TAX THEORY AND PRINCIPLES

A. Definition and Essential Characteristics

TAX is a compulsory contribution from the person to the government to defray the expenses incurred in
the common interest of all without reference to special benefits conferred upon taxpayer.

TAXATION is an important tool which the government employs to keep overall money expenditure for
goods and services from advancing or falling too rapidly.

It is claimed that the most important aspects of taxation is not the amount of revenue which it produces,
but its effect on the level of total money expenditure.

Others express more concern on whether it is really promoting equity in the distribution of income and
efficiency in the allocation of resources.

Both the equity in the distribution of income and efficiency in the allocation of resources are equally
important for developing countries like Philippines where income disparity is very much a problem and
government resources are scarce.

FEATURES OF TAX cited in De Leons THE FUNDAMENTAL OF TAXATION

1. It is an enforced contribution;
2. It is generally payable in money;
3. It is proportionate in character;
4. It is levied on persons, properties or transactions;
5. It is levied by the state which has jurisdiction over the person, property or transaction;
6. It is levied by the lawmaking body of the state; and
7. It is levied for public purpose or purposes.

CLASSIFICATION OF TAXES from ECONOMICS point of view

1. Those imposed in the product or factor markets;
2. Those imposed on the sellers or the buyers side of the market;
3. Those imposed on households or firms; and
4. Those that enter on the sources or uses side of the taxpayers account

B. Bases and Purposes

v The existence of government (and ultimately that of the state) is a necessity since the state is
considered the ultimate socioeconomic and political human organization.

The state provides the people an apparatus or machinery where they could cooperate and consolidate
their resources for the satisfaction of their common needs.

The state supplies an organizational structure for the provision of social (public) goods, like national
defense, parks, fire stations and the construction of roads, etc. since no private individual has the
incentive to provide them on his own.

The internal and external security provided by the state enables the people to concentrate their
energies more on economically productive activities and worry less in protecting their properties.

It is believed that without the state, civilization will be retarded and chaos will result, thus leaving the
people at the primitive survival of the strongest level.

v To justify taxes is to justify the existence of the state itself.

v Taxes are the lifeblood of the government. (Supreme Court ruling)

The state needs resources for its operations specifically for the support of its government.(one
justifications for taxation)
 TAXATION FOR DEVELOPMENT

Taxation had been used as an instrument of directing the economy of the state to prosperity.
Taxation has been employed to effect equitable distribution of wealth (progressivity of taxation) and to
stabilize the economy (including savings or investment or employment opportunities).
To developing countries, taxation assumes a much more important role to hasten the economic
development of the country. Tax policies and systems are formulated and implemented to support the
development thrusts of these countries.
Taxation for development is, therefore, aligned to the strategies for development which include the
generation of capital for economic growth, the efficient allocation of resources for balanced
socioeconomic growth, and the preservation of the economic independence and self-sufficiency of the
country.

Modern theories and principles of taxation revolve around ADAM SMITHS principles of an ideal tax
system: EQUITY, CERTAINTY, CONVENIENCE, and ECONOMY.

1. Equity prescribes that taxes must be based on the taxpayers ability to pay, as measured by his
size of income.
The principle of equitable taxation is especially important for societies where income and wealth
are unevenly distributed.
Its significance is embodied in the policy of states to advance social equity by redistributing
income and wealth through tax measures.
In developing countries, where the disparities of opportunities are common, this is imperative to
achieve the equal allotment of the benefits and efforts of undertaking national development.
The tax systems and strategies used to achieve such are exemplified by the formulation of a
progressive and uniform system of taxation and the efforts to evolve a tax structure characterized
by increasing reliance on direct taxes.
EQUITY therefore is achieved when those who have more are taxed more, and the same tax rate
applies to subjects in similar situations.
2. Certainty this specifies that taxpayers should know which taxes are imposed, the amount to
pay, and the manner of payment.
This is necessary in order to avoid overpayment or underpayment of taxes, evasions, or
discouragement on the part of the taxpayer to pay.

3. Convenience takes into account the convenience of the place, time, and the manner of
payment.
This principle demands that the government must locate its collection offices at places where they
are easily and conveniently accessible to taxpaying public.
Procedures of payment must also be simple and understandable.
Practice of automatically withholding taxes on income
Practice of authorizing banks to collect tax payments
4. Economy tax administration must not involve too much expense on the government.

If a tax is to be economical, the cost of its collection must be minimal, otherwise the cost of
collecting tax will be greater than the revenue realized.

Economy in taxation also means that taxation should not exert negative influences on productive
undertakings. Therefore, it should not be too high so as to discourage investment nor too low to
permit diseconomies.

C. Classification of Taxes

1. As to Purpose.
A tax may be fiscal, designed solely for raising revenues.
It may also be regulatory, intended to achieve social or economic goals regardless of
whether revenue is actually raised or not.
 2. As to Incidence
Has reference to the point at which the burden of the tax is actually borne
This is concerned with who bears the burden of the tax
Under this category, tax may be direct or indirect
DIRECT TAX when the person on whom the tax is imposed absorbs the burden
INDIRECT TAX when the charge is paid by a person other than the one on whom it is
legally imposed
Levied upon commodities as in VAT and is practically paid not as a tax but as part of the
price of the commodity by the consumers to whom the producer passes on the burden.
3. As to Rate
A tax may be proportional, progressive or regressive
PROPORTIONAL when it is based on a fixed percentage, regardless of the amount of the
income or value of property, a single rate being applied to different objects with different
values.
PROGRESSIVE when the tax rate increases as the tax base increases
REGRESSIVE when the effective rate decreases as the tax base increases
4. As to Authority
A tax may be imposed by the national government as in the case of income tax or by the local
governments as in the case of the real estate tax.
5. As to Object
A tax may be charged on personal occupation engaged in by the taxpayers.
Usually, a fixed amount is imposed upon all persons of a certain class within the jurisdiction of
the taxing power without regard for the value of their property or the occupation.
Examples:
o Community tax
o Professional tax
o Excise tax imposed directly by the legislature w/o assessment, measured by the amount of
business done or the extent to which the conferred privileges have been enjoyed or exercised by
the taxpayer, irrespective of the nature or value of the taxpayers assets.
6. As to Scope
Taxes under this classification may be general or specific
GENERAL TAXES are those imposed throughout the state for the purpose of financing general
public benefits.
SPECIAL TAXES are those levied for a special or local purpose, for the benefit of only a part of
the body politic.
Examples:
o Special Fund Tax
o Flood Control Tax
o Anti-TB Stamp Tax
7. As to the Amount Paid
An example of this is the specific tax which is paid in fixed amount as appraised by the head or
number, or by some standard of weight or measurement.
No assessment is required other than a listing or classification of the subject to be taxed.
 THE PHILIPPINE TAX SYSTEM
A. THE CONSTITUTIONAL MANDATE
The Constitution expressly provides that the rule of taxation shall be uniform and equitable and
mandates Congress to evolve a progressive system of taxation.
B. MAJOR PHILIPPINE TAXES

1. INCOME TAX
A tax on all incomes earned by individuals and corporations
Salaries
Wages
Honoraria and commissions
Winnings in gambling and lotteries
Dividends
Bank interests
Profits from business
Among taxes, income tax best approximate the ability-to-pay principle or the progressivity in
taxation, because the income of a person or a corporation is the most apparent indication of his ability
to pay

a. Income Tax of Individuals

Levying income tax on a person

CATEGORIES:
Compensation Income refers to earnings from employment, whether regular or casual, and
regardless of whether the employer is the government or a private entity.
Business Income refers to profits from business operations.
Passive Income refer to royalties, prizes worth over P3,000, other kinds of winnings and interests of
bank deposits, inter alia.

b. Corporate Income Tax

o Corporation for purposes of income taxation also refer to partnership, joint accounts, associations and
insurance companies.
EXEMPT FROM INCOME TAXES

1. Labor, agricultural or horticultural organization not organized for profit;

2. Mutual savings bank not having capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;
3. Fraternal beneficiary society, order or association, operating under the lodge system or for the
exclusive benefit of the members of a fraternity itself operating under a lodge system and
providing for the payment of life, sickness, accident, or other benefits to the members of such
society, order or association, or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. Corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of the net income of
which inures to the benefit of any private stockholder or individual;
6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of
the net income of which inures to the benefit of any private stockholder or individual;
7. Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;
8. Club organized and operated exclusively for pleasure, for recreation, and other non-profitable
purposes, no part of the net income of which inures to the benefit of any stockholder or member;
 9. Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization of a purely local character, the
income of which consists solely of assessments, dues, and fees collected from members for the
sole purpose of meeting its expenses;
10. Farmers, fruit growers, or like associations organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of the
sales, less the necessary selling expenses, on the basis of the quantity of produce finished by
them;
11. Corporation or association organized for the exclusive purpose of holding title to property,
collecting income therefrom, and turning over the extra amount thereof less expenses, to an
organization which is itself exempt from the tax imposed by this Title;
12. Government educational institution.

2. TRANSFER TAXES
Gratuitous transfer of properties is also taxed. It is called estate tax if the property passes to
another by inheritance and gift tax if transferred through donation.
3. VALUE ADDED TAX
This is a tax on the privilege of selling merchandise and of importation.
4. CUSTOM DUTIES
Customs duties are levied on the exportation and importation of goods. All imported articles,
when imported from any foreign country into the Philippines are subject to duty upon each
importation, even through previously exported from the Philippines.
5. LOCAL TAXES
Under the Local Government Code pursuant to the mandate of the Constitution, local government
units are empowered to levy a variety of taxes and other fees.
6. REAL PROPERTY TAXES
Is assessed on real properties located within the territory of a local government unit in proportion
to its value or in accordance with some other reasonable method of apportionment. Real
properties include lands and buildings.
7. EXEMPTION TAXATION
Tax exemption is the grant of immunity to particular persons or corporations from tax. There are
two grounds for grant of exemptions: contract and reason of public policy.

CITIZENS PARTICIPATION IN TAX ANALYSIS, REFORMS AND COLLECTION

Citizen participation in the budget process leads to a responsive budget allocation, enhances good
governance, and improves the delivery of public services.
In the past, despite a vibrant civil society sector in the Philippines, citizen engagement in the budget
process has been limited due to lack of formal consultation mechanisms as well as the overall socio-
political environment that constricted the democratic space.
Since 2010, the Philippines now provides adequate opportunities for citizens to participate in the budget
processranking 5th in the world in the OBS pillar on public engagementbecause of the following
reforms:
- Developed the Principles of Constructive Engagement with CSOs to jumpstart the process of
creating opportunities for participation in the budget process
- Introduced the Budget Partnership Agreements (BPAs) between agencies and CSOs, a formal
mechanism for the latter in budget formulation and execution
- Implemented the Bottom-up Budgeting (BuB) to empower citizens in identifying and
implementing poverty reduction projects with their local government units
- COA introduced the Citizens Participatory Audit (CPA), a mechanism by which CSOs worked
with COA in conducting performance audits in several government projects
Moving forward, the government should further deepen and strengthen citizen participation the
budget by considering the following:
- Institutionalize and expand mechanisms like BPAs, BuB, and CPA that widened the spaces for
citizen participation in the budget process
- Improve the capacity of agencies to respond to the demands of citizens, e.g., providing
information and feedback, and in implementing programs and projects
- Set up participatory mechanisms in the legislation phase of the budget cycle