales is definitely not acceptable. It is ILLEGAL. 2ndly, In the real world, a buyer do not pay capital gains because a buyer has no gains in the sale. Fittingly, it should be the seller. So in essence we give the seller the capital gains money and may never know that they pay BIR and morning after they may be in America sipping martinis laughing at my gullibility.

    Oh, I forgot, they want us the buying price on the 2nd deed of sale based on the Tax Declaration which is always lower which they want as the basis of the Capital Gains. Gosh ! But they want us to pay them based on actual selling price. That is really spooky. It is simply in-your-face like I am clueless.

    The other seller which we touched base with, the house was not declared in the tax declaration and it is not even in the seller's name including the title which is still encumbered to the developer. Gosh and the seller is a middle-eastern marketing regional manager of A HUGE PHILIPPINE ORPORATION THAT MAKES YOU DRUNK. Got my drift ?

    How dare they sucker us up in-your-face with smiling faces, like they are treating us like a bunch of idiots.

    But the house was WoW! I mean WoW ! Few minutes to the beach but an hour to city center. Without traffic is just 10 minutes away. The design was "zen" . Those houses I see in Pacific Palisades by the beach. It was really beach cool !

    We decided to go straight. Went to a land developer and choose a plot rather than deal with "house & lot for sale, PRICE NEGOTIABLE". Don't want to tangle with Philippine Government, BIR and the City that employs crocodile and alligators.

  5. Mariano, crocodiles are big in the Philippines. Like huge.


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