Revenue Mobilization and Responsiveness of Philippine Income Taxes: Implications for Fiscal Policy

Abstract

One basic hypothesis in development finance is that the share of direct taxes, which includes taxes on personal and corporate incomes, increases as development proceeds. During the period 1961-1 973, the share of income taxes to total taxes in the Philippines has grown in accordance with this basic hypothesis. A dramatic downturn, however, occurred in the late 1970s. One of the objectives of this study is to examine this phenomenon.The other specific objectives of the paper are: (a) to evaluate the resource mobilization potential of the corporate and personal income taxes, and (b) to measure and analyze the responsiveness of the individual and corporate income taxes to changes in incomes.On the basis of the results of our study, the following conclusions and implications for policy appear warranted. First, the observed decline in fiscal importance of both personal and corporate taxes relative to total revenues suggests that the tax structure that has emerged in recent years has been relatively more regressive. Regrettably, the potential for tapping both personal and corporate income taxes to increase revenue yield and improve the progressivity of the tax structure is quite limited for a number of reasons: (a) tax avoidance and evasion of individual taxpayers appears to be on the rise; (In) the personal income tax base has severely narrowed in recent years; and (c) there appears to be a shift of capital from the formal, corporate sector to the informal, unincorporated sector, a phenomenon fully predicted by conventional general equilibrium theory of corporate tax incidence. To increase the revenue yield of personal income taxes, policymakers should look into three areas: higher tax consciousness, improved tax administration, and broader tax base. Second, both the personal and corporate income taxes have turned revenue inelastic over the years, but for different reasons: the former, for the decrease in its rate elasticity; the latter, for the fall in its base elasticity.Third, government policy may have to share the blame for the erosion of the corporate tax base. While the corporate dual tax rate system has been maintained since l959, several tax measures were enacted which effectively reduced the tax rates of certain types of corporations. In addition, the corporate tax base may have been substantially eroded as a result of numerous investment incentives measures during the period under review.