How Poorly Thought Out Economic Policies End Up Encouraging Tax Evasion And Illegal Business Activities

One of the biggest root causes to why illegal activities would be poorly thought out economic policies. What are these poorly thought out economic policies? I would like to discuss in detail about two policies namely the current tax rate (32% ceiling mark) and economic protectionism.

The 32% ceiling tax rate for income from PHP 500,000 encourages higher encourages tax evasion and money under the table

If the Bureau of Internal Revenue is wondering why so many Filipinos don't even pay the right taxes it's because the current tax system is a burden. Jailing people for not declaring the right amount may even imprison 99% of Filipino businessmen all at once causing the jails to be overcrowded. It's not even palatable to pay taxes at the current Filipino tax system.

The reason is because the graduated income tax is too high. If you have to pay more because you earn more then that's the system of rewarding the lazy and punishing the diligent. Since there are people who really want to earn more so the solution is to always under-declare their earnings. This gives room for corrupt BIR officials to exploit the lower income while getting close to people of higher income.

One reason why so many rich people haven't paid their taxes properly is because corrupt BIR officials take advantage of the high tax rate. The rich would get protection if they pay some money under the table. It's highly possible Lucio Tan's tax deficit together with Dunkin' Donuts (Philippine branch) and Philippine Daily Inquirer is that they were paying the BIR under the table. They get protection for their billions in taxes while they give some bribe money to the officials.

This should be remedied by lowering income tax rates. It may sound crazy but don't you think more people will declare their income taxes right if the highest rate wasn't so high? For instance, Malaysia has a maximum of 11% in contrast to the Philippines' maximum of 32%. If people only paid up to 11% of income worth PHP 500,000 and much less for anything below it, wouldn't it be more palatable to pay the right tax when the tax rates are justifiable?

The 60/40 economic policy encourages foreign businessmen to do their businesses illegally than to do it legally

Before you keep saying that foreign investors in general will just ruin the country you better ask why foreign businessmen end up operating without a license. If the foreign businessmen have to pass through all the red tape, they can only own 40% of the business partnership with a local Filipino businessmen then think why would they want to operate legally?

It becomes more feasible for foreign investors to invest illegally than to invest legally. The reason would be the only expenses they would need to do is bribe certain government offices and officials to get protection from their monkey businesses. That is, no matter how many times a Filipino businessman may report them for non-issuance of receipts or non payment of taxes or even for smuggling they get away with it. Want to smuggle? Why not bribe the Bureau of Customs to get all the inventory in without having to tax them? Want to avoid taxing them? Why not bribe the BIR?

You can think of how foreign investors are the only ones who get rich is not because they were allowed to invest but because they weren't allowed to invest. In short, they end investing illegally where they can keep all the income while doing business in the Philippines. They may even make billions of pesos and not even half or a quarter of that money is taxed. Instead, that money has been used for money under the table activities which corrupt government officials keep a huge amount of that money. Worse, this is also the reason why so many drug syndicates from other countries end up getting so much of a foothold in the Philippines.

This should be remedied by the use of economic liberalization. If foreign investors could own 50% and upwards and get rid of all the red tape then think how they would find it palatable to do business in the Philippines. If they didn't need to pass through so much hassle, if they can negotiate with a Filipino partner on how much they can own (for example joint ventures usually run at 50-50 in developed countries), own 100% ownership or have more ownership then foreign investors doing underground will be discouraged. Wouldn't it be more fun to invest in the Philippines with the removal of the 60/40 restriction?