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Cinch the Rich: The Wealth Tax Versus Tax Avoidance Along With Its Succeeding Repercussions

Cinch the Rich
Photo by: Lingey Injury Law Firm via Unsplash

With the demands and the increasing cost of living in the country – and more so around the globe – the majority of Filipinos feel the burden of paying for goods and the additional fees in taxes due to the continuous increase in inflation rates and these individuals’ economic needs and desires. This notion may be true for low and middle-income earners; however, while the COVID-19 pandemic has disrupted the lives of millions of people, the wealth of the richest has continued to rise, contributing to the economic burden that it may impose on the marginalized. According to Dejeto (2022), 573 new billionaires were created during the pandemic, at a rate of one every 30 hours, as billionaires’ wealth increased more in the first 24 months of COVID-19 than in the previous 23 years combined.

Although the sudden wealth increase among millionaires can be attributed to establishing a wider market reach in different countries due to the constraints of the physical set-up, a big factor is the payment of taxes by the rich and how they avoid such responsibilities. Senator Sherwin Gatchalian has proposed a wealth tax bill that enforces taxation on the wealthy in the country, which was inspired by how Filipinos on the annual Forbes list of billionaires are not on the list of the country’s top taxpayers. However, the problem lies within the system itself surrounding the government’s proposed reforms since although there may be a bill in which the rich should be paid appropriate taxes based on their wealth in the future, it may not be implemented properly since these individuals have accountants, lawyers, and even political connections to help them avoid paying the right taxes, according to Ibon Foundation executive director Sonny Africa (The Philippines’ Wealth Tax Dilemma: Inquirer, 2022).

Due to these suggested inducements, the existence of a wealth tax does not seem feasible if the rich themselves avoid these kinds of responsibilities, whether tax avoidance or tax evasion, since it affects the country’s marginalized sector. Low to middle-income earners bear the brunt of the rich’s non-payment of tax in order to presumably recover the taxes that wealthy individuals do not pay; thus, the government compensates for this loss by increasing the demand for taxes on the poor. As a result, it is more difficult for the people of the Philippines to continue living decently in accordance with their current wages and tax obligations, as the administration itself is driving the marginalized and the working class to pay for debt that they did not even benefit from. Given that the poor and middle-class Filipinos are already heavily burdened by rising commodity prices and how investors influence wealth determination in the country, the government should not impose a wealth tax if the implementations are not accurately fulfilled due to tax avoidance and evasion opportunities.

The wealth tax currently exists in Singapore, Spain, Norway, Switzerland, and Belgium. For China and the Americas, there is a potential opportunity for the implementation of the wealth tax. With President Xi Jinping’s recent report to his congress, his administration incites that the upcoming wealth regulation may target taxing the rich to narrow the wealth gap in China. Similarly, Elizabeth Warren and Bernie Sanders proposed the Ultra-Millionaire Tax Act of 2021, applying to households with an income of $50 Million and above.

Emmanuel Saez and Gabriel Zucman, Berkeley economists, claim that the wealth tax will not significantly impact the wealth of the richest Americans (2019). On the contrary, the progressive wealth tax shall repress the growing concentration of wealth and distribute revenue among the society. In their letter to Ms. Warren, they estimate that the projected burden for the 0.01% of richest Americans would only account for 3.2% of their wealth; compared to the 7.2% tax burden of the bottom 99% of families, their tax burden is lower. Moreover, the economists argue that the failure of the wealth tax in European countries is political, not economic— implying that with the appropriate enforcement, the wealth tax is a feasible and viable tax regulation. With this, the economists have grounded policies to avoid moving abroad and expatriation. Therefore, a progressive wealth tax would rectify wealth inequality and collect tax revenue for government development programs.

Furthermore, Divito (2021), in her article, summarized the tax as fair, just, targeted and effective. According to her, “if the wealthy have to pay a percentage of that wealth in taxes each year, it becomes harder for them to amass even more wealth,” where administering such tax shall narrow the income gap between the poor and the rich. Specifically, a wealth tax would disrupt this generational cycle of inherited racial wealth in America, where wealth is heavily associated with race. Lastly, she mentions that setting a threshold would avoid the stockpiling of assets by the ultra-rich.

Although their argument is factual and well-supported, Divito failed to acknowledge tax avoidance; while Saez and Zucman may have recognized possible tax avoidance schemes, they have failed to consider the time and money needed to design and enforce the wealth tax. There is no assurance that the 3.2% estimated tax burden on the rich will remain consistent. In their paper, Saez and Zucman discussed that policy choices determine tax avoidance and evasion. Their findings show that out of the three tax avoidance schemes investigated, only one responds highly to policy enforcement. Hence, there is an assumption that tax avoidance opportunities may or may not respond to policy enforcement.

Tax avoidance has long been a corporate strategy and culture. Implementing a wealth tax would not cease this practice; instead, this would encourage incessant tax avoidance practices such as acquiring harder-to-value assets and establishing foundations and pension scheme investments. For Switzerland, this is the situation they are currently facing. Switzerland currently has a wealth tax, yet in 2022, the country had ranked as the second worst facilitator of tax avoidance. It has been reported that the country was responsible for 5.1% of global tax avoidance losses. The Swiss have fallen victim to corporations abusing tax perks, losing $5.68 billion annually due to tax avoidance. In conclusion, while the wealth tax may tax the rich slightly more, it would be unpredictable and promote escaping tax liabilities.

Saez and Zucman may have suggested policies to prevent possible tax avoidance, yet this would call for high costs for implementation and maintenance. Tracking the tax records of each rich individual is too complex and time-consuming. During the 1900s, more than a dozen European countries administered the wealth tax, yet only three remained. The countries have repealed the tax because there is little revenue for too much work. According to Burgher (2021), the costs should depend on the design choices for the implementation. He uses Switzerland as an example of a country with a low cost of wealth tax, which is not the best example considering the rates of tax avoidance.

With these justifications, imposing a wealth tax would be the least desirable way to generate revenue as it would just create distortions. Learning from the twelve European countries that adopted wealth tax, only three of them remained such in the long run. Kasalsky (2019) claims that the wealth tax is expensive to administer, may result in distorted saving and investment choices, drive the wealthy and their wealth out of taxing nations, and, perhaps worst of all, do not generate much revenue. As such, all taxes change how people behave and the inaccuracies they bring about may not be beneficial. Due to the difficulty in dodging these taxes, income and consumption tax rates must be relatively high to deter work or spending. However, wealth taxes are thought to cause the most distortions of all since they prohibit saving and investing even at low rates because they reduce the payoff from these actions (Kopczuk, 2020). Huge distortions in the way estates are taxed are being observed and anomalies in the tax system that affect how tax liabilities on estates are appraised result in delays in asset sales, adjustments to asset values when a person passed away. Although part of the effects may arise from when deaths are reported, a study conducted by Kopczuk and Slemrod (2001), estimates that death rates varied modestly around the time that changes in the tax code that might affect tax liability occurred. The richest families and the biggest corporations that pay the highest taxes will leave if there is a wealth tax in place. Neither the budget deficits nor income disparity will be eliminated by it. Instead, states should reduce budget loss, abuse, and corruption because this is a much more efficient approach to deliver essential services to their citizens.

As distortions surround the proposed wealth tax bill, the implementation of such will be ineffective as the wealthy people could still get away from paying tax through tax avoidance. More so, once these important investors get tired of paying and avoiding taxes, the country’s economy might decline because potential and current investors in the Philippines may withdraw or reduce their investment due to high taxing fees. According to Herenkson and Du Rietz (2014), Sweden ceased imposing the Wealth Tax as the citizens of the country transferred their assets to other countries, the Swedish government did not only lose its tax wealth but as well as capital gains, dividends, and interest income from the citizens. Additionally, as reported by Black, every year, 513 French families leave the country as the people are tired from paying their wealth tax. Since these investors create jobs, when they leave for another country, the country’s unemployment rate rises due to a lack of job openings and opportunities, resulting in decreasing economic growth. Furthermore, as mentioned by Rosales, it is predicted that the taxes to be collected from the 50 wealthiest Filipinos if the wealth tax is implemented would total to PHP 237 billion, and the expected amount of capital and investor flight is much greater than the wealth tax revenue. Therefore, if the wealth tax is implemented in the Philippines, investors might be forced to leave the Philippines and transfer their assets to other countries with lower taxes, followed by an economic decline in the country for the following months or even years.

Although the Philippines is seen to be a country where the poor are most prominent—predominantly those who live on the streets of poverty—there are undoubtedly a select few who are privileged enough to avoid this problem: the super-rich; Fifty Filthy-Rich Filipinos, more prosperous than 71 million of the poorest Filipinos combined (Africa, 2020). In accordance with the proposed House Bill (HB) 10253, the select wealthy—with those assets worth billions—are required to pay their taxes. However, Finance Secretary Benjamin Diokno is not keen on the bill as high taxes may scare potential investors which may ultimately bring the downfall of an already failing economy (Simeon, 2022). In this light, if the wealth tax is indeed implemented, there is a risk in capital flight. Numerous countriest that implemented wealth tax ended up reaping the measures in terms of capital mobility (Department of Finance, 2022).

As the wealth tax promotes social equality by charging the appropriate tax based on the net worth of the taxpayers, a threshold is set accordingly to ensure that low to middle-income earners would not be further inflicted with the policy. Simply put, it ensures economic growth by leaning towards the benefit of those of lower status. In spite of the seemingly efficient taxation policy in the present time, schemes to avoid inheriting higher taxes can inevitably be implemented by the afflicted. One of these is tax avoidance, which can do further harm than good for the poor if done by the wealthy. On these grounds, some recommendations are given to ensure effectiveness when implemented. In his article, Dimitriu (2022) utilized a liberal-egalitarian approach combined with a procedural approach to avoid the current gaps in the existing wealth gaps present in society. The liberal-egalitarian approach focuses on subjecting individuals to the consequences of their decisions – aiming to hold them liable and responsible for their choices. In contrast, the procedural approach identifies that wealth accumulated from unjust transactions is undeserved and should be unrecognized. Dimitriu described unjust transactions as illegal and unethical means of collecting income. Using unjust transactions as a criteria in implementing a wealth tax shall give the implementation of wealth tax justifiable means because, as cited by Dimitriu from Baker (2020), “inequality doesn’t simply result from how markets work, but also from specific kinds of transactions that could have been avoided.” Combining these two approaches would guarantee that the wealth tax is a competent and ethical means of redistributing income among society.

Furthermore, a French economist, Thomas Piketty, wrote a different perspective in his book, “Capital in the Twenty-First Century.” He recognized the root cause of European experiments’ downfall, which were the exemptions and freedom of travel, and stated that a global wealth tax would be the most effective strategy for gathering funds from individuals armed with the best accountants, lobbyists, and boats. In this theory, the entire world would choose to do one thing at one rate, and sanctions will be held against tax havens wherein rich people stock their wealth and invest overseas. Although these concepts sound “utopian,” as Piketty admits himself, in the end, it all boils down to an effort to decline inequality. Last but not least, in order to diminish tax avoidance and generate fair amounts of government revenues in the highest possibility, all sorts of corruption should be first looked into by the government through the conduction of firmer transparency, especially to those accused and in higher positions. Scrutinizing the system will constrain evaders to pay for their tax liability and promote confidence and opportunities for the state to settle decent taxes as it can propose awareness and parity of socio-economic standing.

This paper elevates the readers’ consciousness socially about the matters concerning their rights as a citizen of the country. It had comprehensively discussed the implications of the implementation of the wealth tax to the concerned populations and extensively determined possible approaches to refine the wealth tax. Moreover, if the recommendations were followed, the achievement of desired results would outweigh the difficulty of changes in the process, which can set right one of the most controversial issues of inequity systematically. The alternative course of action would narrow the income gap, eliminating the risks and vulnerabilities of the current wealth tax designs, specifically, high likelihood of tax avoidance, low returns, and capital flight.

With the increasing debates surrounding the implementation of wealth tax, individuals have a better perception of what undertaking they are likely to consider in terms of how taxable their income is in accordance with their wages – particularly those who suffer the brunt of the wealth tax bill. As such, there should be a strict implementation of procedures and advancements wherein the rectified bills develop stricter compliance within the society not only at the national level – but as well as how local councils oversee such taxation procedures. In addition, the government may oversee a different set of guidelines for the provision of taxes for investors in order for them to carry out the circulation of money and remittances while not jeopardizing the Philippines’ marginalized sector. Truly, the difficulties in developing, implementing, and enacting a wealth tax are time-demanding and precarious given that the majority is affected by these changes, but the lived realities of the Filipino people – most especially low to middle-income earners – encourage the government and legislators to enact stricter wealth tax rules to avoid the exploitation and the increase of political power among the wealthiest in the nation. Furthermore, the rich truly becomes richer and the poor become poorer not only in terms of increasing inflation rates and cost of living but also how the system within the country is manipulated by the wealthy; and without further rectifying the proposed wealth tax bill with its strict implementation that the government shall establish, the practices of tax avoidance and tax evasion shall continue and impact the majority of Filipinos in the long run – may it be for the better or worse.

Position Paper by the Grade 12 Accounting, Business and Management students at the University of Santo Tomas – Senior High School, Mazuma Vera Organization


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