Module 1: General Principles

Definition of Taxation
Taxation is the process by which the sovereign raises income to defray the expenses of the
government.
Basic Purpose of Imposing Taxes
Taxes are the lifeblood of the government. Without taxes, the government would not operate
and would be paralyzed for lack of the motive power to active and operate it. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income to the taxing authorities, every
person who is able to must contribute his share in running of the government. The government for
its part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values. This symbiotic relationship is
the rationale and taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.
Purposes or Objectives of Taxation
The main objectives of taxation are the following:

1. Revenue purpose.
2. Sumptuary or regulatory purpose.
-The state increases taxes on harmful substances making them more expensive thus, limiting
their consumption.
3. Compensatory purpose.
-Maintain high level of employment.
-Control inflation
-Social justice through redistribution of income.
Theory of Taxation

a. Acceptance that governmental existence is a necessity.

b. Performance of government function redound to the benefit of the citizenry in general.
c. In view of the above the government could levy proportionate forced contributions among the
citizen to defray its expenditures. Stated otherwise, revenues could be raised to defray
expenditure for public purpose.
Concept of Lifeblood Theory

1. Taxes are the lifeblood of the nation.

2. Without revenue raised from taxation the government will not survive, resulting in detriment
to society.
Principles of the Lifeblood Theory

a. That collection of taxes may not be enjoyed by injunction.

b. That taxes could not be the subject of compensation and set-off.
c. That a valid tax may result in destruction of the taxpayer’s property.
 d. Taxation is an unlimited and plenary power.
Rationale for Taxation or the Benefits – Received Principle

1. Reciprocal duties of protection and support between the stare and its citizens and residents.
Also called the “symbiotic relation” between the stare and its citizens.
2. Jurisdiction by the state over persons and property within its territory.

Taxes, Defined
Taxes are the enforced proportional contributions from 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.

Essential Characteristics of Tax

1. It is an enforced contribution - A tax is not a voluntary payment or
donation and its imposition is in no way dependent upon the will or
assent, open or implied, of the person taxed.
2. It is generally payable in money - Unless qualified by law (e.g., backpay
certificates under Sec. 2 R.A. 304, as amended), the term taxes or tax
is usually understood to be a pecuniary burden - an exaction to be
discharged alone in the form of money which must be in legal

3. It is proportionate in character - A tax is laid by some rule of

apportionment according to which persons share the public burden. It is
ordinarily based on ability to pay. Thus, people pay very high taxes,
others, very small amounts or none at all.
4. It is levied on persons or property - A tax may also be imposed on acts
transactions, rights or privileges. In each case, however, it is only a
person who pays the tax. The property is resorted to for the purpose of
ascertaining the amount of tax that must be paid and of enforcing
payment in case of default of the taxpayer.
5. It is levied by the state which has jurisdiction over the person or
property. - The object of taxation must be subject to the jurisdiction of
the taxing state. This is necessary in order that the tax can be enforced.
Although a state can tax all persons subject to its jurisdiction for all their
property left by them within its jurisdiction, yet its taxing power
necessarily stops at the state boundary lines.
6. It is levied by the law-making body of the state. - The power of taxation
is a legislative power which under the Constitution only Congress can
exercise through the enactment of tax statutes;
The power to tax is also granted by the Constitution to local
governments subject to such guidelines and limitations as may be
provided by law.
 7. It is levied for public purpose or purposes. - Taxation involves, and a tax
constitutes, a charge or burden imposed to provide income for public
purposes — the support of the government, the administration of the law,
or the payment of public expenses.

Basic Principles of a Sound Tax System

They are :

1. Fiscal Adequacy- The revenue received must be sufficient and able to meet the needs of the
government.
2. Administrative Feasibility - The tax laws should be capable of convenient, just and effective
administration. In other words, It must be clear and concise, capable of proper enforcement
and not burdensome, convenient as to time and manner of payment.
3. Equality or Theoretical Justice - The tax burden should be in proportion to the taxpayer's
ability- to- pay principle.

Non-revenue objectives of Taxation

1. Taxation can strengthen weak enterprises or provide incentive to greater
production through grant of tax exemptions or the creation of conditions
conducive to their prosperity.
2. Taxes on imports may be increased to protect local industries against foreign
competition or decreased to encourage foreign trade.
3. Taxes on imported goods may also be used as a bargaining tool by a country
by setting tariff rates first at a relatively high level before trade negotiations
are entered into with another country to enhance its bargaining power.
4. Taxes may be increased in periods of prosperity to curb spending power and
halt inflation or lowered in periods of bleak to expand business and ward off
depression.
5. Taxes may be levied to reduce inequalities in wealth and incomes, as for
instance, the estate, donor's and income taxes, their payers being the
recipients of unearned wealth or mostly in the higher income brackets.
6. Taxation may be made as an implement of the police power to promote the
general welfare.

Requisites of a Valid Tax

I. Should be for a public purpose,

2. The rule of taxation should be uniform;
3. That either the person or property taxed be within the jurisdiction Of the taxing
authority;
4. That the assessment and collection of certain kinds of taxes guarantees against
injustice to individuals, especially by way or notice and opportunity for hearing be
provided; and
 5. The tax must not impinge on the inherent and constitutional limitations on the power
of taxation.

Classification of Taxes
As to subject matter or object:
a. Personal, poll, or capitation. - Tax of a fixed amount imposed on persons
residing within a specified territory, whether citizens or not, without regard to
their property or the occupation or business in which they may be engaged.
Taxes of a specified amount imposed upon each person performing a certain
act or engaging in certain business profession are not, however, poll taxes.
i. Example : Community tax
b. Property. - Tax imposed on property, whether real or personal, in proportion
either to its value, or in accordance with some other reasonable methods of
apportionment. The obligation of the taxpayer to pay the tax is absolute and
unavoidable and is not based upon the voluntary action of the person
assessed. Example : Real estate tax.
c. Excise. - Any tax which does not fall within the classification of a poll
tax or a property tax. It is a charge imposed upon the performance of an act, the
enjoyment of a privilege, or the engaging in an occupation, profession, or
business. It is based on the voluntary action of the person taxed in performing
the act or engaging in the activity which is subject to the excise. The term
"excise" is synonymous with "privilege tax" and the two are often used
interchangeably.

Examples : Income tax; value-added tax; estate tax; donor's tax.

2. As to who bears the burden:

a. Direct. -Tax which is demanded from the person who also shoulders the
burden of the tax; or tax for which the taxpayer is directly or primarily
liable or which he cannot shift to another. Examples : Corporate and
individual income taxes; community tax; estate tax; donor's tax.

b. Indirect. - Tax which is demanded from one person in the expectation

and intention that he shall indemnify himself at the expense of another,
falling finally upon the ultimate purchaser or consumer; or tax imposed
upon goods before they reach the consumer who ultimately pays for its
not as tax but as part of the purchase. The person who absorbs or
bears Example : Value-added tax (VAT)

Taxes as to determination of amount:

a. Specific tax imposed based on some standard of or measurement and which requires
no assessment beyond a listing and classification of the objects to be taxed. Example:
taxes on distilled spirits and wines.
b. Ad valorem - imposed based on a specific proportion of the value fixed by law or as
appraised.

Taxes Classified as to Purpose:

a. General, fiscal, or revenue - imposed for the purpose of raising public funds for the
service of the government.
b. Special or regulatory - imposed primarily for the regulation of useful or non-useful
occupation or enterprises and secondarily only for the raising of public funds.

Classification of Tax as to Authority imposing the Tax:

1. National
2. local
Taxes as to gradation or rate:
1. Proportional. - which increases or decreases in relation to the bracket. or graduated. -
increases as the income of taxpayer
2. Progressive goes higher.
3. Regressive. - decreases as the income of taxpayer goes higher.

Regressive System of Taxation

A regressive tax must not be confused with regressive system of taxation. In a community
where the majority of the people have low income, regressive system exists when there are more
indirect taxes imposed than direct taxes . Since the low-income sector of the population as a whole
buys more consumption goods on which the indirect taxes are collected, the burden of indirect taxes
rest more on them than on the more affluent groups.

A progressive tax is also different from a progressive system of taxation. A progressive system
of taxation is one that imposes tax rates depending on one's ability to pay. Thus, those whose
income, returns or resources are more will naturally pay more. Its inclusion in the Constitution is
designed to bind the legislative branch and constitutes a limitation upon the taxing power. It is more
democratic, being based on a settled tax principle of "taxation based on ability to pay" It is a
principle with the end in view of equitably distributing the wealth Of Nation, by getting more money
from the rich to finance a social justice program.
Instances when tax is considered a debt:

a. A tax is a debt for purposes of remedies for its enforcement.

b. For purposes of allowing interest on delinquent tax as a deduction from gross income, a tax is
an indebtedness.
c. If the payment of the tax is secured by a bond.
d. If the taxpayer is entitled to a refund of tax paid and such refund covered by an appropriation
provided for by special law.
 Subsidy, defined
A subsidy is a pecuniary aid directly granted by the government to an individual or private
commercial enterprise deemed beneficial to the public. A subsidy, therefore, is not a tax although a
tax have to imposed to pay it.

Tax distinguished from Revenue

Tax is distinguished from revenue in that revenues refer to all sums coming into the state
treasury whether from taxes or other kinds of impositions, charges, fees like license and permit fees
and donations. Revenue is also referred to as the fruit or effect of a tax while the latter refers to the
amount imposed.

Customs duties, defined

Custom duties are taxes imposed on good exported from or import ed into the country. The term
"taxes" is broader in scope as it includes • custom duties".