CONCEPTS OF TAXATIONCONCEPTS OF TAXATION

ECONOMICS: its concepts and ECONOMICS: its concepts and principlesprinciplesBy: By: DOMINIC DEUSDEDITHDOMINIC DEUSDEDITH

Definition of TermsDefinition of Terms

TAXATIONTAXATION is defined in many ways. is defined in many ways.

Commonly heard definitions include:Commonly heard definitions include:

It is the It is the processprocess by which the sovereign, through by which the sovereign, through its law making body, races revenues use to defray its law making body, races revenues use to defray expenses of government.expenses of government.It is a means of government in It is a means of government in increasing its increasing its revenuerevenue under the authority of the law, purposely under the authority of the law, purposely used to promote welfare and protection of its used to promote welfare and protection of its citizenry.citizenry.It is the It is the collectioncollection of the share of individual and of the share of individual and organizational income by a government under the organizational income by a government under the authority of the law. authority of the law.

Concept of TaxationConcept of Taxation

TaxationTaxation is the inherent power of the is the inherent power of the state to impose and demand contribution state to impose and demand contribution upon persons, properties, or rights for the upon persons, properties, or rights for the purpose of generating revenues for public purpose of generating revenues for public purposes.purposes.

The power of taxation upon necessity and The power of taxation upon necessity and is inherent in every government or is inherent in every government or sovereignty.sovereignty.

Principles and Theories of Principles and Theories of TaxationTaxation

The Benefit Principle. The Benefit Principle. This principle holds the This principle holds the individuals should be taxed in proportion to the individuals should be taxed in proportion to the benefits they receive from the governments and that benefits they receive from the governments and that taxes should be paid by those people who receive the taxes should be paid by those people who receive the direct benefit of the government programs and direct benefit of the government programs and projects out of the taxes paid.projects out of the taxes paid.

The Ability-to-Pay Principle.The Ability-to-Pay Principle. This principle holds This principle holds that taxes should relate with the people’s income or that taxes should relate with the people’s income or the ability to pay, that is, people with greater income the ability to pay, that is, people with greater income or wealth and can afford to pay more taxes should be or wealth and can afford to pay more taxes should be taxed at a higher rate than people with less wealth. taxed at a higher rate than people with less wealth. Ex. Individual income tax.Ex. Individual income tax.

The Equal-Distribution Principle. The Equal-Distribution Principle. This principle This principle that income, wealth, and transaction should be taxed that income, wealth, and transaction should be taxed at a fixed percentage; that is, people who earn more at a fixed percentage; that is, people who earn more and buy more should pay more taxes, but will not pay and buy more should pay more taxes, but will not pay a higher rate of taxes.a higher rate of taxes.

Structures of a Tax SystemStructures of a Tax System A tax is proportional.A tax is proportional. Meaning the government takes an Meaning the government takes an

amount of money from a person which is indirect proportion amount of money from a person which is indirect proportion to his income. Ex. Ben salary is 10,000pesos and the to his income. Ex. Ben salary is 10,000pesos and the government is deducting 10% of his salary for tax. After a government is deducting 10% of his salary for tax. After a year his income increases to 15,000pesos and the year his income increases to 15,000pesos and the governments now deducts 12% of his salary for tax. The said governments now deducts 12% of his salary for tax. The said tax is proportional.tax is proportional.

A tax is regressive.A tax is regressive. Meaning that the governments takes a Meaning that the governments takes a larger percentage of a persons income per tax, while he is larger percentage of a persons income per tax, while he is receiving a lower income. Ex. Ben’s salary 10,000pesos and receiving a lower income. Ex. Ben’s salary 10,000pesos and government is asking him to pay 15% of his salary for tax government is asking him to pay 15% of his salary for tax which is contrary to our given example in number 1. which is contrary to our given example in number 1.

A tax is progressive.A tax is progressive. Meaning that the government takes a Meaning that the government takes a lager percentage of his salary for tax due to his high salary. lager percentage of his salary for tax due to his high salary. Ex. Ben has a monthly income of 30,000pesos and the Ex. Ben has a monthly income of 30,000pesos and the governments deducted 20% of his salary for tax. The tax governments deducted 20% of his salary for tax. The tax amount is proportionately equal to someone’s status in the amount is proportionately equal to someone’s status in the society. A rich man should pay more than a poor man.society. A rich man should pay more than a poor man.

Significance of TaxationSignificance of Taxation

Primary purpose:Primary purpose: generates funds or revenues use generates funds or revenues use to defray expenses incurred by the government in to defray expenses incurred by the government in promoting the general welfare of its citizenry.promoting the general welfare of its citizenry.

Other purposes:Other purposes: to equitably contribute to the wealth of the to equitably contribute to the wealth of the

nationnation to protect new industriesto protect new industries to protect local producersto protect local producers

Characteristics of TaxCharacteristics of Tax It is enforced contribution.It is enforced contribution. Its payment is not Its payment is not

voluntary nature, and the imposition is not voluntary nature, and the imposition is not dependent upon the will of the person taxed.dependent upon the will of the person taxed.

It is generally payable in cash.It is generally payable in cash. This means that This means that payment by checks, promissory notes, or in kind is payment by checks, promissory notes, or in kind is not accepted.not accepted.

It is proportionate in character.It is proportionate in character. Payment of taxes Payment of taxes should be base on the ability to pay principle; the should be base on the ability to pay principle; the higher income of the tax payer the bigger amount of higher income of the tax payer the bigger amount of the tax paid.the tax paid.

It is levied (It is levied (to impose; collectto impose; collect) on person or ) on person or property.property. There are taxes that are imposed or levied There are taxes that are imposed or levied on acts, rights or privileges. Ex. Documentary tax.on acts, rights or privileges. Ex. Documentary tax.

It is levied by the state which has jurisdiction over It is levied by the state which has jurisdiction over the person or property.the person or property. As a general rule, only As a general rule, only persons, properties, acts, right or transaction with persons, properties, acts, right or transaction with in the jurisdiction of the taxing state are subject in the jurisdiction of the taxing state are subject for taxation.for taxation.

It is levied by the law making body of the state.It is levied by the law making body of the state. This means that a prior law must be enacted first This means that a prior law must be enacted first by the congress before assessment and collection by the congress before assessment and collection may be implemented of the 1987 constitution.may be implemented of the 1987 constitution.

It is levied for public purposes.It is levied for public purposes. Taxes or imposed Taxes or imposed to support the government for implementation of to support the government for implementation of projects and programs. projects and programs.

Basic Principles of a Sound Tax Basic Principles of a Sound Tax SystemSystem

Fiscal adequacy.Fiscal adequacy. Means that the sources of revenue taken as a Means that the sources of revenue taken as a whole should be sufficient to meet the expanding expenditures of whole should be sufficient to meet the expanding expenditures of the government regardless of business, export taxes, trade the government regardless of business, export taxes, trade balances, and problems of economic adjustment. Revenues should balances, and problems of economic adjustment. Revenues should be capable expanding or contracting annually in response to be capable expanding or contracting annually in response to variations of public expenditures.variations of public expenditures.

Equality or Theoretical Justice.Equality or Theoretical Justice. Means the taxes levied must be Means the taxes levied must be base upon the ability of the citizen to pay. base upon the ability of the citizen to pay.

Administrative Feasibility.Administrative Feasibility. This principle connotes that in a This principle connotes that in a successful tax system, such tax should be clear and plain to successful tax system, such tax should be clear and plain to taxpayers, capable of enforcement by an adequate and well-trained taxpayers, capable of enforcement by an adequate and well-trained staff of public office, convenient as to the time and manner staff of public office, convenient as to the time and manner payment, and not unduly burdensome upon on discouraging to payment, and not unduly burdensome upon on discouraging to business activity.business activity.

Consistency or Compatibility with Economic Goals.Consistency or Compatibility with Economic Goals. This refer This refer to the tax laws that should be consistent with economic goals or to the tax laws that should be consistent with economic goals or programs of the government. This are the basic services intended programs of the government. This are the basic services intended for the masses. for the masses.

Classification of TaxesClassification of Taxes

1.1. As to subject matterAs to subject matter Personal, Poll or Capitation Tax (ex. Residence Personal, Poll or Capitation Tax (ex. Residence

Tax)Tax) Property Tax. (ex. Real State Tax)Property Tax. (ex. Real State Tax) Excise Tax (ex. RVAT)Excise Tax (ex. RVAT)

2.2. As to who bears the burdenAs to who bears the burden Direct Tax (ex. Income Tax)Direct Tax (ex. Income Tax) Indirect Tax (ex. Buying of goods and services Indirect Tax (ex. Buying of goods and services

(RVAT) ) (RVAT) )

3.3. As to determination of accountAs to determination of account Specific Tax (ex. Taxes on wines)Specific Tax (ex. Taxes on wines) Ad Valorem Tax (ex. Tax according to value such Ad Valorem Tax (ex. Tax according to value such

as Real Estate Tax.as Real Estate Tax.

4.4. As to purpose As to purpose General Tax (ex. Almost All Taxes)General Tax (ex. Almost All Taxes) Special Tax Special Tax

5.5. As to scopeAs to scope National Tax (ex. National Revenue Taxes)National Tax (ex. National Revenue Taxes) Local Tax Local Tax

Distinction of TaxDistinction of TaxTax distinguished from TollTax distinguished from Toll

- A tax is demand of sovereignty, while toll is A tax is demand of sovereignty, while toll is demand for proprietorship.demand for proprietorship.

- A tax is paid for the use of the government’s A tax is paid for the use of the government’s property, while a toll is paid for the use of property, while a toll is paid for the use of another’s property.another’s property.

- A tax may be imposed by the government only, A tax may be imposed by the government only, while a toll is enforced by the government or a while a toll is enforced by the government or a private individual or entity.private individual or entity.

Tax distinguished from PenaltyTax distinguished from Penalty- A tax is intended to raise revenue, while penalty is A tax is intended to raise revenue, while penalty is

designed to regulate conduct.designed to regulate conduct.- A tax may be imposed by the government only A tax may be imposed by the government only

while a penalty may be imposed by the while a penalty may be imposed by the government or a private individual.government or a private individual.

Tax distinguished from DebtTax distinguished from Debt- A tax is base on law, while a debt is based on A tax is base on law, while a debt is based on

contract.contract.- A tax may not be assignable, while a debt is A tax may not be assignable, while a debt is

assignable.assignable.- A tax is generally payable in cash, while debt is A tax is generally payable in cash, while debt is

payable in cash or in kind.payable in cash or in kind.- A person may be imprisoned for a non-payment of A person may be imprisoned for a non-payment of

taxes, but any person may not be imprisoned for non-taxes, but any person may not be imprisoned for non-payment of debt.payment of debt.

Tax distinguished from other TermsTax distinguished from other Terms- Revenue. This refers funds or income derived by the Revenue. This refers funds or income derived by the

government whether from tax or any other source in government whether from tax or any other source in another sense.another sense.

- Internal Revenue. It refers to taxes imposed by the Internal Revenue. It refers to taxes imposed by the legislature other than duties on imports and exports.legislature other than duties on imports and exports.

- Customs Duties. These are taxes imposed on goods Customs Duties. These are taxes imposed on goods exported into a country.exported into a country.

Entities Exempted from TaxationEntities Exempted from Taxation

Religious InstitutionsReligious Institutions Charitable InstitutionsCharitable Institutions Non-Profit, Non-Stock Educational InstitutionsNon-Profit, Non-Stock Educational Institutions Non-profit CemeteriesNon-profit Cemeteries Government InstitutionsGovernment Institutions Foreign DiplomatsForeign Diplomats

Situs of TaxationSitus of Taxation

Situs Situs is a latin term which means is a latin term which means “situation”, “location”, or “place.” In “situation”, “location”, or “place.” In short, its literal meaning refers to a place short, its literal meaning refers to a place taxation. In real property, the rules is tax taxation. In real property, the rules is tax is imposed to a place or state where the is imposed to a place or state where the property is located and subject to be tax property is located and subject to be tax has a jurisdiction over the said property.has a jurisdiction over the said property.

Double TaxationDouble Taxation

Direct DuplicateDirect Duplicate

ElementsElements:: Taxing twiceTaxing twice By the same taxing By the same taxing

authorityauthority Within the same Within the same

taxing jurisdictiontaxing jurisdiction For the same purposeFor the same purpose In the same taxable In the same taxable

periodperiod Involving the same Involving the same

purposepurpose

Indirect duplicateIndirect duplicate

Indirect duplicate Indirect duplicate taxation, on the other taxation, on the other hand, occurs when hand, occurs when taxes on the property taxes on the property are not imposed by the are not imposed by the same taxing authority. same taxing authority. The local and national The local and national governments imposed governments imposed taxes on the same taxes on the same property during one property during one taxable period. This taxable period. This kind of imposition is kind of imposition is legal.legal.

Forms of Escape from TaxationForms of Escape from Taxation

6 forms of escape from taxation6 forms of escape from taxation1.1. Shifting.Shifting. It is one way of passing the It is one way of passing the

burden of tax from one person to another. burden of tax from one person to another. Ex. Taxes paid by the manufacturer may be Ex. Taxes paid by the manufacturer may be shifted to the consumer by adding the shifted to the consumer by adding the amount of the tax paid to price of the amount of the tax paid to price of the product.product.

Kinds of ShiftingKinds of Shifting Forward shiftingForward shifting occurs when the burden of the tax is occurs when the burden of the tax is

transferred from a factor of the production to the transferred from a factor of the production to the factor of distribution.factor of distribution.

Backward shiftingBackward shifting occurs when the burden of tax is occurs when the burden of tax is transferred from the consumer to the producer or transferred from the consumer to the producer or manufacturer.manufacturer.

Onward shiftingOnward shifting occurs when tax is shifted to two or occurs when tax is shifted to two or more times either forward or backward.more times either forward or backward.

2.2. Capitalization.Capitalization. This refers to the reduction in the This refers to the reduction in the price of the tax object to the capitalized value of price of the tax object to the capitalized value of future taxes which the purchaser expects to be future taxes which the purchaser expects to be called upon to pay. called upon to pay. Ex:Ex: A reduction made by the A reduction made by the seller on the price of the real estate, in seller on the price of the real estate, in anticipation of the future tax to be shouldered by anticipation of the future tax to be shouldered by the future buyer.the future buyer.

3.3. TransformationTransformation occurs when the manufacturer or occurs when the manufacturer or producer upon whom the tax has been imposed producer upon whom the tax has been imposed pays the tax and endeavor to “recoup” (pays the tax and endeavor to “recoup” (make up make up forfor) himself by improving his process of production) himself by improving his process of production

4.4. Tax EvasionTax Evasion is the practice by the taxpayer is the practice by the taxpayer through through illegal or fraudulentillegal or fraudulent means to defeat or means to defeat or lessen the amount for tax. This is also know as lessen the amount for tax. This is also know as “tax dodging.”“tax dodging.”

5.5. Tax AvoidanceTax Avoidance is the exploitation by the is the exploitation by the taxpayer of legally permissible methods in taxpayer of legally permissible methods in order to avoid or reduce tax liability. This is order to avoid or reduce tax liability. This is also known as “tax minimization.”also known as “tax minimization.”

6.6. Tax ExemptionTax Exemption is the grant of immunity or is the grant of immunity or freedom from a financial charge or obligation freedom from a financial charge or obligation or burden to which others are subjected.or burden to which others are subjected.

Grounds for tax exemption:Grounds for tax exemption:

Contract, wherein the government is the Contract, wherein the government is the contracting party.contracting party.

Public policyPublic policy

Reciprocity Reciprocity

T H E E N DT H E E N D

Prepared by:Prepared by:

DOMINIC DEUSDEDITH, BITDOMINIC DEUSDEDITH, BIT