THE Department of Finance (DOF) has warned that the proposed “super rich tax” bill would defeat its purpose of generating more revenues, as the measure would instead encourage “aggressive” tax avoidance.
In a letter to Speaker Lord Allan Jay Velasco, Finance Secretary Carlos G. Dominguez III said that while the wealth tax being proposed under House Bill 10253 could initially lead to gains in tax collections, he cannot support it as the measure would discourage growth and investments in the long run.
Diminished investments would result in far greater revenue losses and fewer new jobs to help Filipinos recover from the pandemic, he said.
While the bill’s authors estimate that their proposal will generate P236.7 billion per year, the DOF said it projects a “more conservative” P57.6 billion in revenues, adding that “losses incurred from other taxes are far more substantial.”
Dominguez said the bill is also “prone to aggressive tax avoidance because the so-called ‘super-rich’ will find ways of avoiding tax by transferring their assets to different accounts where they can seek tax relief and exemptions, as proven by what happened in other countries that had imposed a similar wealth tax.
“Thus, wealth taxes fail to significantly promote economic equality or create additional fiscal space. Moreover, net wealth taxes often failed to meet their redistributive goals as a result of their narrow tax bases, tax avoidance, and tax evasion,” he said.
Under HB 10253, individuals with taxable assets that exceed P1 billion should pay a 1 percent tax, while a tax of 2 percent is imposed on taxable assets over P2 billion, and 3 percent for over P3 billion.
Dominguez also said many countries that had wealth taxes before ended up repealing them because of the increased capital mobility and access to tax havens in other countries. Only four countries continue to implement the wealth tax—Belgium, Norway, Spain and Switzerland, he said.
On top of this, he said the wealth tax will be “costly and complex to implement” because this would require additional manpower and costs.
According to Dominguez, it would also be difficult to assess all assets held by the rich for subsequent taxation, citing the case of Austria which repealed its wealth tax because it became too costly to maintain.
To determine the various aspects of a “super-rich” taxpayer’s wealth, Dominguez said there would be a need to relax the Bank Secrecy Law and forge exchange of information agreements with other countries.
He also argued that the country lacks a reliable database to identify the wealthiest individuals in the country.
Although the Bureau of Internal Revenue has a list of its large taxpayers, this is only based on taxes paid and does not include the net worth of the total accumulated wealth of taxpayers.
A study done by the Organization for Economic Co-operation and Development (OECD) showed that the collection performance of wealth tax is relatively low, partly because of the high administrative and compliance costs, Dominguez said.
Several OECD countries used to have wealth taxes but eventually repealed them. These include Austria (which repealed their wealth tax law in 1994); Denmark (in 1997); Germany (in 1997); the Netherlands (in 2001); Finland, Iceland and Luxembourg (all three in 2006); Sweden (in 2007); and France (in 2017).
For his part, Asian Institute of Management economist John Paolo R. Rivera agreed that there is a risk of tax avoidance if the bill is implemented.
“There is a risk because there [must be] a mechanism that will allow the rich to declare 100 percent of their wealth. We cannot even ask people to declare their income, what more wealth?” he said.
While a wealth tax can redistribute income to the economy which could be beneficial to the country’s economic recovery, he also stressed the need for a thorough study, simulation, review, and consultation of the bill because of the constraints identified by the DOF.
“There is a need to weigh its cost and benefit. If this will be too burdensome and would create more red tape, leakages, constraints, unintended consequences, and other problems, it may not be the appropriate approach for now,” he said.