PRINCIPLES OF A SOUND TAX SYSTEM - 123 PJP 19 (2019)
The principles of a sound tax system are fiscal adequacy, administrative feasibility, and theoretical justice.[1]
Fiscal adequacy means the sources of revenue must be sufficient to meet government expenditures and other public needs. It cannot be too much that it overburdens the people, and it cannot be too little that the operations of the government would be jeopardized.
Administrative feasibility means tax laws and regulations must be capable of being effectively enforced with the least inconvenience to the taxpayer.[2] This is the problem as the Congress of the Philippines appears to be uninterested in passing bills that will adopt modern measures such as emails and reverse tax assessments that will increase the people’s responsiveness to the duty to pay taxes.
Theoretical justice means that a sound tax system must be based on the taxpayers’ ability to pay.[3] This principle is always mentioned alongside with the cliché that one must not kill the hen that lays the golden egg.
Notice that there is an interplay among the above-mentioned three principles of a sound tax system. If the assessment and collection of taxes are burdensome, taxpayers are likely to be discouraged from paying their just share in the nation’s lifeblood. This, in turn, results in problems anent fiscal adequacy. A budget deficit, on the other hand, may prompt the government to overreact, thereby resulting in laws that will increase the rates of taxes. Consequently, taxes become more of a burden because they impose more than what people can pay, thereby discouraging people from paying taxes, and so on, and so on.
Anent fiscal adequacy, it is said that sources of tax revenue should coincide with, and approximate the needs of, government expenditures. The revenue should be elastic or capable of expanding or contracting annually in response to variations in public expenditure.
Ideally, taxes collected should be enough for the operations of the government. Government funds should not be lower than what is needed. However, it should also not be more than that because, if so, the public would be overburdened with tax.
Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.[4][5] It simply means that sources of revenues must be adequate to meet government expenditures and their variations. The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe.[6]
More on administrative feasibility, tax laws should be capable of convenient, just, and effective administration. Each tax should be capable of uniform enforcement by government officials, convenient as to the time, place, and manner of payment, and not unduly burdensome upon, or discouraging to, business activity.
Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid, except to the extent that specific constitutional or statutory limitations are impaired.[7] Thus, for example, even if the imposition of value-added tax (VAT) on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the 1987 Constitution.[8]
Finally, in the matter of theoretical justice or equality, the tax burden should be in proportion to the taxpayer’s ability to pay. This is the so-called “ability to pay principle.” Taxation should be uniform as well as equitable.
The non-observance of the above principles will not necessarily render the tax imposed invalid except to the extent those specific constitutional limitations are violated.[9]
[1] GRANT THORNTON, Taxation of ‘passed-on’ GRT, https://www.grantthornton.com.ph/insights/articles-and-updates1/lets-talk-tax/taxation-of-passed-on-grt/.
[2] Ibid.
[3] Ibid.
[4] ADAM SMITH, Canons of Taxation (1776).
[5] MARXISTS INTERNET ARCHIVE, Wealth of Nations, https://www.marxists.org/reference/archive/smith-adam/works/wealth-of-nations/book05/ch02b.htm.
[6] ABAKADA v. ERMITA, 506 Phil. 1 (G.R. No. 168056, September 01, 2005) [Per J. Austria-Martinez, En Banc].
[7] DIAZ v. SECRETARY OF FINANCE, 669 Phil. 371 (G.R. No. 193007, July 19, 2011) [Per, J. Abad, En Banc].
[8] Ibid.
[9] HECTOR S. DE LEON AND HECTOR M. DE LEON, JR., The Fundamentals of Taxation (2004 Ed.), Page 16.