Theory and basis of taxation

The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens and property within its limits to contribute.

The basis of taxation is found in the reciprocal duties of protection and support
between the State and its inhabitants. In return for his contribution, the taxpayer
received benefits and protection from the government. This is the so-called benefits
received principle.

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.

Illustrations of lifeblood theory

1. Collection of taxes cannot be enjoined by injunction.

2. Taxes could not be the subject of compensation or set off.

3. A valid tax may result in destruction of the taxpayers property.

4. Taxation is an unlimited and plenary power.

Benefit-received principle

This principle serves as the basis of taxation and is founded on the reciprocal duties of
protection and support between the State and its inhabitants. Also called symbiotic
relation between the State and its citizens.

In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is
compensation or consideration for the other; protection for support and support for
protection.
 However, it does not mean that only those who are able to and do pay taxes can enjoy
the privileges and protection given to a citizen by the government.

In fact, from the contribution received, the government renders no special or

commensurate benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from the enjoyment of the privileges of living in
an organized society established and safeguarded by the devotion of taxes to public
purpose. The government promises nothing to the person taxed beyond what may be
anticipated from an administration of the laws for the general good. [Lorenzo v.
Posadas]

Taxes are essential to the existence of the government. The obligation to pay taxes
rests not upon the privileges enjoyed by or the protection afforded to the citizen by the
government, but upon the necessity of money for the support of the State. For this
reason, no one is allowed to object to or resist payment of taxes solely because no
personal benefit to him can be pointed out as arising from the tax. [Lorenzo v.
Posadas]

ASPECTS OF TAXATION

Processes that are included or embodied in the term taxation

1. Levying or imposition of the tax which is a legislative act.

2. Collection of the tax levied which is essentially administrative in character.

The first is taxation, strictly speaking, while the second may be referred to as tax
administration. The two processes together constitute the taxation system.

Non-revenue or regulatory: Taxation may also be employed for purposes of regulation or

control.

a) Imposition of tariffs on imported goods to protect local industries.

 b) The adoption of progressively higher tax rates to reduce inequalities in wealth
and income.

c) The increase or decrease of taxes to prevent inflation or ward off depression.

TAX SYSTEMS

Constitutional mandate

The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation. [Section 28(1), Article VI, Constitution]

Tolentino v. Secretary of Finance: Regressivity is not a negative standard for courts

to enforce. What Congress is required by the Constitution to do is to evolve a
progressive system of taxation. This is a directive to Congress, just like the directive to
it to give priority to the enactment of laws for the enhancement of human dignity. The
provisions are put in the Constitution as moral incentives to legislation, not as judicially
enforceable rights.

Progressive system of taxation v. regressive system of taxation

A progressive system of taxation means that tax laws shall place emphasis on direct
taxes rather than on indirect taxes, with ability to pay as the principal criterion.

A regressive system of taxation exists when there are more indirect taxes imposed than
direct taxes.

Regressive tax rates

Tax the rate of which decreases as the tax base or bracket increases. There are no
regressive taxes in the Philippine jurisdiction.
 Regressive tax rates should be differentiated from a regressive system of taxation which
exists when there are more indirect taxes imposed than direct taxes.

Three basic principles of a sound tax system

1. Fiscal adequacy

It means that the sources of revenue should be sufficient to meet the demands
of public expenditures. [Chavez v. Ongpin, 186 SCRA 331]

2. Equality or theoretical justice

It means that the tax burden should be proportionate to the taxpayers ability to
pay. This is the so-called ability to pay principle.

3. Administrative feasibility

It means that tax laws should be capable of convenient, just and effective
administration.