Taxes and economic development

There is a proposed huge real estate tax increase in Cebu City that will quadruple the tax for residential lots and up to 11 times for commercial properties. There is also a soon-to-be-implemented sales tax on online sales and a possible income tax on earnings from unreported earnings from the “gig” economy. The BIR also reported the record high collections up to October 2023 from VAT, sales and income taxes together with also record collection of customs duties/export taxes. Given the ?14 trillion government debt and the ?4.5 trillion budget for 2024, the government has to collect as much taxes as possible.

All these tax efforts are happening when we are also inundated with news of confidential/intelligence funds abuses, legislative pork barrel/overpricing of government projects, excessive salaries/allowances of government officials, and uncontrolled travel expenses. There are also government subsidies that are handed by politicians to the poor beneficiaries, making it appear that the money came from them, to get their votes in the coming elections. These are not the ideal or optimum situations to where our taxes are going or the time to increase our taxes.

The objective of real estate taxes is for the cities/towns to generate additional revenues on top of their share of the national taxes (IRA), and the fees that they collect for permits and licenses. These local governments may also have other fund sources such as their share of the revenues of the PAGCOR and PCSO as host cities, and even investment income from productive enterprises or sale of assets. It is therefore necessary for the city/municipality to calibrate the real estate tax rates, so as not to become a disincentive to business, especially property development.

The issue of taxing fixed assets in a building like the elevators, generators, air conditioners, and pumps, are unfair and could be double taxation as buying these equipment included paying the manufacturers/sales taxes and the installers have paid VAT and income taxes. Then the city government has to justify and show that revenues of the city from all sources are used for the services provided by the city government and the development of the city in terms of security, peace and order, social stability, and economic progress. Failing to do all these, the city residents/landowners will not be receptive to real estate tax increases, and private investments and the city’s economy will suffer.

On the national level, the Philippine government’s latest “tax efficiency” rate, i.e. the percentage of national taxes to the total economy or GDP is in the 12% to 13%. This is a combination of the tax efficiency rates for personal income taxes, corporate taxes and the VAT. There is an estimate leakage of 2% from professional/syndicate tax evaders and local taxes should add another 2%. All these should amount to a 16% tax efficiency, which is fair for a developing country. In highly-developed countries, the tax efficiencies are in the 20% to 25%, but their education, social and health services are superior. People/citizens are willing to pay reasonable taxes as long as the services and benefits are commensurate and applies to all and not just the privileged.

Given the inadequate services that the Filipinos are now getting, the wastage of funds through graft and corruption and wrong priorities in both the national and local governments, local and national government officials should be careful and minimize tax increases, so it will not slow down/depress economic growth and development. Ironically, and for his own reasons, former president Duterte is the one advocating a tax boycott or not paying taxes to discipline the corrupt government.