Public finance

Tax Principles,
Theories and Policies
Public Finance
Prof. Rolando C. Rodolfo, A.B. LlB, MPM
(30 MINUTES)
PRE-LECTURE QUIZ
Question
What is taxation?
Why is there a need for taxation?
What is your understanding of the
life-blood theory of taxation?


It is the inherent power by which the
sovereign state imposes financial burden
upon persons and property as a means
of raising revenues in order to defray the
necessary expenses of the government
(Tax Digest by Crescencio Co Untian,
2002).

Taxation is the imposition of financial
charges or other levies, upon a taxpayer
(an individual or legal entity) by a state
such that failure to pay is punishable by
law.

What is Taxation?
It is a mode by which government make exactions
for revenue in order to support their existence and
carry out their legitimate objectives (Tax Law and
Jurisprudence by Justice Vitug, 2000).

It is the most pervasive and the strongest of all the
powers of the government. Taxes are the lifeblood
of the government, without which, it cannot
subsist.

What is Taxation?
What is Taxation?
A means by which governments finance their expenditure by
imposing charges on citizens and corporate entities. Governments
use taxation to encourage or discourage certain economic decisions.
For example, reduction in taxable personal (or household) income by
the amount paid as interest on home mortgage loans results in
greater construction activity, and generates more jobs.




Taxation according to
Colbert:
.
"The art of taxation consists in so plucking the
goose as to obtain the largest possible
amount of feathers with the smallest possible
amount of hissing." (Colbert, 1665)
Jean-Baptiste Colbert was the controller general of
finance (from 1665) and secretary of state for the
navy (from 1668) under King Louis XIV of France.
He carried out the program of economic
reconstruction that helped make France th dominant
power in Europe.

Life blood or necessity theory


The life blood theory constitutes the theory of taxation, which
provides that the existence of government is a necessity; that
government cannot continue without means to pay its expenses;
and that for these means it has a right to compel its citizens and
property within its limits to contribute.

In Commissioner v. Algue, the Supreme Court said that taxes are
the lifeblood of the government and should be collected without
unnecessary hindrance. They are what we pay for a civilized society.
Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. The government, for its
part, is expected to respond in the form of tangible and intangible
benefits intended to improve the lives of the people and enhance
their moral and material values.
The first known system of taxation was
in Ancient Egypt around 3000 BC - 2800
BC in the first dynasty of the Old
Kingdom.

In Biblical times, tax is already prevalent.
According to Genesis 47:24:

"But when the crop comes in, give a fifth of it
to Pharaoh. The other four-fifths you may
keep as seed for the fields and as food for
yourselves and your households and your
children".
History of Taxation
Earliest taxes in Rome are called as portoria
were customs duties on imports and exports

Augustus Caesar introduced the inheritance tax
to provide retirement funds for the military.
The tax was five percent on all inheritances
except gifts to children and spouses .

In England, taxes were first used as emergency
measures.
History of Taxation
History of Taxation in the
Philippines
The pre-colonial society, being communitarian,
did not have taxes.
During the Spanish Period, new income-
generating means were introduced by the
government such as the :

Manila-Acapulco Galleon Trade
Polo Y Servicio (Forced Labor)
Bandala
Encomienda System
Tribute




History of Taxation in the Philippines
Manila-Acapulco Galleon Trade
was the main source of income
for the colony during its early
years.

The Galleon trade brought silver
from Nueva Castilla and silk from
China by way of Manila.


History of Taxation in the Philippines
Polo Y Servicio is the forced labor for 40 days, of
men ranging from 16 to 60 years of age who were
obligated to give personal services to community
projects. One could be exempted from the polo by
paying a fee called falla (which was worth one and a
half real).

Bandala is one of the taxes collected from the
Filipinos. It comes from the Tagalog word mandala,
which is a round stock of rice stalks to be threshed.





History of Taxation in the Philippines
Encomienda are large tracts of land given to a person
as reward for a meritorious act. The encomenderos
were given full authority to manage the encomienda by
collecting tribute from the inhabitants and govern
people living on it.

Tribute was the residence tax during the Spanish times.
It may be paid in cash or kind, partly, or wholly.

But in 1884, the tribute was replaced by the cedula
personal or personal identity paper, equivalent to the
present community tax certificate.

History of Taxation in the Philippines
That in the 19th century, the
cedula served as an identification
card that had to be carried at all
times. A person who could not
present his or her cedula to a
guardia civil could then be detained
for being indocumentado.

Andres Bonifacio and other
Katipuneros tore their cedulas in
August 1896, signaling the start of
the Philippine Revolution.


The cdula was imposed by the
Americans on January 1, 1940, when
Commonwealth Act No. 465 went into
effect, mandating the imposition of a
base residence tax of fifty centavos and
an additional tax of one peso based on
factors such as income and real estate
holdings.

The payment of this tax would merit the
issue of a residence certificate.
Corporations were also subject to the
residence tax.
The Development of the Community Tax
A sample cedula in the 1920s.
Also known as a residence certificate, is a
legal identity document in the Philippines.

Issued by cities and municipalities to all
persons that have reached the age of
majority and upon payment of a
community tax, it is considered as a
primary form of identification in the
Philippines and is one of the closest single
documents the Philippines has to a
national system of identification, akin to a
driver's license and a passport.
What is a cedula?
A person is required to present a cedula when
he or she acknowledges a document before a
notary public; takes an oath of office upon
election or appointment to a government
position; receives a license, certificate or
permit from a public authority; pays a tax or
fee; receives money from a public fund;
transacts official business; or receives salary
from a person or corporation.
Why is cedula important?
ADAM SMITHS CANONS OF
TAXATION
Adam Smith's contribution
to this part of economic
theory is still regarded as
classic. His enunciation of
the canons of taxation has
hardly been surpassed in
clarity and simplicity. His
four celebrated canons are
as follows:

1. Canon of Equality.
Equality here does not mean that all tax-
payers should pay an equal amount.
Equality here means equality or justice. It
means that the broadest shoulders must
bear the heaviest burden.

This canon has given rise to
two theories:

(i) Equality of Sacrifice Theory. It means that the burden of taxation
should involve an equal sacrifice for every individual. This equality,
however, though good in theory, is difficult to attain in practice. Sacrifice is
subjective, something in the mind and feelings of a person. It is difficult to
measure. Besides, it has to take into consideration the number of
dependents on the earning member in the family and their standard of
living.
(ii) The second principle indicating justice is the Ability or Faculty
Theory, which holds that the rich should be made to pay something more
than proportionate to their income. A man with an income of P125,000 per
month will not, other things being equal, feel the same pinch in parting with
P15,000 as a man with an income of only P20,000 feels in paying P15,000
because the former's faculty to pay is greater. On this principle is based
progression in taxation i.e., increasingly higher rates of taxation as incomes
increase. Proportional taxation will not do justice.

2. Canon of Certainty.
The individual should know exactly what,
when and how he is to pay a tax.
Otherwise, it causes unnecessary
suffering. Similarly, the State should also
know how much it will receive from a tax.

3. Canon of Convenience
Obviously, there is no sense in fixing a
time and method of payment which are
not suitable. For example, Land revenue in
India is realized after the harvest has been
collected. This is the time when the
cultivators can conveniently pay.

4. Canon of Economy
This means that the cost of collection
should be as small as possible. If the bulk
of the tax is spent on its collection, it will
take much out of the people's pockets but
bring little into the State's pocket. It is not
a wise tax.

Taxation has four main purposes or
effects:

1. Revenue
2. Redistribution
3. Repricing
4. Representation
The Four Rs of Taxation
Revenue
The taxes raise money
to spend on armies,
roads, schools and
hospitals, and on more
indirect government
functions like market
regulation or legal
systems.
The Four Rs of Taxation
Redistribution
This refers to the transferring
wealth from the richer sections
of society to poorer sections.

Repricing
Taxes are levied to address
externalities; for example,
tobacco is taxed to discourage
smoking, and a carbon tax
discourages use of carbon-
based fuels.

The Four Rs of Taxation
Representation the government is
representing the paramount interest of the
people in its effort to collect taxes from
the populace;
TWO PRINCIPAL APPROACHES TO
MODERN TAXATION

Benefit approach principle
Ability-to-pay principle
Benefit Approach Principle
Benefit approach principle is a traditional taxation principle which
holds that people benefiting from government spending should be
the ones to pay taxes to finance these expenditures, whatever and
whichever they may be.
Benefit approach principle is developed by English philosophers
Thomas Hobbes (1588-1679) and John Locke (1632-1704), and by
Dutch jurist Hugo Grotius(1583-1645).
Under the benefit approach system, individuals pay for each and
every one of the government-provided goods and services that they
consume. They are not charged any taxes for goods and services
they do not benefit from. Therefore, the taxes people pay under the
benefit approach principle are in accordance with the benefits they
receive.

A practical problem in the benefit approach
system is the difficulty of measuring how much
benefit an individual actually receives from the
government.
The benefit approach principle was refined by
Swedish economist Erik Lindahl (1891-1960) in
the 20th century.

Ability to Pay Principle
Ability-to-pay principle envisages that taxation should be levied
according to an individual's ability to pay; that is, individuals with
higher incomes should be charged higher taxes.
Individuals with higher incomes are charged more taxes not
because they use more government goods and services but because
they have the ability to pay more. The primary indicator of ability to
pay is commonly agreed to be income. Ability-to-pay principle is
therefore in contrast with the benefit approach principle, which
determines the amount of taxes a person should pay by the benefits
received in public services. Ability-to-pay principle is based not on
the benefits received but on the notion of equal sacrifice. It is
considered to be characteristic of a socialist sentiment, and is used
in most industrialized economies; but equality of sacrifice, is open to
interpretation as it can be easured in absolute, proportional or
marginal terms.
The main downside of the ability-to-pay principle is that
it diminishes the incentive to work, since a higher
portion of the generated income will be collected by the
government as taxes.
Ability-to-pay principle was extended by the Swiss
philosopher Jean-Jacques Rousseau (1712-1778), the
French political economist Jean-Baptiste Say (1767-
1832) and the English economist John Stuart Mill(1806-
1873).



The main purpose of taxation is to accumulate funds for
the functioning of the government machineries. No
government in the world can run its administrative
office without funds and it has no such system
incorporated in itself to generate profit from its
functioning.

The governments ability to serve the people depends
upon the taxes that are collected. Taxes are
indispensable in the government operation and without
it, the government will be paralyzed.

Why Tax?
Tax law in the Philippines covers national and
local taxes. National taxes refer to national
internal revenue taxes imposed and collected
by the national government through the
Bureau of Internal Revenue (BIR) and local
taxes refer to those imposed and collected
by the local government. The 1987 Philippine
Constitution sets limitations on the exercise
of the power to tax. The rule of taxation shall
be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
(Article VI, Section 28, Paragraph 1).

The Philippine Tax System
Agencies responsible for
Collecting Duties and Taxes
Bureau of Internal Revenue
Bureau of Customs
BUREAU OF CUSTOMS
The Bureau of Customs is mainly
responsible for collecting duties from
importations and exportations. The law
governing the operations of the Bureau of
Customs is the Tariff and Customs Code of
the Philippines. The Current head of the
agency is Commissioner John Philip
Sevilla.
BUREAU OF INTERNAL REVENUE
The Bureau of Internal Revenue is the
primary agency responsible for the
collection of taxes. The law governing the
Bureau of Internal Revenue is the National
Internal Revenue Code of the Philippines.
The current head of the agency is
Commissioner Kim Henares
Tax evasion happens when
there is fraud through
pretension and the use of other
illegal devices to lessen ones
taxes, there is tax evasion,
under-declaration of income,
and non-declaration of income
and other items subject to tax,
Under-appraisal of goods
subject to tariff , and over-
declaration of deductions


The Congress may, by law, authorize the
President to fix within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government (Article VI, Section 28, Paragraph 2).

The Branches of Government vis--vis the Tax Law
The President shall have the power to veto any
particular item or items in an appropriation,
revenue, or tariff bill, but the veto shall not affect the
item or items to which he does not object (Article VI,
Section 27, Paragraph 2).

The Supreme Court has the power to: review, revise,
reverse, modify, or affirm on appeal or certiorari, as the
law or the Rules of Court may provide, final judgments
and orders of lower courts in all cases involving the
legality of any tax, impost, assessment, or toll, or any
penalty imposed in relation thereto (Article VIII,
Section 5, Paragraph 2b).
The Branches vis--vis the Tax Law
A) Personal, capitation or poll taxes
These are taxes of fixed amount upon
residents or persons of a certain class without
regard to their property or business

B) Property taxes
1. Real Property Tax - an annual tax that may
be imposed by a province or city or a
municipality on real property such as land,
building, machinery and other improvements
affixed or attached to real property.


The Forms of Taxes Imposed on Persons and Property
2. Estate Tax (Inheritance Tax) - a tax on the right
of transmitting property at the time of death
and on the privilege that a person is given in
controlling to a certain extent the disposition
of his property to take effect upon death.

3. Gift or Donors Tax - a tax on the privilege of
transmitting ones property or property rights
to another or others without adequate and
full valuable consideration.
The Forms of Taxes Imposed on Persons and Property
4. Capital Gains Tax - tax imposed on the sale or
exchange of property . Those imposed are
presumed to have been realized by the seller for
the sale, exchange or other disposition of real
property located in the Philippines, classified as
capital assets.

C. Income Taxes - Taxes imposed on the income of
the taxpayers from whatever sources it is derived.
Tax on all yearly profits arising form property,
possessions, trades or offices.



The Forms of Taxes Imposed on Persons and Property
D. Excise or License Taxes - Taxes
imposed on the privilege, occupation or
business not falling within the
classification of poll taxes or property
taxes. These are imposed on alcohol
products; on tobacco products; on
petroleum products like lubricating oils,
grease, processed gas etc; on mineral
products such as coal and coke and
quarry resources; on miscellaneous
articles such as automobiles.
The Forms of Taxes Imposed on Persons and
Property
Under these lies two other taxes:
1.Documentary Stamp Tax - a tax imposed upon
documents, instruments, loan agreements and
papers and upon acceptance of assignments, sales
and transfers of obligation and etc.

2. Value added tax- is imposed on any person
who, in the course of trade or business sells,
barters, exchanges, leases, goods or properties,
renders services, or engages in similar
transactions.
The Branches of Government vis--vis the Tax Law
1. Individuals
a. Resident Citizen
b. Non-resident Citizen
c. Resident Aliens
d. Non-resident Aliens

2. Corporations
a. Domestic Corporations
b. Foreign Corporations

3. Estate under judicial settlement

4. Trusts irrevocable both as to the
trust property and as to the
income.




Who Should Pay Taxes?
The Constitution expressly grants tax
exemption on certain entities/institutions
such as:

1. Charitable institutions, churches,
parsonages or convents appurtenant
thereto, mosques, and nonprofit
cemeteries and all lands, buildings and
improvements actually, directly and
exclusively used for religious, charitable
or educational purposes (Article VI,
Section 28, Paragraph 3).
Who (or What) are those exempted in
paying taxes?
Who (or What) are those exempted in paying taxes?
2. Non-stock non-profit educational institutions used
actually, directly, and exclusively for educational purposes.
(Article XVI, Section 4 (3)).

Exempted to tax as stated in the Article 283 of Rules and
Regulations Implementing Local Government Code of 1991
(RA 7160):

Local water districts
Cooperatives duly registered under RA 6938, otherwise
known as the Cooperative Code of the Philippines
Non-stock and non-profit hospitals and educational
institutions
Printer and/or publisher of books or other reading
materials prescribed by DECS (now DepEd) as school texts
or references, insofar as receipts from the printing and /
or publishing thereof are concerned.
SHIFITNG AND INCIDENCE
OF TAXATION
Shifting: The process of transfer of a tax, while its impact lies on
the person who pays it at first instance. Or Shifting is the process
through which a taxpayer escapes the burden of a tax.

1. Forward shifting: Tax burden from the producer to the
consumers in the form of higher price of the commodity. Price
serves as the vehicle through which a tax is shifted.
2. Backward shifting: When the imposition of a tax caused a
reduction in the prices paid to the factor-owner.
A tax cannot be shifted:
(i) when it is purely personal and
(ii) when it is levied upon economic surplus.







END OF LECTURE
ACTIVITY:
BATTLE OF THE BRAINS
Instruction: Group yourselves into two then for
each question select a champion that will
represent your team. The most number of wins
will win the game and will be exempted from the
Post lecture Quiz.


EASY ROUND

Question No. 1: Easy Round
It states that taxation should be
levied according to an individual's
ability to pay; that is, individuals
with higher incomes should be
charged higher taxes.

Question No. 2: Easy Round
It is a traditional taxation principle
which holds that people benefiting
from government spending should be
the ones to pay taxes to finance
these expenditures, whatever and
whichever they may be.
Question No. 3: Easy Round
True or False: Andrew
Smith developed the four
canons of taxation?
Question No.4 Easy Round
It is an agency responsible for the
Collection of Duties.


Question No. 5 Easy Round
It is an annual tax that may be imposed by a
province or city or a municipality on real
property such as land, building, machinery
and other improvements affixed or attached
to real property.

Question No. 6 Easy Round
These are taxes imposed on the income of
the taxpayers from whatever sources it is
derived. Tax on all yearly profits arising
form property, possessions, trades or
offices.
AVERAGE ROUND
Question No. 1
This happens when there is fraud through
pretension and the use of other illegal devices
to lessen ones taxes, there is tax evasion,
under-declaration of income, and non-
declaration of income and other items subject
to tax, Under-appraisal of goods subject to
tariff , and over-declaration of deductions.

Question No. 2
Give one entity or institution exempted
from paying taxes.


DIFFICULT ROUND
Question No. 1: Difficult Round
What is the life-blood or necessity
theory?
Who said that "The art of taxation consists
in so plucking the goose as to obtain the
largest possible amount of feathers with
the smallest possible amount of hissing ?
Question No. 2: Difficult Round
Question No. 3 Difficult
Round
The process of transfer of a tax, while its
impact lies on the person who pays it at
first instance. Or it is the process through
which a taxpayer escapes the burden of a
tax.