August 1st, 2022
I am strongly in favor of taxes on the wealthy. After all, the Constitution explicitly requires that our tax system be progressive, and therefore bearing more heavily on the wealthy. Several members of the Senate, including my friend and counterpart, incoming Senate Ways and Means Chair Sherwin Gatchalian, and my fellow Bicolano, Senator Robin Padilla, have voiced his reservations on wealth taxes, so this policy priority will move.
The matter is not the principle, but the practice. How can we impose taxes on wealth without inducing capital flight or in a way that really makes the rich pay?
The classic problem for tax systems in a globalized environment is that financial assets are very mobile, taxpayers can move from one country to another, and tax jurisdictions remain limited to their territorial coverage. So, if we will tax high net worth individuals based on their financial wealth, that will induce three things. Either the rich (individuals or corporations) move completely from the Philippines to more tax-friendly jurisdictions; or they move their financial assets away from the Philippines; or they structure their wealth-generating businesses in a way that profits are booked elsewhere rather than in the Philippines.
These are very convenient for wealthy people, especially since our bank secrecy laws have not been relaxed, we are not yet unable to implement Automatic Exchange of Information (AEOI) for tax purposes with other tax jurisdictions, and we do not have a strong transfer pricing enforcement system.
The best way to tax the wealthy is either through their immovable wealth (land), or through their conspicuous consumption. For the first manner, we need to find ways to properly value and tax high-value land through the Real Property Valuation and Assessment Reform Act. At the same time, we need to balance the impacts on smaller landowners. I will be proposing amendments to that bill that will provide relief to agricultural landowners while taxing high-value land in the proper time. That will also incentivize their use, since high-value land should be induced to generate an income to meet its tax obligations.
On the second manner, we need to expand the non-essential goods tax under Section 50 of the tax code, and expand it to other obvious luxury items such as luxury watches, expensive bags, and high fashion. We can also raise the rate from 20% to 25%. The luxury goods market in the Philippines is P71 billion in revenues annually. That should raise between P12 to 18 billion annually. Removing the excise tax exemption on pickup trucks and the tax discount on expensive hybrid cars, is also something I am looking at.
On income, there may be room to adjust the top marginal tax rate to 40% for those earning above P15 million, but given how easy it is to do compensation in the form of stock options and other non-cash methods, I suspect it will not yield very significant revenues.
I am skeptical about raising taxes on capital assets and financial wealth, because that is effectively a tax on investments. We need investments because they create jobs and provide the financing needed for private infrastructure and services. So, wealth taxes with these assets as the base might hurt the economy.
I am studying the effective tax rate on aggregate wealth that taxes on immovable wealth and on luxury consumption will yield. The aim is close to 1-2% of aggregate wealth as the more direct proposals want. If we reach that number, then it wouldn’t if the cat is black or white so long as it catches mice.