In Part 1, we proposed a 3% wealth tax to end Philippine poverty, noting that it would be reasonable given the wealth and profits of the country’s richest. Moreover, a fair wealth tax schedule can be adopted following the concentration of wealth in the country. In this part, we seek to demonstrate that a wealth tax is feasible by showing how to address technical and political obstacles.1
As with any tax, a primary obstacle is tax evasion. This can be mitigated by knowing how much exactly a rich individual owes the government.
Unlike income, the government has little information on the individual wealth of the richest families, except perhaps the non-triangulated data on the ownership of firms available to the Securities and Exchange Commission (SEC), and the still-messy cadastral data from the Land Registration Authority (LRA). We usually rely on private lists such as that published yearly by Forbes magazine, which may not be able to capture true wealth accurately, limited as they are by resources.
One way to overcome this handicap is to require everyone with a net income (as reflected in the Income Tax Return or ITR) above a certain amount to file a Statement of Assets, Liabilities, and Net worth (SALN), similar to those required of government employees. We can assume a threshold of capital-to-income ratio of 5:1, meaning, given the wealth tax schedule we previously proposed, citizens with an annual income of ₱10 million will be assumed to own ₱50 million and therefore asked to submit a SALN. If the SALN reports a net worth that reaches the threshold of ₱50 million, then the individual will now be required to pay a wealth tax.
In addition, given the volatility of valuated wealth, we also propose the use of the 12-month average of net worth as a basis for the wealth tax, rather than a mere snapshot before the deadline. This is also to prevent actions to artificially deflates one’s net worth just before the tax assessment period.
Given the predisposition to tax avoidance, SALN alone, even if audited, will not be sufficient. To augment the state’s capacity to ascertain the true net worth of individuals as declared in their SALNs, agents of government, specifically of the Bureau of Internal Revenue (BIR), must have full, unimpeded access to the information from the banking, stock exchange, and other securities exchange systems. This requires the amendment of Sections 22 and 33 of Republic Act 1405, or the Bank Secrecy Law.
A wealth tax also risks capital flight. To address this, some countries with a wealth tax have also opted to impose a 25% “exit tax”. We can also do so for those who will bring capital out of the country by renouncing their Filipino citizenship,4 provided that the net worth of the person is within our wealth tax brackets. There would be few problems with regards to real property and physical investments which cannot be “exported” and can be expropriated. The BIR can confiscate properties in lieu of tax payments. The exit tax targets financial capital.
The possibility of estate planning, or outright tax avoidance, also requires a response, given that the rich conduct informal dealings with relatives and employees to hide their assets, or to reduce their position in the wealth tax brackets. These dealings, however, can only be made through transactions such as gifts, inheritance, or other transfers mediated by the financial system.
In our proposal, assuming full transparency and strong surveillance over all financial transactions and legal bequests, the state can treat such transfers as “exit” from the asset and charge a 25% levy. Note that this effectively reverses the reduction of the estate tax in TRAIN 1, from 20% to 6%.5
But the only way to sustainably mitigate the risk of “capital flight” is to promote international cooperation on taxation wherein all countries of the world agree on a common wealth tax rate, as proposed by French economist Thomas Piketty.6 Otherwise, capital markets will attempt to punish countries that will attempt to impose a wealth tax, similar to what commodity markets do to countries that refuse to participate in free trade agreements.
As worldwide movements push for an end to austerity, the Philippine government should support a global call for a common wealth tax. More urgently, we can call for the creation of an ASEAN Wealth Tax Union, which will also be a negotiating forum for a regional-level wealth tax schedule appropriate to the national level of capital and investment flows. This is with the end goal of eventually securing intra-regional wealth tax agreements.
In the meantime, the Philippines can push for the automatic sharing of all information on financial transactions as a conditionality for participating in all present and future economic agreements, especially the ones on trade.7 This information will go a long way in the correct assessment of the net worth of the economic elite, and will strengthen the case of the governments of the world in imposing a common wealth tax.
James Miraflor is a fellow at LEARN.
1Of course, this is with the understanding that political balance of forces is such that citizens can pressure Congress to enact a wealth tax, even as the vast majority of representatives will likely be affected by levies on huge assets. Excluding the outright exemption of politicians to wealth taxes (an untenable proposal), this isn’t something that can be addressed by the wealth tax design.
2“All deposits of whatever nature with banks or banking institutions in the Philippines including investments in bonds issued by the Government of the Philippines, its political subdivisions and its instrumentalities, are hereby considered as of an absolutely confidential nature and may not be examined, inquired or looked into by any person, government official, bureau or office, except upon written permission of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.”
3“It shall be unlawful for any official or employee of a banking institution to disclose to any person other than those mentioned in Section two hereof any information concerning said deposits.”
4Sen. Warren proposes 40% in her own wealth tax proposal.
5This has actually resulted in foregone revenues of hundreds of billions of pesos, since the death of Henry Sy, Sr., George Ty, John Gokongwei, Jr., Lucio Tan, Jr., and Danding Cojuangco all conveniently falling after the effectivity of RA 10963.
6He proposed a wealth tax such that the rate of return on wealth $r$, is less than or equal to the growth rate $g$. This is to neutralize the powerful economic forces favoring accumulation.
7The Ricardian theory of comparative advantage rests on the assumption of capital immobility across nations, as capital is reallocated within the nation to allow for the restructuring in the allocation of factors. Without capital immobility, capital can simply leave countries which won’t have any resources left to reallocate. A common wealth tax reduces capital mobility, allowing nations to build sectors in a strategic manner.