ECONOMIC DEVELOPMENT

LESSON 4.1 Economic Growth and Development

Growth vs. Development

Economic growth and development is a goal of all people and nations in the world. Economic growth is the sustained increase per capita real output of goods and services. The output of goods and services is measured in terms of the gross national product (GNP). The economic growth is usually expected to result from economic development.

Economic development is a process of bringing about changes in the economic and social structure of the economy. Economic structural changes mean the modernization of techniques of production designed to bring about increase in the output of goods and services. It can also mean the transition from peasant agriculture to mechanized farming; the weaning away from the dependence on endowments of Mother Nature. Moreover, it is the transition from rural living to an urban way of life. Other definitions of development include the following:

• A social system is moving away from a condition of life widely perceived as unsatisfactory in some way, towards some conditions regarded as maturation, humanization or qualities ascent of human societies (Goulet).
• The capacity of a national economy whose initial economic condition has been more or less a static for a long time, to generate or sustain an annual increase in GNP rates of 5 to 7 percent or more.
• Planned alteration of the structure of production and employment.
• Having a fuller, better, and richer life in egalitarian society (Mariano Guillermo).
• It includes the modernization of institutions, whether economic or non-economic.
• The upward movement of the entire social system where there is circular causation between changes and conditions with cumulative effects.
• A widely participatory process of social change intended to bring an about social and material advancement for the majority of the people through their gaining control over their environment.
• Progress process of improving human conditions.
• Reduction or elimination of poverty, unemployment, and inequality (Dudley Seers).
• Sustained elevation of an entire society and social system toward a better and more humane life.
• A widely participatory process of social change intended to bring about social and material advancement for the majority of the people through their gaining control over their environment.
• The process of improving the quality of all human lives (Michael Todaro).
• Conceived as a multi-dimensional process involving major changes in social structures, popular attitudes and national institutions, as well as the acceleration of economic growth, the reduction of inequality and the eradication of poverty.

Three Core Values of Development

The three core values of development are: substance- the ability to meet basic needs; self-esteem- to be a person; and freedom from servitude- to be able to choose.

Consistent with the core values of development, the objectives of development are:

• To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health and protection.
• To raise levels of living, in addition to higher income, provision of more jobs, better education and greater attention to cultural and humanistic values.
• To extend the range of economic and social choices available to people and nations by freeing them from servitude and dependence not only in relation to other people and nation states, but also to the forces of ignorance and misery.

Millennium Development Goals (MDGs)

The United Nations envision that by 2015, the following MDGs shall be achieved:

1. Eradicate extreme poverty and hunger.
2. Achieve universal primary education.
3. Promote gender equality and empower women.
4. Reduce child mortality.
5. Improve maternal health.
6. Combat HIV/AIDS, malaria and other diseases.
7. Ensure environment sustainability.
8. Development global partnerships for development.

Characteristics of Advanced and Third World

There are differences between the advanced countries and the third world countries. Table 4.1.1 summarizes the characteristics of advanced and third world countries.

ADVANCED COUNTRIES      THIRD WORLD COUNTRIES

Sustained rise of output per head of High birth rate

Population

Subsistence agricultural economy

Increased population due to increasing

Agricultural production  High literacy

Sustained patterns of technological  Low per capital income

Progress

High rates of unemployment

Sustained increase in net capital stock

Negative attitudes, values and

Sustained rise in real wages institutions

High rate of change in economic Poor health inefficient public

Structure and transformation in  Administration

Social and other non-economic sectors   

Theories of Development

The theories of development are based from the works of the following distinguished and famous economists of all times:

1. Adam Smith and the Wealth of Nations

• That a country will grow economically if the people would accumulate capital via domestic savings and gains from trade.
• “Invisible Hand” in the economy.
• Advocated minimal intervention by the government in production.
• The wealth of nation is in its enterprise development, labor productivity and capital formation.

2. David Ricardo and The Limits of Growth 

• The economy will continue to grow for as long as people work on the land on profitable basis so that profit for the entrepreneurs and wages for labor would result in accumulated savings which in turn, can be used for capital formation.

3. Thomas Malthus and The Population Theory

• As population grows, food production can cope less and less with the food requirement of society so that the quality of life will fall. No saving can be generated by the masses because they will have subsistence wages.  

4. John Meynard Keynes and the General Theory

• Holds that the economy can be stabilized and stirred up to grow by injecting income into the economy which will in turn spur new productive efforts among enterprises.
• Pump priming.

5. Harrod-Domar Theory

• Growth is determined by the capital-output ratio and the marginal propensity to save.

6. Schumpeter’s Theory of Technological Change
7. Development of the business organization and the economy is dependent on the chain of innovation that can be produced.
8. Balanced Growth Theory

• A country should balance the development of its agricultural, commercial and industrial sectors so that it can avoid complications such as loss of the agricultural base, through sudden shift to industrialization, slow growth through over-emphasis of agricultural production and failure to find the markets to match the growth of agriculture and industry.

9. Trickle Down Theory

• Development will trip down from the higher income groups to the masses so that there is no need to plan for growth with redistribution.

10. Debt Trap Theory

• There is a limit to how much a country can borrow from other countries and the international lending institutions.
• Beyond the limit, the burden will be so heavy that the repayment problem will be so heavy and pervasive.

11. Import-Substitution Theory

• A country that wants to develop should manufacture or produce ose items that the economy imports from other countries; otherwise, it shall remain as an importing country with the consequent effect of promoting the growth of exporting countries.

Models of development

1. Linear Stages of Growth Model

• Development is a series of stages through which all countries undergo, given the right mix of savings, investment and foreign aid.
• Development is merely a matter of time and that countries follow the same historical path trod by the industrialized nations.

Stages of Economic Growth by W.W ROSTOW

1. The traditional society
2. The precondition for take-off
3. Take-off or self-sustaining growth
4. Drive for maturity
5. The age of high mass consumption

2. Neo-Colonial Dependence Model

• Underdevelopment is due to a highly unequal internationalist capitalist system of rich country-poor country relationship.
• The coexistence of rich and poor nations in an international system dominated by an unequal power relationship between the center and the periphery makes development efforts of poor countries difficult and sometimes even impossible.

3. False Paradigm Model

• Underdevelopment is due to faulty and inappropriate advices, provided by well-meaning, but often uninformed, biased, and ethnocentric international “expert advisers” from developed country assistance agencies and multinational donor organizations.
• Experts offer sophisticated concepts, elegant theoretical structures and complex econometric models of development that often lead to inappropriate or incorrect policy.

4. Ideal Model

• Swedish Model. This model sets a lower limit for wealth and income.
• Argentinian Model. This model sets a lower and upper limit for wealth and income.

Dimensions of Development

1. Economic Development. It is growth oriented and development is measured according to how much progress is made in gross and per capita national product, national and per capita income and similar economic indicators.
2. Social Development. It considers people and their total development and improvements in the quality of life as a focus of development. Poverty eradication, social justice and equity, and employment opportunities are the .goals pursued by social development.
3. Political Development. The maturity and stability of political institutions and systems.
4. Sustainable Development. It balances the requirement for economic progress. And the imperative to conserve and safeguard the environment for the future generations. Productivity remains a valid goal but one that is consistent with the carrying capacities of nature.
5. Human Development. It is the process of enlarging people’s choices. The strategies used in to achieve human development focus on providing opportunities and access to education, health services and livelihood.
6. Sustainable Human Development. A development paradigm that emphasize total well-being of the people within a context of an ecologically friendly and future minded development activities. It is development that distributes the benefits of growth more equitably, substantially satisfies human needs, and improves the quality of life. 

Determinants of Development

Economic development is not determined by economic factors (such as capital, technology and market) alone. There are non-economic factors such as social structure, family system, cultural values, political conditions, corruption in public administration, religion, population and geography that affect economic development and they have greater influence than the economic ones. These factors and their effects on the development of a country such as the Philippines are explained below.

Some Problems of Philippine Economic Development

The Philippines as a developing country continue to face many problems in its attempt to achieve economic development. Many economist, however, believe that the Philippine’s concern with respect to economic development policy is mainly that of structural problems. These include the following:

SAVING AND INVESTMENT. Typically, in developing countries, the question is not how much to save, but in what form should endeavor to mobilize a certain level of savings necessary to promote economic growth. However, the lack of knowledge of opportunity costs in various areas of investment lead people to hold money balances in idle form (e.g., jewelry or in real estate) such that these assets do not appreciate in value over time. Thus, this form of saving does not generate production and employment.

TAX STRUCTURE. Tax collections in developing countries cannot really cope with government expenditures. It is difficult for a developing country to rely on taxation alone to finance many development programs. Some economic, socio-cultural and political factors explain why taxation cannot really cope with public expenditures.

AGRICULTURAL STRUCTURE. In the Philippines, large land areas are owed by only a few. Farm operations make use of tenancy arrangements and absentee landlordism. Moreover, pricing of the produce is dominated by traders and millers. Other heartaches of small farmers include typhoons, floods, pestilence, draught and the market mechanism. Increasing agricultural output is a problem that arises out of a social system that benefits only a few.

EDUCATION. The educational system in the Philippines has been influenced predominantly by Spain and the United States. Some recurrent issues in education continue to be addressed by educational planners and policy makers. These are issues on quality of education, literacy, curriculum offering, mismatch between demand and supply for labor, job opportunities and labor market information.

POPULATION. Rapid Population growth is one of the most pressing problems of developing countries. The ideal ratio is this: if population growth rate is 3 percent, then production growth rate should be more than 3 percent. Economists contend that too large a population proportion to support lowers the standard of living.

The need is not population control alone, but also a population program of human settlement, that is, to involve the people in activities that contribute to productivity to overcome the current problem of scarcity.

BUSINESS AND ENTERPRISE. Traditional characteristics of methods of production and organization are among the structural faults of economic institutions in developing countries. Economic development requires integration of the various stages by interlinking with other supplier-firms, and not a self-contained process from the first to the final stages of production.

LESSON 4.2 ESSENTIALS OF TAXATION

Taxation and Economic Development

To accelerate the economic development of the Philippines, equitable distribution of income and wealth has been given top priority in our national development program. While economic development involves the interaction of different factors, economic and non-economic, as mentioned in the preceding lesson, social structure or the institutions of the society is one of the more fundamental barriers to our economic development.

The present institution of ownership of private properties in our country favors to elite. A very big portion of the wealth and income of the society belongs to them, and only about ten percent of such resources are owned by the 90 percent of the population. Taxation and agrarian reform program have been the key measures adopted by our government as the key instruments of social control, to effect a more equitable distribution of wealth among the people and achieve economic and social stability.

Relying on the ability-to-pay concept, individuals and business firms in higher income levels have been taxed at higher rate to provide revenues for income security and services that are greater proportion by those in the lower income level.

Why Should We Study Taxation?

Taxes are referred to as the lifeblood of the nation without which the State cannot exist and perform its many and varied functions.

In the Philippines, most of our people are not tax conscious. They must be made aware of the need to pay to be Government taxes imposed by law. One effective way of achieving this is to teach the young, even before they become taxpayers, the reason for and basic workings of taxation.

To a lot of people, taxation means additional burden. This attitude should be discouraged. In its place, the payment of taxes should be considered as the means by which a person shares in the support of his Government so that the latter can perform its function effectively.

Taxes are the enforced proportional contributions from the 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.

Taxation is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is the inherent power of the State to demand enforced contributions for public purposes.

Basic Purposes of Taxation

The primary purpose of taxation on the part of the government is to provide funds or property with which to promote the general welfare and protection of its citizens, and to enable it to finance its multifarious activities. Almost all revenues of the government are derived from taxes raised. Taxation may also be employed for purposes of regulation or control as shown in the following examples: Imposition of protective tariffs on imported goods to protect local industries.

Adoption of progressively higher tax rates to reduce inequalities in wealth and income. The increase or decrease of taxes to prevent inflation or word-off depression.

Essential Characteristics of Tax

The essential characteristics of a tax include the following:

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.
5. It is levied by the State which has jurisdiction over the subject or object of taxation.
6. It is levied by the law-making body of the State.
7. It is levied for public purposes.

Theory and Basis of Taxation

The power of taxation proceeds upon the theory that the “existence of government is a necessity”; that it cannot continue without means to pay its expenses, and that for this means it has a right to compel all its citizens and property within its limits to contribute.

The basis of taxation is found in the reciprocal duties, protection and support between the State and its inhabitants. In return for his contribution, the taxpayer receives benefits and production from the Government. This is the so called benefits received principle. Protection in the enjoyment of his rights is a duty owed by the State to every citizen.

Aspects of Taxation

The exercise of the power of taxation involves two aspects, and they are:

1. Levying or imposition of the tax which is a legislative act; and 
2. Collection of the tax levied, which is essentially administrative in character.

The first is taxation, strictly speaking, while the sound, which involves the Implementation of tax laws, is referred to as tax administration. The two processes together constitute the taxation system.

Basic Principles of a Sound Tax System

The basic principles of a sound tax system are as follows:

1. Fiscal adequacy, which means that the sources of revenue should be sufficient to meet the demands of public expenditure;
2. Equality or theoretical justice, which means that the tax burden should be proportionate to the taxpayer’s ability to pay. This is the so-called ability to pay principle; and
3. Administrative feasibility, which means that tax laws, should be capable of convenient, just, and effective administration.

As to purpose

1. General, fiscal or revenue which is tax imposed solely for the general purposes of the government, that is, to raise revenue for governmental expenditures.

Examples: Income tax, sales tax, and almost all taxes

2. Special or regulatory tax which is imposed for a special purpose, that is, to achieve some social or economic ends irrespective of whether revenue is actually raised or not.

Examples: Protective tariffs of customs duties on imports to protect local industries against foreign competition; and lower tariffs on imports to encourage foreign trade.

 As to scope (or authority imposing the tax)

1. National tax is imposed by the national government under the National Internal Revenue code and other laws particularly the Tariff and Customs code.

Examples: National internal revenue taxes, customs duties, and national taxes imposed by special laws.

2. Municipal or local tax is imposed by municipal or public corporations (local governments) to meet p0articular needs the Local Government Code.

Examples: Real property tax, community tax

 As to graduation or rate

1. Proportional tax is based on a fixed percentage of the amount of the property, receipts/income or other basis to be taxed.

Examples: Real property taxes; all percentage taxes

2. Progressive or graduated tax is a tax whose rate increases as the tax base or bracket increases.

Examples: Income tax, estate tax, donor’s tax

3. Regressive tax is a tax whose rate decreases as the tax base or bracket increases.

A regressive tax must not be confused with regressive system of taxation which exists when there are more indirect taxes imposed than direct taxes.

Limitation on the Power of Taxation

There are constitutional and inherent limitations in the power of taxation.

• Constitutional limitations are those that are expressly found in the constitutions or implicit from its provisions as follows:

Due process of law. A taxpayer may not be deprived of his property for non-payment of taxes without giving notice to him of his tax liability as well as of the sale at public auction of such property to satisfy the taxes as this will amount to denial of due process. Here, the giving of notice is part of the procedure that is prescribed by law.

A tax which is imposed for a private purpose or which is beyond the jurisdiction of the government to levy and collect, likewise violates due process of law. In this case, the law imposing such tax is void.

Equal protection of the laws. This signifies that “all persons subject to legislation shall be treated alike under like circumstances and conditions both in the privileges conferred and liabilities imposed.”

The doctrine does not require the persons or properties different in fact be treated in law as though they were the same. What it prohibits is class legislation which discriminates against some and favors others.

1. Rule of uniformity and equity in taxation

Uniformity in taxation. This means that “all taxable articles or properties, or other subjects like transactions, business, rights, of the same class shall be taxed at same rate.” Different articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere.

Equity in taxation. The appointment of the tax burden among the taxpayer’s ability to shoulder the burden.

2. No imprisonment for non-payment of a poll tax. This principle is based on the constitutional provision that “No person shall be imprisoned for debt or non-payment of a poll tax”.

Under Section 38(e), Article 6 of the Local Government Code (Chapter IV), the only penalty for delinquency is the payment of surcharge; and this is not prohibited by the Constitution. A person, however, is subject to imprisonment for violation other than for non-payment of the community tax as in falsification of the community certificate; and for non-payment of other taxes if so expressly provided by the pertinent law.

3. Non-impairment of the obligation of contracts. The obligation of contract is impaired when its terms or conditions are changed by law or by party without consent of the other, thereby weakening the position or rights of the latter. 

An example of impairment by law is when a tax exemption based on a contract entered into by the government is revoked by the latter through a later taxing statute.

4. Non-infringement of religious freedom. The constitutional provision is as follows: “No law shall be made respecting an establishment of religion or prohibiting the free exercise thereof. The free exercise and enjoyment of religious profession and worship without discrimination or preference shall forever be allowed.”
5. No appropriation for religious purpose. This is based on the requirement that taxes can only be levied for public purpose. The legislative body is without power to appropriate funds for a private purpose.
6. Exemption of religious, charitable and educational entities, non-profit cemeteries, and churches from taxation. This limitation is based on the following constitutional provisions.

Sec. 28 (3), Art. VI, 1987 Constitution. Charitable institutions, educational entities and churches are exempted from tax for the use of the property but not ownership. Thus, a property leased by the owner to another who uses it exclusively for charitable purposes is exempt from property tax but the owner is subject to income tax.

Parsonages or convents appurtenant tereto, mosque and non-profit cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation.

The exemption covers only property and no other taxes.

7. Exemption of non-stock, non-profit educational institutions from taxation.

Sec. 4 (3), Art. XIV, 1987 Constitution. All revenues and assets or non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.

Sec. 4, Art. XIV, 1987 Constitution. Subject to conditions provided for by law, all grants, endowments, donations, or contributions used actually, directly and exclusively for educational purposes shall be exempt from tax.

The exemption covers income, property, donor’s and donee’s taxes and customs duties.

8. Concurrence by a majority of all members of Congress for the passage of a law granting tax exemption. This is intended to prevent the indiscriminate grant of tax exemption
9. Authority of the President to veto the particular item or items in a revenue or tariff bill.

1. Non-impairment of the jurisdiction of the supreme court in tax cases.

“The Congress shall have the power to define, prescribe, and apportion the jurisdiction of the various courts but may not deprive the Supreme court of its jurisdiction enumerated in Section 5 hereof.” (Sec. 2, Article VIII).

“The Supreme court shall have the following powers: review, revise, reverse, modify, or affirm final judgments and orders of lower courts in all cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed in relation thereto.” (Secs, 1, 5 (2b), article VIII).

Under the two provisions, the Congress cannot take away from the Supreme Court the power given to it by the Constitution as the final arbiter of tax cases.

2. Inherent limitations include the following:

a. Requirement that levy must be for a public purpose. The term is synonymous with “government purpose”. The proceeds of the tax must be used for the support of the government, for some of the recognized objects of government, or to promote the welfare of the community.

b. Non-delegation of the legislative power of tax. Only the law making body of the government has the sole power to impose taxes.

c. Exemption from taxation of government entities. The government need to tax itself.

d. International comity. The property of a foreign state or government may not be taxed by another. This is based on the sovereign equality among states under international law by virtue of which one state cannot exercise its sovereign powers over another.

e. Territorial jurisdiction. Tax laws do not operate beyond a country’s jurisdictional limits. Furthermore, property which is wholly and exclusively within the jurisdiction of another state receives none of the protection in return for which a tax is supposed to be imposed.

Exemption from taxation is the grant of immunity to particular persons or corporations or to persons or corporations of a particular class from a tax which others generally within the same tax district are obliged to pay.

Tax Laws

Tax laws in the Philippines cover national and local taxes. National taxes refer to national internal revenue taxes imposed and collected by the national government through the Bureau of Internal Revenue (BIR) and local to those imposed and collected by the local government.

The basic source of Philippine tax law is the National Internal Revenue Law, which codifies all tax provisions, the latest of which is embodied in Republic Act No. 8424 (The Tax Reform Act of 1997). It amended previous national internal revenue codes and was approved on December 11, 1997. The Tax Reform Act of 1997 took effect on January 1, 1998.

Administrative Issuances, BIR Issuances and Rulings

The Secretary of Finance, upon the recommendation of the Commissioner, promulgates needful rules and regulations for the effective enforcement of the provisions of the tax Code (Section 244, Tax Code of 1997). The Commissioner of the Internal Revenue, however, has the exclusive and original power to interpret the provisions of Tax Code, but subject to review by the Secretary of Finance.

Administrative issuances which may be relied upon in interrupting the provisions of the Tax Code, which are signed by the Secretary of Finance or the Commissioner of Internal Revenue, or his duly authorized representative, come in the form of Revenue Regulations, Revenue Memorandum Orders, Revenue Memorandum Rulings, Revenue Memorandum Circulars and BIR Rulings.

Revenue Regulations (RRs) are issuances signed by the Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, that specifies, prescribes or defines rules and regulations for the effective enforcement of the provisions of the National Internal Revenue Code (NIRC) and related statues.

Revenue Memorandum Orders (RMOs) are issuances that provide directives or instructions, prescribe guidelines, and outline processes, operations, activities, workflows, methods and procedures necessary implementation of stated policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except auditing.

Revenue Memorandum Rulings (RMRs) are rulings, opinions and interpretations of the Commissioner of Internal Revenue with respect to the provisions of the Tax Code and other tax law, as applied to the specific set of facts, with or without established precedents, and which the Commissioner may issue from time to time for the purpose of providing taxpayers guidance on the tax consequences in specific situations. BIR Rulings, therefore, cannot contravene duly issued RMRs; otherwise, the Rulings are null and void ab initio.

Revenue Memorandum Circular (RMCs) are issuances that publish pertinent and applicable portions, as well as amplifications, of laws, rules, regulations and precedents issued by the BIR and other agencies/offices.

BIR Rulings are the official position of the Bureau to queries raised by taxpayers and other stakeholders relative to clarification and interpretation of tax laws.

The Bureau of Internal Revenue

        The Bureau of Internal Revenue (BIR) functions under the supervision and control of the Department of Finance (DOF). The Bureau was created by Commonwealth Act No. 4669, approved by the National Assembly in June 15, 1939 made effective July 01, 1939. It was revised and codified and then internal revenue laws of the Philippines. 

The mission of the BIR is to “collect taxes efficiently and effectively, for and at the least cost to the government, through impartial and consistent enforcement of internal revenue laws, and convenient and honest service to taxpayers.

BIR accounts for more than 60 percent of the national government’s total revenues. The BIR carries the bulk of the burden of solving the country’s budget deficit problem.

Organization of the Bureau of Internal Revenue (BIR)

        The BIR has offices at the national, regional and district levels.

At the national level are the Commissioner of the Internal Revenue, the four Deputy Commissioners, and the constituent offices of the Bureau.

Field Service is decentralized to the regional offices and revenue district offices as follows:

1. Regional Offices. For an effective administration and control, the Philippines have been divided into regional offices, each office being headed by a Regional Director. He administers and enforces internal revenue laws and regulations within this area. He is assisted by an Assistant Regional Director.
2. Revenue District Offices.     Under the regional officers are revenue district offices headed by Revenue District Officers who are under the immediate supervision of the Regional Director. Each district is compost of field men and examiner’s performing assessment work and collection agents and clerks performing collection works. They are the revenue personal having direct contact with the taxpayers.

Powers and Duties of the Bureau of Internal Revenue

In general, the powers of BIR are:

1. To assess and collect all national interval revenue taxes, fees and charges.
2. To enforce all forfeitures, penalties, and fines connected there with.
3. To execute judgments in all cases decided in its favor by the Court of Tax Appeals and ordinary courts.
4. To give effect to and administer the supervisory and police power conferred upon it by law.
5. To recommend to the Secretary of Finance all needful rules and regulations for the effective enforcement of the provisions of the National Internal Revenue code (Sec. 244).

Distinction between Tax Evasion and Tax Avoidance

Tax evasion is the use by the taxpayer of illegal or fraudulent means to defeat or reduce the payment of a tax. It is punishable by law. Tax evasion is escape from taxation accomplished by breaking the letter of the tax law, like the deliberate omission to report a taxable income, or a taxable property, under declaration of sales, over statement of expenses, and back dating an important document.

Tax avoidance, on the other hand, is the use by the taxpayer of legally permissible means or methods in order to avoid or reduce tax liability. It is not punishable by law. It covers escape from taxation accomplished by legal means which may be contrary to the intent of the sponsors of the tax law but nevertheless does not violate the letter of the law. The term may include situations where a person refrains from engaging in some activity or enjoying some privilege in order to avoid the incidental tax, or to lower his tax bracket for a taxable year to avoid the higher rate of tax. A man may change the form of his property by putting his money into non-taxable securities.

Progressive System of Taxation and the Income Tax

To achieve the quality objective in taxation, the Constitution enjoins Congress to “evolve a progressive system of taxation”. This means that tax laws shall place more emphasis on direct taxation, with ability to pay as the main criterion.

The individual income tax provides the best example of a direct and progressive tax.

For tax purposes, income means all wealth which flows into the taxpayer other than as a mere return on capital. Not all receipts of a person are income.

Income tax is a tax on a person’s income, profits and the like, realized in one taxable year. It is generally regarded as a privilege tax and not a tax on property. It is a tax on the privilege to earn an income.

Gross Income is all income but not including exempt income and income subject to final income tax.

Examples of gross income are salaries or wages for services including fees, commissions, and similar items and those derived from business or profession, sale of and other dealings in property, interests, rents, dividends, and securities.

Taxable income is gross income less the deductions allowed by law, including in the case of individuals, the allowable personal and additional exemptions. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due.

Depending on the tax payer involved, taxable income may refer to either one of the following: (1) net compensation income, (2) gross compensation income, (3) net income or (4) entire or gross income. Discussed in this module is the tax on net compensation income.

Net Compensation Income. The compensation income is arrived at after subtracting from gross compensation income derived by resident citizens or resident aliens, basic personal and additional exemptions, and premium payments, if any, on health and or hospitalization insurance under certain conditions.

In the succeeding illustration, computation of tax due on net compensation income is sequenced and patterned after the actual BIR income tax returns forms.

Exclusion from Gross Income or Exempt Income

There are incomes that are exempt from the tax e.g. life insurance proceeds paid to beneficiaries upon the death of the insured, as they are considered more as an indemnity rather than as gains or profits, and payments for injuries or sickness as they are compensatory in nature. Other examples of exempt income are retirement benefits (under certain conditions) receive from private firms, social security and GSIS benefits, prizes and awards granted in recognition of religious, charitable scientific, educational , artistic literary or civic achievement , or in sports competition.

Deduction from Gross Income

Deductions are items or amounts which the law allows to be deducted from gross income to arrive at taxable income.

Individual tax payers who are earning beyond the minimum wage shall enjoy an increase in their personal exemptions and additional deductions. Regardless of his civil status an individual taxpayer shall now be entitled to a fifty thousand pesos (P50, 000) personal exemptions and an additional deductions of twenty five pesos (P25, 000) for each dependent child, not to exceed four (4)

The increases in the personal exemptions and additional deduction for quality dependent children exceed the cumulative inflation from 1998 to 2008. It was 1998, through the passage of RA 8424, when the last adjustments period of personal exemption from P96, 000 for a family of 6 (2working spouses and 4 dependent children) P200, 000.

Tax Exemption to Minimum, Wage Earners 

Under the new law, minimum wage earners in both private and government sectors shall now be exempted from the payment of income tax. Their income tax exemption extends to their wage and work related benefits such as holiday pay, overtime pay, night shift different pay and hazard pay. There are more than half a million minimum wage earners in both private and public sectors, who are presently income taxes on their wages.

RA 9504 formalizes the income tax exemption of minimum wage earners in the private and public sectors. It might be recalled that they have been exempt from the withholding tax since of BIR Revenue Regulations No.01-2006.

LESSON 4.3 AGRARIAN REFORMS

Agrarian Reform vs. Land Reform

Agrarian Reform is a social or political movement to bring about land reforms and to improve the economic status of the farmer. It is a package of services which includes land reform and other services designed to provide a way of life which will elevate the status of the farmer and release him from the bondage of the soil. It pertains to services in the form of credit support, infrastructure, farm extension, legal assistance and the development of rural institutions.

Agrarian reform is considered wider than land reform as explained below:

1. The term comprises not only land reform but also the reform and development of the complementary institutional framework such as administrative agencies of the national government, rural, educational, and social welfare institutions, cooperatives, etc., and not limited simply to the question of the farmers to the land.

It encompasses all programs designed to bring about improvement in all the institutions surrounding farm life as well as companion measures necessary to make the work of the tenant, farm worker, and owner-cultivator successful. It means remedying not only the defects in the distribution and use of land but also, and especially, the accompanying human relations regarding land, including economic, social, and political relations. It is concerned not only with the farmer and the land he tills but also the community he lives in.

2. In the Comprehensive Agrarian Reform Law of 1988 (R.A. No. 6657), agrarian reform defined as the “redistribution of all public and private agricultural lands, regardless of crop or tenurial arrangements, to landless farmers and regular farm workers, to include all the necessary support services designed to improve the economic status of beneficiaries and increase land productivity, and all other arrangements which will provide the beneficiaries a just share of the fruits of the land they work ” (Sec. 3 (a) of R.A. 6657)

3. In short, agrarian reform means solving the agrarian problem and thereby elevate the quality of life of the rural populace and make them active participants in the economic and political affairs of their locality.

Land Reform on the other hand, is measure or method for electing the land distribution of large estates into small landholdings which would be given to the tillers of the soil. Land reform aims to correct the situation where a large number of farmers are under some kind of bondage to the land owners. It pertains to improvement and changes in land use and to problems arising from the land itself.

According to Basilio Estanislao, then president of the Land Bank, agrarian reform (of which land reform is only a component) is a broad program to improve not only the productivity but also the income levels of the agrarian sectors, to generate and expand employment, and reduce poverty in the countryside. He said that an agrarian reform program in the context of the Philippine condition should contain several components among which are:

1. The tenurial or the land reform component (the visible aspect of which is the on-going transfer of the land to the tenants);
2. The infrastructure component (irrigation, flood-control, farm-to-market roads);
3. The institutional development component (cooperatives);
4. The financial support or the funding component;
5. The agricultural development component (modern farm methods, etc.);
6. The small-scale or cottage or backyard industrialization component; and
7. The price structure component (since prices of both inputs and outputs somehow affect the profit component of a rice production project, and therefore, the income of farmers).

Dimensions of the Agrarian Problem

The agrarian problem has two important dimensions: the land (agricultural/productivity) and the people (social/human rights). Of the two, the second is the more fundamental one. “The person who tills the land does not own it and the person who owns the land does not till it”. In the course of time, the non-tilling owner gets more income while the non-owning tiller gets relatively poorer and poorer. The imbalance or gap, starting at the economic sphere, permeates the cultural, the social, and the political spheres and each sphere reinforces the others, thus creating a vicious circle of poverty and injustice.

Because of the agrarian problem, the farmer is poor. Because the farmer is poor, he cannot afford to pay more taxes and thus, government cannot raise sufficient revenue with which to support its operation. Because of the agrarian problem, the farmer is poor and less people want to be farmers, the people leave the farms, they flock to the cities to try their luck. There is overcrowding and urban squatting, unemployment and crimes.

Why Agrarian Reform in the Philippines?

The economic, social and political necessity of agrarian reform in our country can hardly be the subject of argument.

1. By replacing share tenancy with owner-cultivatorship and setting up farmers as independent landowners, land reform would increase their production, set them free from poverty and debt, and make them dignified p-participants in nation-building.

It is estimated that two-thirds of the Filipino poor live in the rural areas, and majority of them are engage in agriculture.

2. The Philippines must industrialize but industrialization requires a tremendous amount of capital most of which is frozen in land tilled by tenants. Agrarian reform would liberate the capital for investment in new industries. This would increase production and provide employment to our expanding population and raise general standard of living.

3. Land reform is the answer to the communist challenge for it will bring both industrialization and the end of the tenancy system, the principal breeder of communism. No industrial country with agricultural population of prosperous free farmers has ever come under communist rule.

4. Land reform will correct the present imbalance in our society where there are enormous concentrations of land, and political powers in the hands of a few.

5. The land reform program will make democracy truly meaningful to our people and provide the impetus for the creation of a stable society as it is a program designed to uplift our masses from poverty and ignorance.

Components of Agrarian Reform

Agrarian reform has at least two components

1. Land distribution. This is the most effective way of providing security of tenure to tillers of the soil. This is the meat of agrarian reform – to make the tillers of the land the owners of the land they are tilling to ensure their right to just share in the fruits of their labor; and

2. Companion measures. It is not enough that the tillers become the owners. They must also become successful owners of the land. After transferring ownership to the users of the land, the other problem must be tackled and solved, which is the increased, maximized and modernized utilization of the land for the benefit of not only the new owner but that of society. This would mean the creation and development of new social institutions that could effectively carry out the other companion measures of agrarian reform such as the following:

a. Credit;

b. Modern and better methods of production;

c. Marketing facilities, equitable pricing, infrastructure; and

d. Cooperatives. All the companion measures cannot be done without the organized and conscious efforts of the farmers themselves, hence the necessity of cooperatives and other forms of social organizations. On the other hand, these cooperatives can, in turn, be the most effective channels for proper agricultural planning for both the micro and macro levels that will ensure food sufficiency in terms of adequate supply and proper distribution.

Objections of Agrarian Reform

There are objections to agrarian reform which are as follows:

1. Fragmentation of farm-holdings. There is an impression that the land distribution aspect of agrarian reform means wholesale reduction in the size of farm units.

2. Unproductive small farms. It is claimed that family-size farms are small farms and farms are most productive and economical only when operated on a big scale.

3. Inclusions of small landholdings. The other prevalent objection is why including the small landholdings? At present the vast majority of farm units are less than family-size farms, farms of three hectares for irrigated land and five hectares for non-irrigated land.

4. Failure of agrarian reform in the past. This is one of the most prevalent objections to agrarian reform. Farmers who are given lands in the past have either sold their lands or have not been able to pay the lands given to them. Somme people believe that because of agrarian reform, agricultural production has gone down.

Implementation of Agrarian Reform

The implementation of agrarian reform within a politically democratic framework poses some problems. Unlike countries with revolutionary and authoritarian forms of government, the diffusion of political powers among executive, legislative and judicial organs of the government makes it difficult to overcome the opposition of vested interests or reorganize or change the existing institutions which impede the reform. The implementation of agrarian reform, particularly land reform, is not purely a function of the administrative process; nor can it be studied in the isolation of the political, economic, and social structure forms a part.

A favorable political climate is the precondition of a sound reform and its implementation. This is so because any reform that transfers property and privilege from one group to another can neither be properly initiated nor carried out unless the controlling political forces of a country are willing to support the revolutionary changes and ready to use all instruments of government to attain goals.

The Successful Implementation of Agrarian Reform

Below are measures for the successful implementation of agrarian reform.

1. Agrarian reform is a complex and often controversial program which usually meets with opposition from vested interests. It is therefore necessary that any organization for its implementation should provide a line of command from the center to field levels in order to ensure that policy is enforced and supported at all levels.

2. In view of the fact that all support like agricultural credit, is usually withdrawn by landlord on the introduction of the program, it is essential that the beneficiaries are provided with the necessary supporting services.

3. Since the prevailing political, economic, social and administrative systems are usually weighed against would – be beneficiaries, it is necessary that the administrative organization and procedures as well as the judicial system by which the newly conferred rights are to be enforced are fashioned in such a manner as to enable the attainment of the objectives of the program.

4. Lastly, since existing administrators are often not adequately oriented or sympathetic towards the reforms and such a program is often obstructed by vested interests at all levels it is desirable to involve the beneficiaries in the implementation of the program.

COMPREHENSIVE AGRARIAN REFORM LAW OF 1988(REP. ACT No. 6657)

Overall concept

The Comprehensive Agrarian Reform Law of 1988 (CARP ’88) conceives of agrarian reform as redistribution of all public and private agricultural lands regardless of crop or tendril arrangement, to landless farmers and regular far workers, to include all necessary support services designed to improve the economic status of beneficiaries a just share of the fruits of the land they work (Sec. 3(a) of R.A 6657).

Retention Limits under the Law

Rep. Act 6657 provides the landowner shall retain not more than five (5) hectares of agricultural land. Each child of the landowner may be awarded three (3) hectares, provided he at least 15 years old and is actually tilling the land or managing the farm. In the case of landowner, whose lands (rice and corn lands) have been previously covered by Presidential Decree No. 27, they can keep the area originally retained by them under this decree. Similarly, owners of original homesteads or their compulsory heirs who still own these homesteads at the time of approval R.A. 6657 can retain the same areas as long as they continue to cultivate them.

Area to be retained by Landowner

The landowner has the right to choose the area to be retained which shall be compact and contiguous.

Options of Tenants in Lands Selected for Retention

Tenants of areas to be retained have the option to remain in those areas or be a beneficiary in the same or another agriculture land with similar features. If they choose to remain in the retained areas, they shall be considered as leaseholders and they forfeit their right to become beneficiaries under the law. They will however give up their right as leaseholders in the retained areas if they choose to become beneficiaries of another land. The tenants must exercise this option within one year from the time the landowner makes his choice of the area to be retained.

Priorities in the Acquisition and Distribution of Agricultural Lands

All agricultural lands shall be programmed for redistribution within 10 years from the effectivity of R.A 6657 according to the following schedule.

Phase One. Rice and corn lands under P.D 27, all lands foreclosed by government financial institutions, all idle or abandoned lands, all private lands voluntarily offered for redistribution, PCGG acquired lands; all government-owned agricultural lands are for immediate acquisition and distribution to be completed within four years from the effectivity of the Act.

Phase Two. All alienable and disposable public agricultural lands, all arable public agricultural lands under agro-forest, pasture and agricultural leases already cultivated and planted to crops, all public agricultural lands to be opened for development and resettlement, and all private agricultural lands in excess of 50 hectares, in so far as the excess is concerned, are for immediate acquisition and distribution upon the effectivity of the Act, also to be completed within a period of four years.

Phase Three. All other private agricultural lands as follow:

1. Above 24 hectares up to 50 hectares shall begin to be redistributed on the fourth year from the effectivity of the Act and to be completed within three years.
2. From the retention limit up to 24 hectares shall begin to be redistributed on the sixth year from the effectivity of the Act and to be completed within four years.

Executive Order No. 364 (Sept. 27, 2004 transformed the Department of Agrarian Reform into the Department of Land Reform (DLR). The DLR is responsible for all reform in the country, including agrarian reform, urban land reform, and ancestral domain reform.

Identification of Land Covered by CARP

Within 180 days the effectivity of R.A. 6657, all natural and juridical persons, including government entities, owning or claiming to own agricultural lands are required to register their landholdings with the Assessor’s Office in the municipalities where their properties are located. Those who have already registered under executive Order No. 229 and who have furnished all the information required need not register again.

Just Compensation for lands Acquired be Determined

Every effort shall be exerted to give just compensation to the landowner for lands acquired from him. To be considered in determining compensation are the cause of acquisition of the land, it’s nature, actual use and income, the current value of like properties, the sworn valuation by the owner, tax declarations, and assessed value. Other factors to consider are the social and economic benefits contributed by the farmers and farm workers and by the government to the property as well as the non-payment of taxes or loans secured from government financial institutions.

Mode of Payment to Landowners

The landowner may choose from any of the following modes:

1. Cash Payment under the following terms and conditions:

1. 25% cash for lands above 50 hectares, insofar as the excess is concerned, the balance to be paid in government financial instruments negotiable at any time.
2. 30% cash for lands 24 hectares and below, the balance to be paid in government financial instruments negotiable at any time.
3. 30% cash for lands hectares and below, the balance to be paid in government financial instruments negotiable at any time.

2. Shares of stocks in government-owned or controlled corporations, Land bank preferred shares, physical assets or other qualified investments.
3. Tax credits which can used against any tax liability.
4. Land Banks bonds.

A landowner who voluntarily offers his land for sale is entitled to any additional 5% cash payment.

Qualified Beneficiaries under CARP

Landless barangay residents or those who own less than three hectares of land and who show willingness, aptitude, and ability to make land productive may qualify in the same barangay or municipality, in the following order of priority:

1. Agriculture lessees and share tenants
2. Regular farm workers
3. Seasonal farm workers
4. Other farm workers
5. Actual tillers or occupants of public lands
6. Collectives or cooperatives of the above beneficiaries
7. Others directly working on the land

Beneficiaries under PD 27 who culpably sold, disposed of, or abandoned their land can no longer become beneficiaries under CARP. Any beneficiary found guilty of negligence of the land forfeits his right.

Award of Land to Beneficiaries

The DAR shall complete an award of land to a beneficiary within 180 days from the time the DAR takes possession of the land. The beneficiary will receive a Certificate of Land Ownership Award which contains the conditions and restrictions of the award and shall be recorded in the register of Deeds and annotated on the certificate of Title.

Payment of Land by Beneficiaries

The beneficiary shall pay the Land Bank in 30 annual amortizations at 6 percent per annum. The PARC may reduce the amounts for the first three payments, provided that first five payments may not be more than 5 percent of the value of the annual gross production as established by DAR. If the scheduled annual payments after the fifth year is more than 10 percent of the value of the annual gross production, and the low production is not the beneficiary’s fault, the Land bank may reduce the interest rate or the principal obligation to make the payment affordable to the beneficiary.

The land awarded remains under mortgage to the LBP until fully paid. If the beneficiary fails to pay an aggregate of three annual amortization, the LBP may foreclose the mortgage, and the foreclosed landholding may later be awarded to other beneficiaries. A beneficiary whose land has been foreclosed is permanently disqualified from becoming a CARP beneficiary.