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Chapter 1FUNDAMENTAL PRINCIPLES OF TAXATIONTaxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It, is the act of ...

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Chap Chapter ter 1 FUNDAMENTAL PRINCIPLES OF TAXATION Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. It, is the act of levying a tax to apportion the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens. It is power inherent in every sovereign state being essential to the existence of every government. Hence, even if not mentioned the constitution, the state can still exercise the power. Therefore, any constitutional provision regarding the state’s power to tax should not be interpreted as a “grant of power”, but merely a limitation on the state’s power to tax. Taxes on the other hand, are the enforced proportional contributions or charges from persons and property levied by the law-making body of the state by virtue of its sovereignty for the support of the government and all public needs.

General Objectives: ✓ Discuss and illustrate the basic principle of Philippine taxation. ✓ Distinguished tax from other terms or imposts. ✓ Enumerate and discuss the sources of tax laws.

Lesson 1 - NATURE AND PURPOSE OF TAXATION

Taxation is the process or means by which the sovereign (independent state), through its law-making body (the legislature), imposes burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of the government. 1

Government will exercise this inherent power base on its nature, extent and intended purpose. Lesson Objectives: After studying this lesson, a student should be able to: •

Define taxation and explain its role in the state.

•

Identify and differentiate the nature of taxation.

•

Discuss the extent of the power of taxation.

•

Distinguish and illustrate the purpose of taxation.

NATURE OF TAXATION 1. Inherent in sovereignty – taxation is an inherent power of every government. A state cannot exist without taxation to support its operation and welfare of people. 2. Legislative in character – government’s inherent power to impose and collect taxes is exercise through its legislative branch or the congress.

EXTENT OF THE POWER OF TAXATION Subject to constitutional and inherent restrictions, the power of taxation is regarded as comprehensive, unlimited, plenary and supreme.

PURPOSE OF TAXATION Primary: Revenue or Fiscal Purpose -To provide funds or property to promote the general welfare and protection of its citizens and to finance its diverse activities. Examples of taxes to raise revenues are income and business taxes. Secondary: Regulatory Purpose (or Sumptuary/Compensatory) -in this purpose taxation is employed as a devise for regulation or control such as: A.) Promotion of General Welfare B.) Reduction of Social Inequality C.) Economic Growth

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Examples of taxes to imposed for regulations are excise and amusement taxes. Exercises Discussion - Based on its definition and purpose discuss the importance of taxation to the following: a. individual citizen b. private sectors c. government

Lesson Summary A state cannot exist without the inherent power to impose and collect taxes. Government exercise its power of taxation to raise revenue to support its operation and promote and protect the general welfare of its citizens. Taxation is also a government’s means to reduce social inequality and support economic growth.

Lesson 2 - THEORY AND BASIS OF TAXATION The power of taxation proceeds upon the theory that the existence of government is a necessity. This power is essential because the government can neither exist nor endure without taxation. Its basis is the reciprocal duties of protection and support between the state and its inhabitants.

Lesson objectives: After studying this lesson, a student should be able to: •

Discuss the theory of taxation.

•

Explain the basis of taxation.

LIFEBLOOD THEORY OR NECESSITY THEORY ➢ Taxes are the lifeblood of the nation ➢ Without revenue raised from taxation, the government will not survive, resulting in detriment to society. Without taxes, the government would be paralyzed for lack of motive power to activate and operate it. 3

➢ Taxes are the lifeblood of the government and their prompt and certain availability is an imperious need. ➢ Taxes are the lifeblood of the nation through which the agencies of the government continue to operate and with which the state affects its functions for the benefits of its constituents.

Manifestation of the Lifeblood Theory: a. Rule of 'No Estoppel against the Government" b. Collection of taxes cannot be enjoined (stopped) by injunction. c. Taxes could not be the subject of compensation or set-off. d. Right to select objects (subjects) of taxation The power of tax is essentially legislative in nature. Hence, the right to select the objects/subjects of taxation rests with the Congress. The matters within the competence of the legislature include the determination of: •

The subject or object to be taxed

•

The purpose of the tax as long as it is a public purpose

•

The amount or rate of the tax

•

Kind of tax

•

Apportionment of the tax

•

Situs of taxation

•

The manner, means, and agencies of collection of the tax.

e. A valid tax may result in the destruction of the taxpayer's property.

“POWER TO DESTROY" The power to tax includes the power to destroy if it is used as an implement of the police power (regulatory) of the State. However, it does not include the power to destroy if it is used solely for the purpose of raising revenue.

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Basis of Taxation: BENEFITS RECEIVED THEORY OR RECIPROCITY THEORY The state collects taxes from the subjects of taxation in order that it may be able to perform the functions of government. The citizens, on the other hand, pay taxes in order that it may be secured in the enjoyment of the benefits of organized society. Exercises In relation to the topics, explain the following terms/ phrase and site a specific scenario or events in our society which correlate to those terms/ phrase: a. “lifeblood of the society” b. “Symbiotic Relationship” c. “Existence of the government as necessity”

Lesson Summary Necessity theory of taxation states that the existence of government is a necessity and the government cannot exist without taxation. For taxation is a necessary burden to preserve the state’s sovereignty and a means to defend its people. Lifeblood theory proceed with taxation as a lifeblood of the government and their prompt and certain availability is an imperious need. For the Basis of Taxation, the state collects taxes to perform the functions of the government. The citizens, on the other hand, pay taxes for their security and enjoy an organized society, this is an example of the Doctrine of Symbiotic Relationship. Lesson 3 - THE THREE (3) INHERENT POWER OF THE STATE A state cannot exist without its inherent power. The government cannot serve it purpose and organize its citizens without exercising those powers. To put up a well organize society government must enjoy its power to raise revenue, strengthen security measures and the power to acquire properties for public purpose.

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Lesson objectives: After studying this lesson, a student should be able to: •

Explain the three inherent power of the state.

•

Distinguish the three inherent power of the state.

•

Discuss the similarities among the three inherent powers of the state.

The inherent powers of the state 1. Police Power- it is the power of the state for promoting public welfare by restraining and regulating the use of liberty and property. It may be exercise only by the government. The property taken in the exercise of this power is destroyed because it is noxious or intended for a noxious purpose. 2. Power of Taxation- it is the power by which the State raises revenue to defray the necessary expenses of the government. 3. Power of Eminent Domain- It is the power of the State to acquire private property for public

purpose

upon

payment

of

just

compensation. DISTINCTIONS AMONG THREE (3) INHERENT POWERS TAXATION

POLICE POWER

EMINENT DOMAIN

1. Nature

Power to

Power to make

Power to take

enforce

and implement

private property

contributions to

laws for general

for public use

raise gov’t

welfare.

with just

funds

2. Authority

Government

compensation.

Government only

only

May be granted to public service/utility companies

3. Purpose

For the support

Promotion of

The taking of 6

of the

general welfare

private property

government

through

for public use

regulation 4. Persons affected

Community or

Community or

On an individual

class of

class of

as the owner of

individuals.

individuals.

personal

Applies to all

5. Scope

property.

persons,

Applies to all

Only particular

property and

persons, property property is

excises that,

and excises that,

may be subject

may be subject

thereto

thereto

Plenary,

Broader in

comprehended.

Merely a power

comprehensive, application.

to take private

supreme

General power to

property for

make and

public use.

implement law. 6. Effect

Contribution

No transfer or

There is transfer

becomes part

title. There may

of title to

of public fund

just be a restraint

property.

on the injurious use of property. 7. Benefits received

In form of

No direct and

Market value of

protection and

immediate

property taken

benefits

benefit but only

received from

such as may

government

arise from the maintenance of a healthy economic standard of society.

8. Amount of imposition

No limit

Sufficient to

No imposition.

cover cost of the

The owner is

7

license and the

paid equivalent

necessary

to the fair value

expenses of

of his property.

police surveillance and regulation.

SIMILARITIES AMONG THE THREE (3) INHERENT POWERS a) They are inherent in the State. b) They exist independently of the constitution although the conditions for their exercise may be prescribed by the constitution. c) Ways by which the state interfere with the private rights and property. d) Legislative in nature and character. e) Presuppose an equivalent compensation received, directly or indirectly, by the persons affected. Exercises TRUE or FALSE - State whether the statement is True or False and justify your answer. 1. The three inherent power of the state may be exercise only by the government. 2. Taxes are raised to cover the cost of governance. 3. Police power regulates both liberty and power. 4. Eminent domain maybe exercise by public service corporations and public entities. 5. the three inherent powers of the state can be exercised simultaneously.

Lesson Summary With its inherent powers state is able to promote public welfare by restraining and regulating the use of liberty and property. It is also capable to 8

destroy noxious properties or intended for a noxious purpose (Police Power). The state has also the power to raise revenue to defray the necessary expenses of the government (Power of Taxation). Upon payment of just compensation government can acquire private property for public purpose (Power of Eminent Domain). Lesson 4 - TAXES With an inherent power of taxation, the government has the right to imposed and collect taxes. Taxes are the enforced proportional contributions or charges from persons and property levied by the law-making body of the state by virtue of its sovereignty for the support of the government and all public needs.

Lesson objectives: After studying this lesson, a student should be able to: •

Differentiate taxation and taxes.

•

Enumerate and discuss the essential elements of tax.

•

Explain the aspects of taxation.

•

Determine the classifications of taxes. ESSENTIAL ELEMENTS OF A TAX 1. It is an enforced contribution. 2. It is generally payable in money. 3. It is proportionate in character. 4. It is levied on persons, property, or the exercise of a right or privilege (subjects or objects of taxation). 5. It is levied by the law-making body of the state. 6. It is levied for public purpose. ASPECTS OF TAXATION 1. Levying or imposition of the tax which is a legislative act or function. 2. Assessment or determination of the correct amount of applicable tax. 3. Collection of the tax levied which is essentially administrative in character. 9

CLASSICATION OF TAXES 1. As to scope: a) National A national tax is imposed by the government. b) Local A local tax is imposed by the municipal corporations or local government units (LGUs). 2. As to subject matter or object: a.) Personal, poll or capitation tax A tax of a fixed amount imposed upon individual, whether citizens or not, residing within a specific territory without regard to their property or the occupation in which he may be engaged. b.) Property tax Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment. c.) Excise Tax Any tax which does not fall within the classification of poll tax or property tax. This is a tax on the exercise of certain rights and privileges. 3. As to who bears the burden: a.) Direct Tax which is demanded from the person who also shoulders the burden of tax or tax which the taxpayer cannot shift to another. b.) Indirect Tax which is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. These are taxes wherein the incidence of or the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person.

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4. As to determination of amount: a.) Specific Tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement. b.) Ad valorem Tax of fixed proportion of the value or the property with respect to which the tax is assessed. 5. As to purpose: a.) Primary, Fiscal, or revenue purpose Tax imposed solely for the general purpose of the government. b.) Secondary, Regulatory, Special or Sumptuary Purpose Tax imposed for specific purpose. 6. As to graduation or rate: a.) Proportional Tax based on fixed percentages of amount of the property, receipts or other basis to be taxed. b.) Progressive or graduated Tax the rate of which increases as the tax base or bracket increases c.) Regressive Tax the rate of which decreases as the tax base bracket increases Exercises Do you agree with the following statements? Discuss your Yes or No. 1. Tax is generally unlimited because it is based on the needs of the state. 2. Levying of local government taxes should be exercise only by the legislative branch of the local government. 3. A person may refuse to pay on the ground that he will not receive a benefit from the tax.

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Lesson Summary Taxation is the inherent power of the state to impose and collect taxes while tax is the burden or the enforced proportional contribution by the people. Tax has various essential elements. Aspects of tax are levying, assessment and collection. Taxes are also classified according to scope, subject matter, to who bears the burden, determination of amount, purpose and rate. Lesson 5 - ELEMETS OF SOUND TAXATION The fundamental purpose of taxation is to raise revenue necessary to fund public services. Consequently, it is necessary that the sources of revenues must be adequate to meet government expenditures and sustain the level of public services (Fiscal Adequacy). Taxpayers ability to pay must be taken into consideration. The tax burden should be appropriate to taxpayer’s ability to pay (Theoretical Justice or Equity). tax laws must be capable of effective and efficient enforcement (Administrative Feasibility). Lesson objectives: After studying this lesson, a student should be able to: •

Discuss the elements of sound tax system.

•

Apply the principles of sound tax system

Principles of Sound Tax System A. Fiscal Adequacy B. Administrative Feasibility C. Theoretical Justice Notes: FISCAL ADEQUACY ➢ VIOLATION-VALID ➢ Sources of revenue should be sufficient to meet the demands of public expenditure ➢ Revenues should be elastic or capable of expanding or 12

contracting annually in response to variations in public expenditure ➢ Even if a tax law violates the principle of Fiscal Adequacy, in other words, the proceeds may not be sufficient to satisfy the needs of the government, still the tax law is valid.

ADMINISTRATIVE FEASIBILITY ➢ VIOLATION-VALID ➢ The tax law must be capable of effective or efficient enforcement ➢ Tax laws should be capable convenient, just and effective administration ➢ Tax laws should close-up loopholes for tax evasion and deter unscrupulous officials from committing fraud ➢ There is no law that requires compliance with this principle, so even if the tax law violates this principle; such tax law is valid. THEORITICAL JUSTICE ➢ VIOLATION-INVALID ➢ This principle mandates that taxes must be just, reasonable and fair ➢ Taxation shall be uniform and equitable ➢ Equitable taxation has been mandated by our constitution, as if taxes are unjust and unreasonable then they are not equitable, thus invalid ➢ The tax burden should be in proportion to the taxpayer’s ability to pay (“ability to pay principle”) Exercises Give at least three features of each of the element of a sound tax system. Lesson Summary Fiscal adequacy, theoretical justice or equity and administrative feasibility are principles found in a sound tax system. 13

Lesson 6 - LIMITATIONS ON THE POWER OF TAXATION The state can exercise its inherent power to create an organize society and serve its people. However, those powers are subject to certain limitations and restrictions to better serve the government purpose. Inherent and constitutional limitations will regulate the government to exercise those inherent powers to protect the welfare of every citizen from the abuse of authority. Lesson objectives: After studying this lesson, a student should be able to: •

Identify the existing limitations on the state’s inherent powers.

•

Distinguish inherent limitations and constitutional limitations.

•

Enumerate and di...