Just recently, Sen. Sonny Angara is planning to reduce Estate Taxes from 20% to 6% on the basis that lowering Estate Taxes would encourage more people to pay their taxes.
EVERY TIME WE REDUCE TAXES WE ARE INCURRING MORE LOANS AND WILL PAY MORE INTEREST
Have you ever wondered where the government will get money to fund government services even if the taxes collected are not enough? Why does the government keep lowering taxes and incurring more loans? Every time we get loans we pay more interest. Every interest we pay means we need to collect more taxes in the future to pay the interest and the principal. A look at the deficit projection in the coming years show that always lowering taxes will be detrimental for the future generations who will be burned to pay the debt of the previous generation.
THERE IS AN EVER INCREASING GAP BETWEEN THE RICH AND THE POOR
A recent survey by the BBC early this year showed that the 1% of the population now controls 99% of the wealth. To illustrate how bad this is, imagine the world had only 100 people living in it. One person owns the same wealth as the 99 people’s wealth combined. To make this worst, every year the wealth of this 1% is continually increasing every year. Someday we might see 0.1% of the population now controls 99.9% of the wealth. This will happen if we do not act upon this ever increasing gap between the rich and the poor.
IS IT RIGHT TO CHANGE A LAW IF THE PEOPLE IMPLEMENTING THE LAW ARE NOT DOING IT WELL
Estate tax was created as a means to redistribute wealth accumulated by the rich back to the poor by taxing the inheritance received by the heirs. There will always be money available to pay for Estate Tax since the heirs are receiving something they didn’t even own before. We do not think that the reason why people do not pay Estate Tax is because it is expensive. The reason why people do not pay is because they do not know that they should pay it in 6 months. And there is a heavy penalty as much as 50% additional tax and 20% yearly interest for unpaid estate taxes exceeding the 6 month period. The essence of the law is good but just because the BIR is not properly doing its job in collecting taxes doesn’t mean we should change the law.
WHEN WE DECREASE ONE TAX, WE MUST EVENTUALLY INCREASE ANOTHER TAX
If we lower Estate Taxes even if we are at a net loss or deficit, we must find other sources of income to be able to remove the deficit. Because if we don’t we might not be able to pay off our loan principal and interest in the future. For example, if our tax income is P200B and our government expenses is P300B, we need to borrow P100B at for example 10% interest. Next year we need to pay off the P100B loan plus 10% interest or a total of P110B. If next year our tax is not yet sufficient to pay for expenses we will need to borrow another P100B making our loan to P200B and we need to pay 10% interest or P20B in interest per year. Every time we borrow money, we need to collect more taxes in the future to pay for the principal plus interest. If we keep on borrowing someday most of the tax we collect from the people will be used to pay interest.
WHAT SHOULD BE DONE TO ENCOURAGE PEOPLE TO PAY ESTATE TAXES
- Awareness. The BIR should create more ways to increase awareness of Estate Tax. Based on our experience most people think Estate Tax is the same as Real Estate Tax. Maybe we should also change the name of the Estate Tax to something self-explanatory so that the people would not think they are the same as Real Estate Tax (e.g. Inheritance Tax). Also the BIR should spread awareness campaigns through social media or TV.
- Increase time to pay and allow installment payments of Estate Tax. Normally the inheritance received is in the form of hard assets or real estate. That is why it is hard to pay off the Estate Tax because it is paid in cash but the inheritance received is not cash. Double the allowable time to pay from 6 months to 12 months. In certain cases, allow the commissioner to approve payment of estate taxes in installments while the assets are being liquidated.
- Require as part of the requirement of getting a Death Certificate from the NSO, a notice to the BIR that the person has died. Currently, the law requires a notice of death to the BIR within two months after a person dies but unfortunately this is not being followed.
- Currently all assets are frozen until the Estate Tax has been paid including bank accounts. Increase the limit for allowable bank withdrawals to pay for hospital expenses and expenses necessary to liquidate the hard assets/real estate properties.
- Do not tax a reasonable amount of family home, increase from P1M to P2M maximum allowable deduction and adjust the allowable deduction to increase according to the inflation rate.
- Segregate the income received from Estate Taxes for specific purposes such as alleviation of poverty and social welfare so that the people will know that the Estate Taxes have been used to redistribute wealth to the poor. Increase transparency and accountability so that those who paid the Estate Tax will be happy to have helped the poor.
What happened to the Department of Finance’s goal of reaching P50B in Estate Tax collections? In 2013, the DOF set out a goal to reach P50B in Estate Tax collections which we welcomed. Every time we pay less tax today, we are going to pay more taxes in the future. The loans that we incurred because of our budget deficit will not just magically disappear. We believe that there is too much tax on the living in the form of Income Taxes (32%) and VAT (12%) and too little tax on the dead in the form of Estate Tax (20%). Imagine 44% of our income is stripped away from Income Tax and VAT. There is always a trade-off. Every time you pay less tax, the government needs to loan money and so our children and grandchildren will be the ones to be burdened with higher taxes in the future to pay off the loans. On top of that more tax money will be used to pay interest and lesser services to the people. Every time we lessen the taxes of dead, we are in effect taxing the living more. This is a trade-off we must accept. So my question to the DOF is this, why are you lessening the tax collections from the dead and increasing VAT collections on the living? Is it right to tax so much the money of the people that they earned through blood sweat and tears versus the inheritance that the heirs did not even work hard for to receive? Senator Sonny Angara, we voted for you because we believe in how good you are. Please reconsider.
P.S. If we pay 12% VAT when we buy a condominium unit, then why is it that we will lower the Estate Tax to 6%? Meaning if we purchase property worth 10M we pay 1,200,000 VAT and we don’t even mind paying it. Why is it that the rich will only pay 6% or 600,000 Estate Tax under the proposed law?
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ABOUT THE AUTHOR:
Mark Joseph T. Fernandez, CPA, RFC, AFA, AWP, AEP, MDRT is the founder and head financial advisor of FinancePH. He has helped thousands of people start saving, investing and insuring. He conducts regular monthly seminars and is a regular TV and radio guest on finance topics. If you want him to be your financial advisor contact him at email@example.com .