Moral hazard in tax amnesty

REVENUE Commissioner Caesar Dulay was recently asked by some business leaders to adopt a tax amnesty program to raise more money for the anticipated high funding needs of the Duterte administration.

In a tax amnesty, the liabilities of a taxpayer who failed to pay the correct taxes or filed incorrect tax returns are condoned on condition he complies with certain requirements and pays a specific sum of money to the government.

This measure is considered extraordinary because it goes against the motherhood principle that citizens are legally and morally obliged to support the government by paying the correct taxes.

It is resorted to if the government is in dire financial straits and needs to immediately raise funds to finance its projects or meet pressing financial obligations.

The scheme also helps broaden the country’s tax base and enables the government to have a fresh start in the enforcement of its tax laws. It’s a two-way street though because the amnestied taxpayer is, for his part, expected to turn a new leaf and be more conscious in complying with his tax obligations.

Condonation

Several tax amnesty programs have been adopted over the years to raise additional revenues from different tax levels, e.g., income tax, improperly taxed motor vehicles, real property tax and travel tax.

The Marcos regime issued 18 presidential decrees on tax condonation. President Cory Aquino came out with four executive orders for the same purpose.  In the case of Presidents Fidel Ramos, Joseph Estrada, Gloria Macapagal-Arroyo and Benigno Aquino III, since they did not have legislative powers during their term of office, they went through the administrative route, i.e., the Bureau of Internal Revenue (BIR).

The last time Congress took an active role on this matter was in 2007 when it enacted a Tax Amnesty Law that allowed individual and corporate taxpayers to extinguish their liabilities for unpaid internal revenue taxes by paying an amount equivalent to five percent of their net worth and, in the case of corporations, P25,000 to P500,000 depending on their subscribed capital stock.

This early, despite the fact that President Duterte has yet to submit the proposed 2017 national budget to Congress and the Department of Budget and Management stating that it has over P1.02 trillion available for higher spending, some business leaders already want the BIR to include tax amnesty in its bucket list.

Short term

No doubt, the tax amnesty programs earlier implemented raised additional funds for the government.

This is not surprising because tax dodgers will always welcome the opportunity to avoid civil and criminal liabilities in exchange for paying a small sum of money and, at the same time, be able to keep the bulk of their untaxed wealth.

From the BIR’s standpoint, all past tax amnesty programs had been successful. Of course they were, if the criterion for success were simply the collection of additional revenue.

But whether or not the cash inflows met their objective or collection targets is a big question mark. The BIR’s website or database has scant information about the payments received from amnesty programs that can be matched with the expected collections.

If at all, the gains from previous tax amnesty programs may be described as  short-termed. After the initial windfall, it was back to square one.

The amnestied taxpayers took advantage, again, of the inefficiencies of the collection process and the vulnerability to corruption of tax collectors.

The collection system reverted to the same situation that it was in prior to the tax amnesty. The facts and figures collated from the program were hardly used to streamline the process and discourage potential tax evaders from gaming the system.

Disincentive

The adoption of another tax amnesty program would be like sending a message to the public that “crime pays” in complying with tax obligations.

If you’re a tax cheat, don’t lose sleep about going to jail for tax evasion as long as you do not do anything that may catch the BIR’s attention and subject you to a tax investigation.

Go under the radar and wait for the BIR to offer a tax amnesty program. When that happens, quickly avail of it and take full advantage of its benefits for you and your family.

In doing so, you not only get complete pardon for all your tax misdeeds but will also be hailed as a patriotic Filipino for “confessing” to your sins and sharing your wealth with the government.

The mere suggestion of a tax amnesty already creates a moral hazard to taxpayers. It unwittingly gives an incentive not to comply with tax obligations with the expectation that the adverse consequences of their noncompliance can be mitigated, if not totally avoided, by a tax amnesty program.

A more efficient collection system, not a tax amnesty program, is the best way to fund the anticipated heavy cost of the infrastructure and other populist projects of the Duterte administration.

Shortcuts in the tax system often give rise to unintended adverse consequences.

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