Part 6

Principles of Taxation
Origin
Tax comes from latin word Taxo meaning “I estimate”. This is to impose a financial change or
the levy upon a taxpayer or legal entity by the state and failure to pay is punishable by law. It may be
defined as a pecuniary burden laid upon individuals or property owners to support the government. A
tax is not a voluntary payments or donation, but an enforced contribution, exacted pursuant to
legislative authority. Another definition is any contribution imposed by the government whether
under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply, or other name.

4 Rs of Taxation
Taxation has four main purpose of effects, and these are:
1. Revenue –to raise money for the construction of roads, schools and hospitals, and on other indirect
government functions like good regulation or justice system
2. Redistribution – to transfer wealth from the richer sections of society to poorer sections.
3. Repricing – to address externalities; ex. A tobacco is taxed to discourage smoking.
4. Representation – the citizens demand accountability from their rulers as the other part of the
bargain for governance.

Taxation in the Philippines

Taxes are as old as government. During the Spanish period to support the colony, several
forms of taxes and monopolies were imposed. The firsts system is called “encomienda system”. The
Buwis ( tribute), which could be paid in cash or in kind, was initially fixed at 8 reals (1 real being 8
centavos) and later increased to 15 reales. By 1884, the tribute was replaced by the Cedula personal,
wherein colonists were required to pay for personal identification and everyone over the 18 was
obliged to pay.
Bandala System. The bandala ( from the Tagalog word mandala, a round stack of rice stalks to
be threshed) is an annual enforced sale and requisitioning of goods such as rice. Custom duties and
income tax were collected. It is one of the direct taxes that the Spaniards ruled wherein the natives
were coerced to sell their products to the government at very low prices.
Forced Labor or Polo y Servicios. The system of forced labor known as polo y servicios evolved
from the encomienda system. Polo y servicios was imposed on men from 16 to 60 years old who were
obligated to render personal services to community projects for forty days. One could be exempted
from polo by paying a certain amount known as falla. In 1884, labor was reduced to 15 days.

Principles of Taxation
1. Productivity. The chief goal of a tax system is to generate the revenue a government needs to pay
its expenses. When a taxes system produces such revenue, it satisfies the principles of productivity.
2. Equity . Most people agree that a tax system should be equitable to the taxpayers.
2 kinds of equity
a. Horizontal equity means that the taxpayers who have the same amounts of income
should be taxed at the same rate.
 b. Vertical equity implies that wealthier people should pay more taxes than poorer people.
This is sometimes called the principle of ability to pay.
3. Elasticity. A tax system should be elastic so that it can satisfy the changing financial needs of a
government. Under the elastic system, taxes help stabilize the economy. For example, tax increase
during the period of economic growth helps prevent inflation or rapid price increases. Increasing taxes
would leave less money for the consumers to spend lesser purchase to go up. Similarly, taxes decrease
during a decline in economic activities help prevent a recession.
Theories and bases of taxation
1. Lifeblood Theory. It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate.
2. Necessity Theory. The power to tax is an attribute of sovereignty emanating from necessity. It
is necessary burden to preserve the State’s sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shore from invasion, a corps of civil servants
to serve, public improvements designed for the enjoyment of the citizenry, and protection
which a government is supposed to provide.
3. Benefits-Protection Theory. Taxation is described as a symbolic relationship whereby in
exchange of the benefits and protection that the citizens get from the government, thus taxes
are paid.
Classification of taxes
1. According to subject matter
1.1. Personal, Capitalization or poll taxes- taxes of fixed amounts upon residents or person
of a certain class without regard to their property or business, ex - - community tax.
1.2. Proper taxes – taxes assessed on things or property of a certain class. Ex real state
taxes
1.3. Excise or license taxes – taxes on privilege, occupation or business not falling with the
classification of poll taxes ex . customs duties

2. According to Burden:
2.1. Direct taxes-Taxes which are demanded from person. Ex. Income tax
2.2. Indirect taxes -Taxes levied upon transactions or activities before the articles reach the
consumers to whom the burden of tax may ultimately be charged or shifted. Ex. VAT

3. According to Determination of Amount

3.1. Specific taxes. Taxes imposed per head, unit or number, or by weight or volume and
which require no assessment beyond a listing and classification of the subject or articles
to be taxed. Ex. Certain tax of BIR
3.2. Ad Valorem taxes. Taxes based upon the value of the article subject to tax. Ex. Tax on
minerals, jewelleries, gold

4. According to Purpose:
4.1. General. Taxes imposed for the general purposes of the government. Ex. Income tax
 4.2. Special and Regulatory. Taxes imposed for a particular legitimate object of government.
Ex. Educational fund tax under Local Government Code.

5. According to Scope or Authority

5.1 National. Taxes imposed by the national government. Ex. Internal Revenue taxes
5.2 Municipal or Local- Taxes imposed by local government unit. Ex. Business taxes

6. According to Gradation (tax base)

6.1. Progressive. The tax rate increases as the tax base increases.
6.2. Regressive. The tax rate decreases as the tax base increases (ex: tariff on rice
production)
6.3. Mixed. The tax rates are partly progressive and partly regressive (ex: documentary tax).
6.4. Proportionate. The tax rates are fixed on a flat tax base.

Escape from taxation

1.Tax Evasion- also known as “tax dodging”, is the use of illegal means to defeat or lessen the
payment of tax.
2. Tax Avoidance- also known as “tax minimization”, is the use of illegally permissible means to
reduce tax liability.
3. Tax Exemption- Grant of immunity to particular class, persons or corporation generally within
the same state or taxing district.

National and Local taxation

Income Tax= is a tax in a person income, emoluments, profits, arising from property, practice
of profession, conduct of trade or business or on the pertinent items or gross income specified in the
Tax Code of 1997 less deductions and personal and additional exemptions, if any authorize for such
type of income by the Tax Code or other special laws.

Based on National Internal Revenue Code of 1997

 A citizen of the Philippines is taxable on all income derived from source within or without the
Philippines.
 A non-resident citizen is taxable only on income derived from source within the Philippines.
 An individual citizens of the Philippines who is working and deriving income from abroad as an
overseas contract worker ( ex. Seaman).
 An alien individual, weather a resident or not of the Philippines, is taxable only on income
derived from source within the Philippines.
 A Domestic corporation is taxable on all income derived from source within and without the
Philippines.
 A foreign corporation, weather engage or not in trade or business in the Philippines, is taxable
only in income derived from source within the Philippines.
Gross Income Means all income derived from weather source. Gross income includes, but not
limited to the following:
 Compensation for services, in weather form paid, including but not limited to fees, salaries,
wages, commissions and similar item
  Gross income derived from the conduct of trade or business or the exercise of profession
 Gains derived from dealings in property.
 Interest
 Rents
Excluded from Gross Income
1. Life Insurance
2. Amount Received by Ensured As Return of Premium
3. Gifts, Bequests, and Devices
4. Compensation for injuries or sickness
5. Income exempt under a treaty
6. Retirement benefits, Pensions, Gratuities
7. Any amount received by an official or employee or by his heirs from the employer as an
consequence of separation of such official or employee.
8. Provisions of any existing law.
9. Payments of benefits due or to become due to any person residing in the Philippines.
10. Benefits received from or enjoyed under the Social Security System
11. Benefits receives from the GSIS under Republic Act No. 8291
12. Miscellaneous Item
12. 1. Income Derived by Foreign Government
12. 2. Income derived by the government or its political subdivisions.
12. 3. Prizes and Award
12. 4. Prizes and awards in sports competition
12. 5. 13th month pay and other benefits
12. 6. GSIS, SSS Medicare and other contributions
12. 7. Gains from the sale of bonds, debentures or other certificate of indebtedness
12. 8. Gains from redemption of shares in mutual fund

Income Tax Rates

The tax should be computed in accordance with and at the rates established in the following
schedule effective Jan 1 to Dec 31, 2022.

Bracke If Taxable Income Is. Tax Due Is

t Tax

1 Php 250,000 and below 0%

2 Above 250,000 to 400,000 20% of the excess over 250,000
3 Above 400,000 to 800,000 30,000 + 25% of the excess over 400,000
4 Above 800,000 to 2,000,000 130,000 + 30% of the excess over 800,000
5 Above 2,000,000 to 8,000,000 490,000 +32% of the excess over 2,000,000
6 Above 8,000,0000 2,410,000+35% of the excess over 8,000,000
Source: https://www.bir.gov.ph>index.php BIR Tax Table 2018

Rate on Passive Income

1. Interest Income =20%. A final tax is hereby imposed upon the amount of interest from any
currency bank deposit.
2. Royalties Income=10%. Books, as well as other literary works and musical compositions.
3. Prizes Income=10%. All prizes and winnings (except Phil Charity Sweepstakes and Lotto winnings),
derived from sources within the Phil.
4. Cash and/or Property Dividends=10%. Imposed upon the cash and/on property dividends actually
or constructively received by an individuals from a domestic corporation or from a joint stock
company, insurance or mutual fund companies.
5. Capital Gains from Sale of Shares of Stocks=5%. Imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of through the stock exchange.
6. Capital Gains from Sale of Real Property=6%. Based on the gross selling price or current fair
market value is imposed upon capital gains presumed to have been realized from the sale,
exchange, of real property, classified as capital assets.

Estate Tax
It is the tax in the form of percentage of the taxable estate that is imposed on the property
owner’s right to transfer the property to others after his or her death. The Estate tax shall be levied,
assessed, collected and paid upon the transfer of the net estate in decedent, whether resident or non-
resident of the Phil, a tax based on the value of such net estate, as computed in accordance with the
following schedule:
Over But not over The tax shall be Plus Of the excess over
P200,000 Exempt

P200, 000 500,000 0 5% P200,000

500,000 2,000,000 P15,000 8% 500,000

2,000,000 5,000,000 135,000 11% 2,000,000

5,000,000 10,000,000 465,000 15% 5,000,000

10,000,000 And over 1,215,000 20% 10,000,000

Donors or Gifts Tax

It is a tax imposed on the privilege of transmitting properties by and from living person to
another by way of donation.

Over But not over The tax shall be Plus Of the excess over

P100,000 Exempt
P100, 000 200,000 0 2% P100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
Amusement Tax
1. 18% in the case of cockpits
2. 18% in the case of cabarets, night or day clubs.
3. 10% in the case of boxing exhibitions
4. 15% in the case of professional basketball game
5. 30% in the case of Jai-Alai and racetracks of their gross receipts.

Taxing and Revenue –Raising Power of Provinces

1. Tax on Transfer of Real Property Ownership
2. Tax on Business of Printing and Publication
3. Franchise Tax
4. Tax on Sand, Gravel and Other Quarry Resources
5. Professional Tax
6. Amusement Tax
7. Annual fix tax for every delivery truck or van of manufacturer or producers of certain products

Taxing and Revenue-Raising Power of Cities and Municipalities

1. Tax on Business
2. Fees and Charges
3. Fees and Sealing and Licensing of Weights and Measures
4. Fishery Rentals, Fees and Charges

Taxing and Revenue-Raising Power of Barangays

1. Taxes on stores or retailers
2. Service fees or charges
3. Other fees and charges
3.1 Commercial breeding of fighting cocks, cockfights and cockpits
3.2 Places of recreation which charge admission fees
3.3 Billboards, signboards, neon signs, and outdoor adventures.
Agent Function
Household  Supply factors (land, labor, capital, entrepreneurship) to business Part 6
 Purchase consumer goods and services
 Save
 Pay taxes
Businesses  Use the factors supplied by the households to produce the nation’s
output
 Purchase investment goods (I)
Government  Purchase government goods and services
 Collect taxes
Foreigners  Purchase exports
 Supply inports
Macroeconomics

The Main Economic Agents in the Macroeconomy

This four main agents has different source of demand for goods and services.

National Income and Product Account (NIPA)

Economists use gross national product (GNP) to measure a country's economic activity. As to
the basic concept of NIPA, there is 1. Product side: where all goods and services purchased for final
demand (except inventory investment); and 2. Income side: where all income earned by various
factors of production.

National Income Accounting (NIA)

 Economists use national income accounting to determine how well a country is performing
economically. We use two methods to calculate GNP: the expenditure approach adds up all of the
purchases citizens have been made during the past year, the income approach adds up all of the
earnings citizens have obtained during the past year. A country, just like a firm, needs to know how
well it is doing economically. National income accounting provides the statistics that indicate whether
the economy is doing well or encountering difficulties.

National Income is the total income earned by resource owners, including wages, rents, interest, and
profits.

Gross National Product (GNP)

Gross national product (GNP) is the sum total of all of the final goods and services a country
has produced during the past year. Economists can calculate GNP with an expenditure or income
approach. GNP excludes intermediate goods, second-hand sales, and financial transactions. Since GNP
is an amount of money, economists have to adjust the final dollar figure, according to changes in the
value of money. GNP measures a country's economic activity by adding up all of the different types of
production: such as the cars, computers, and other commodities it produces. We use a currency or
dollar amount to calculate and sum up all of the costs of these goods and services so we are able to
easily compare and contrast our progress.
Gross Domestic Product (GDP)
The gross domestic product (GDP) is the sum of all of the the final goods and services residents
of a country produce domestically during a given year. According to many economists, limiting our
definition to the production of domestic residents (excluding those who live abroad) offers a more
useful picture of the level of economic activity within a country.
Note that gross national product (GNP) includes the income citizens receive from foreign
investments (including any income they earn while living abroad).
GNP does not include income earned by foreign nationals who live within the borders of the
country. So, for example, GNP will include the income Filipino citizens earn while they live in Germany,
but it does not include the income German citizens earn while living in the Philippines.
GDP only includes production within the domestic, geographical confines of a country, for all of its
domestic residents, whether they are citizens or not.
The GDP for a country that has many foreign firms operating within its borders is larger than its
gross national product. On the other hand, the GDP for countries that have a lot of companies that
operate in foreign countries, is smaller than the gross national product (the net income from
foreigners is negative).

Components of GDP
Consumption
Durables
Non-durables
Services
Investment
Capital Spending (Plant and Equipment)
Residential Construction
Inventory Investment
Net Exports
 Exports
Imports
Government Expenditures
National Defense
Consumer spending
Durable Goods-last 3 years or more, mainly motor vehicles and appliances
Nondurables – used up quickly, mainly food, gasoline, household supplies.
Services- mainly housing and utilities, transportation, medical and recreational

Items excluded from GDP and NI

All income from transfers of assets
All capital gains and losses
Barter of goods and services
Actual mortgage payments
The illegal ground economy. Illegal and unreported transactions.

UNEMPLOYMENT AND INFLATION

Employment: A situation wherein a member of the society is presently involved in any kind of
legal work receiving benefits from that gainful work. Produce products and services as result of
productive work. It could be regular employee (Considered the most secured of all the types of
employment) or probationary employment (Shall not exceed six(6) months from the date the
employee started working, unless it is covered by an apprenticeship agreement stipulating a
longer period).

Labor market: Labor market refers to the availability of work for prospective member of society
who wants to become parts in labor force for production purposes of goods and services.

Underemployment: People hold jobs more appropriate for someone w/ fewer skills, includes
people who hold part time jobs because they cannot find full time jobs.

Unemployment: Situation which not enough jobs are available for everyone who wants to
works.

Unemployment rate is the percentage of people in the economy who are willing and able to
work but who are not working. The unemployed include all 15 years old and over as of their last
birthday and are reported as: without work, currently available for work, and seeking work. The
unemployment rate is calculated by dividing the number of unemployed individuals by the
number of people in the labor force and multiplying by 100.
number unemployed
unemployment rate = 100
labor force
Causes of Unemployment
1. Overpopulation. Limited jobs available in the labor market. High population increases
competition for limited jobs available in the labor market.
2. Poor economic policies. Bad and weak policies, programs, and laws governing the economic
activity of the country.
3. Weak economy. Is a situation of less economic activity that reduces production of goods and
services and increase of prices in the products and services in the country. It can be attributed
to : bad leadership and management, lack of funds, limited resources, and poor technology.
4. Job mismatch. It can also trigger unemployment and underemployment for professionals and
competent workers of society. This is a result of the deteriorating quality of education in the
Philippines.

Types of Unemployment
1. Frictional Unemployment. Is a temporary absence of job that is dictated by the job seeker’s
behaviour, environment, seasonal or contractual, lack of information on available job;
sometimes called transitional or search unemployment.
2. Structural Unemployment. Is a result of job mismatch. In example: Nursing graduates
oftentimes apply work as call center agent or other jobs not related to their field of expertise
while waiting for the suitable job.
3. Cyclical Unemployment. Is dictated by the economic condition of the country. Poor economy
means lack of job and there is high competition among applicants due to limited job
opportunity for numerous job seekers.

EFFECT OF UNEMPLOYMENT
On people:
a. Malnutrition: no job means no money, no money means no food that leads to
malnutrition
b. Crime and violence: increase the rate of crime
c. Tension at home: quarrel and arguments at home which may lead to tension and increase
the number of divorce
d. Suicide case: increase in the rate of suicide attempts and actual suicide as well
e. Social outing: bring a decrease in social outings and interaction with other people
including friends
f. Standard of living: people suffer a loss of income and either have to survive on private
savings or on benefits
g. Loss of skills: as they will stop on working and will start losing their skills and ability to
work
h. Underemployment: they got job that are not related to their courses they finished

On Government:
a. Political issues: loss of trusts in administration and the government which may lead to
political instability
b. Higher welfare costs: means that fewer people will be working and more people will be
claiming benefits.
c. Fewer tax revenues: there will be fewer people earning enough income to pay tax. As a
result, the government will receive less tax revenue.
On Firms:
a. Lower wages costs: more people are willing to get a job at a slightly lower wage. This will
have a positive effects on firms as their variable costs will fall.
b. Less demand for goods and services: more people won’t not spent more on good and
services. As a result, firm will experience lower sales and fall in profits.
c. Increase the demand for inferior goods: when unemployment increase in an economy
more people start buying inferior goods. As a result, sellers of inferior goods will see an
increase in the sales revenue and increase profits
d. Higher training costs: they spent more resources on training new employees because they
have been out of work for so long. Firms uses their time and resources as a result most
firms will see an increase in employment costs

INFLATION
It is an economic condition when there is a continuing increase in prices of all the goods and services in
the country and reduces the purchasing power of the money. Inflation can be mathematically expressed in the
following formula: Where: CPI stands for Consumer Price
Index

What is CPI? This is the patterns of behavior of the consumers, particularly those living in urban areas on how
they spend their money in buying commodities and services in a specific period (by month or year).
Causes of inflation
1. A frequent cause is deficit spending by government
2. Shortage in important goods
3. Monopolies
4. Trade restriction between countries

Types of inflation
1. Demand-Pull Inflation: “ too much money chasing too few goods and services”; increase in the price
level due to excessive spending
2. Cost-Push Inflation: increase in the price level caused by the sharp rise of the cost of key resources in
the production of goods and services.

Effect of inflation
a. DEBTORS AND CREDITORS: debtors gain and creditors lose, borrowers benefits during a price increase
particularly if interest rate of loans are lower than the inflation rate.
b. SALARIED PERSONS: they are lose when there is inflation, because their salary are in fixed.
c. WAGE EARNERS: wage earners may gain or lose depends upon the speed and how many work have done
d. BUSINESSMEN: when prices are rising, the value of their inventories (goods in stock) rise. Businessmen
increase their profits
e. REDUCTION ON SAVINGS: when prices rise rapidly, the propensity to save a declines because more
money is needed to buy goods and services than before.
f. AGRICULTURISTS: landlords lose during inflation because they get fixed rent. But peasant proprietors
who own and cultivate their farms gain. Prices of farm product increase more than the cost of production.
g. Loss of employment and no job opportunities: inflation leads to retrenchment and no job opportunities