Taxation: a Brief Explaination

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Briefly explain the role of taxation in development

Tax Structures, Tax Reform, and the Development of Philippines

Structural Characteristics

The Philippines’ shares of various taxes in total tax revenue parallel those of Thailand. However, while there has been a steady-though slow-increase in Thailand’s tax/GDP ratio over the last decade, the Philippines’ tax ratio has not increased beyond the low level of 11 percent (table 2.3), which occurred during a period when expenditure increases were significant. The consequence was a continuous fiscal crisis. Despite the recognition, in a number of studies and reports since the mid-I970s, of a need for major tax reform, the period through the first half of the 1980s witnessed only minor ad hoc changes in the tax system. Changes in excises-especially in petroleum products-sales tax, and trade taxes were among the minor ad hoc revisions made. These changes made the system more complex and the administration more unwieldy. For example, domestic consumption was taxed by a “manufacturers’ sales tax” on a value-added basis; a “contractor’s tax” on some services while other individual services were taxed at differing rates; “fixed and graduated fixed taxes” on sales establishments, with rates varying according to business; and variously rated sales taxes on imports of domestic consumption goods that were designed to selectively provide protection to domestic production. Income taxes also went through various revisions. For example, in 1981 the tax base was changed from net to gross income, and separate rates and exemptions were applied to different sources of income. These changes had the objective of improving revenue performance through easier administration.

However, their impact on revenue was disappointing. Table 2.3 reveals that the income tax/GDP ratio as well as the individual income tax/GDP ratio both declined steadily in the post-1981 period. The same occurred to other taxes during the first half of the 1980s....