What’s wrong with paying the correct tax?

Now that is a question for the ages—literally.

As anyone who has worked with taxes – either as an accountant, a lawyer, a tax administrator, a business executive, or an entrepreneur – will tell you, the word “taxes” is guaranteed to stir feelings ranging from the wary to the visceral.

And as we approach the tax filing season, taxes are bound to be on everyone’s mind in the next few months. Benjamin Franklin, that intrepid and inventive Founding Father of the United States, certainly knew how omnipresent taxes would become in all our lives when he remarked in a letter to French historian Jean-Baptiste Leroy, “In this world nothing can be said to be certain, except death and taxes.”

While I would argue with the good Mr. Franklin that “change” is just as inevitable an occurrence in human life, no one can argue with the fact that taxes have truly become part of our everyday life.

It is also true, however, that not even the balm (or should I say justification?) of democratic government – who can forget the battle-cry of the American Revolution, “No taxation without representation!” – can ever seem to make taxation truly palatable in the eyes of most people.

Unhappy experiences

Centuries of unhappy experiences with taxes as a form of oppression imposed by feudal lords or colonial masters have made the 21st century citizen leery of taxation. Undoubtedly, taxes still have a “bad rep,” even in these very modern times – and because there’s no way to avoid taxes (unless one decides to live in the Himalayas), it’s not unheard of for a person to try and minimize the taxes he has to pay.

This is where tax evasion and tax avoidance come in.

What’s the difference, someone may ask. Well, it all boils down to the legality – or lack thereof – of the method to be used in minimizing the tax one has to pay.

If, for instance, you try to claim all possible and above all, permissible, deductions to lower the taxable amount, that’s tax avoidance, a practice that makes use of legal means to reduce a person’s tax exposure.

But if, shall we say, an entrepreneur decides not to declare all his taxable sales, that is tax evasion, which is most definitely illegal and will surely result in a RATE [Run after Tax Evaders] investigation, a criminal case at the DoJ, and yes, a colossal headache for the entrepreneur (who really should have known better – crime never pays).

So, given that tax evasion could very well land you in jail and tax avoidance entails hours of wading through tax laws and regulations, we go back to the question, what’s wrong with paying the right amount of taxes?

Pondering this question made me think of a meeting I had a few days ago with a former Crimson schoolmate, who had asked for my help with a tax compliance evaluation review.

After we discussed some issues that needed clarification, I began to outline a tax minimization proposal to my schoolmate.

I had barely begun my explanation of the proposal when one the lawyers sitting in on the meeting asked me, “What’s wrong with paying the correct amount of tax?”

A good question, but it was clear to me that because the lawyer was not a practicing tax lawyer, he didn’t have a clue about the intricacies of tax law.

This is not to say that I don’t agree with the lawyer – definitely not.  There’s nothing wrong with paying the correct amount of tax; in fact, it is, ethically speaking, the right thing to do.

But the next question is, just what is the right amount of tax to be paid?

Life would certainly be easier if all of us were salaried employees working for just one employer – computing the taxable amount would be a relatively simple matter of following the basic formula of Income – Personal Deductions = Taxable Amount.

Test of patience

But for entrepreneurs and businessmen from virtually every level of society, trying to follow the Tax Code becomes a test of patience and perseverance that, more often than not, involves a near-desperate search for a bookkeeper or an accountant who can make head or tail of the maze that is the country’s tax laws.

Think about the situation of a multi-tiered corporation or a diversified conglomerate, and the magnitude of the problem increases dramatically.

Over the years, the State has tried to simplify tax laws as far as possible, to reduce the loopholes and ambiguities of the Tax Code, and make life easier for the taxpayer. These simplifications have also been geared at making it more difficult for the taxpayer to either avoid or evade paying taxes.

But while many appreciate the effort to ease the burden of tax compliance, the unfortunate truth is that incidents of tax avoidance and tax evasion continue to haunt the tax system – and yes, that means that people are still not paying the right amount of taxes.

And so we go back to that question posed by my client’s lawyer: What’s wrong with paying the right amount of taxes?

What, indeed, is wrong with giving over to the government the amount of taxes that the law says a person should pay?

Well, I’m going to hazard a guess, and it involves a very basic principle of Juan de la Cruz: value for money.

I’m willing to bet that the reason why Filipinos – and indeed, taxpayers in general – have such a dim view of paying the right amount of tax is because they feel that their hard-earned money won’t be used wisely – or worse, will end up in someone else’s pockets.

From its erstwhile image as an instrument of oppression, taxes have now become – in the public’s perception – a virtually bottomless money pit for corrupt politicians or government officials itching to enrich their already-burgeoning bank accounts.

In a nutshell, when the Filipino taxpayer thinks twice about paying the right amount of taxes, it’s usually because he doesn’t think he’s going to get his money’s worth.  “Kotong” cops, potholes on major thoroughfares, SUV-riding politicians, arrogant city executives – all of them continue to be a blight on the face of the Philippine Government, and disincentives to the taxpayer.

Indeed, poor Juan de la Cruz might be forgiven for thinking, “Is this what I pay taxes for?”

It is disheartening in the extreme to any citizen, who gives up a part of his hard-earned income to pay his taxes, to see public funds being wasted in such a blatant manner.

It’s not easy to earn a living. How can we blame anyone for wanting to get his money’s worth for every peso that he shells out for a product or a service?

What holds true for private sector business certainly holds true as well when it comes to public sector service – any citizen wants to know that he’s going to get his money’s worth for the taxes he pays.

He wants to know that his money will be used wisely, for the purposes that government says it collects taxes for.

He wants to see his money spent in building roads that won’t dissolve into potholes after one downpour, schools with enough desks for its students, hospitals with clean rooms and functioning equipment.

He wants to know that he can call the police to report a crime and see a squad car arrive on the scene within a few minutes and, yes, he wants to be treated with good, old-fashioned courtesy when he visits a government office.

Don’t get me wrong. I’ll be the first to applaud the government’s high-profile campaign against corruption and its efforts to prosecute certain persons who were quite shameless while in power – that is a step in the right direction.

Improvements

But it’s also true that Juan de la Cruz wants to see some improvements in the many ways that the Government affects everyday life, whether it be in small-town Philippines or in the great urban sprawl of Metro Manila: the stoplights that work, the health centers with medical supplies, the clean and airy schoolrooms with books and desks, the friendly face behind the public service counter, the garbage that’s collected on time, the policeman in a well-pressed uniform with an earnest look on his face.

Catchy slogans, vivid campaign ads, popular endorsers – they might raise awareness of our obligations as taxpayers, but I’ll always believe that the best incentive for the Filipino taxpayer to pay the right amount of tax is for the government to give him his money’s worth.

The State can argue until it’s blue in the face that taxes are the lifeblood of the nation and development programs can’t be implemented without taxpayers’ funds.

But until the public themselves see some concrete results by way of improvement in their everyday lives, I’m afraid tax avoidance – and yes, tax evasion – will continue to be part of the equation, and we’ll all still be asking ourselves, “What’s wrong with paying the right amount of taxes?”

(The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines. The author is a senior partner of The Tax Offices of Romero, Aguilar & Associates and member of the MAP National Issues Committee and MAP Special Committee on Taxation. Feedback at [email protected].  For previous articles, visit <map.org.ph>.)