LECTURE 1: Fundamental Principles of Taxation enforce proportional contribution from its

TAX 301: INCOME TAXATION subjects for public purpose

3. As a mode of cost distribution – Taxation is
Learning Objectives: a mode by which the State allocates its costs
1. Define what is taxation and learn its aspects and or burden to its subjects who are benefited
purposes; by spending.
2. Know the role of taxes;
3. Learn the aspects, theories and basis of taxation What are TAXES?
and the scope of power of taxation;
4. Ascertain the elements of tax and the elements of • Taxes are enforced proportional contributions or
a sound tax system; charges from persons and property levied by the
5. Differentiate the three inherent powers of the law-making body of the state by virtue of its
state. sovereignty for the support of the government and
all public needs.
What is TAXATION?
ASPECTS of TAXATION
•Taxation is the process or means by which the
sovereign (independent state), through its law- 1. Levying or imposition of the tax (legislative
making body (the legislature), imposes burdens function)
upon subjects and objects within its jurisdiction for 2. Assessment or determination of the correct
the purpose of raising revenues to carry out the amount of applicable tax (executive function)
legitimate objects of government. 3. Collection of the tax levied (executive function).
The National agency charged with the function of
•Taxation is the act of levying a tax to apportion the collecting internal revenue taxes is the Bureau of
cost of government among those who, in some Internal Revenue.
measures are privileged to enjoy its benefits and
must therefore bear its burdens. PURPOSES OF TAXATION

• Taxation is a power inherent in every sovereign 1. Primary: Revenue or Fiscal Purpose

state being essential to the existence of every • The primary purpose of taxation on the part
government. of the government is to provide funds or
property with which to promote the general
• Hence, even if not mentioned in the Constitution, welfare and the protection of its citizen and
the state can still exercise the power. Any to enable it to finance its multifarious
constitutional provision regarding the state’s power activities.
to tax should not be interpreted as a “grant of • A government can run its administrative set
power”, but merely a limitation on the state’s power up only through public funding which is
to tax. collected in the form of tax.
• Examples: Taxes imposed for raising
• Taxation can be defined as a state power, a revenues which are income and business
legislative process, and a mode of government cost taxes.
distribution.
2. Secondary: Regulatory Purpose
1. As a state power – Taxation is an inherent (Sumptuary/Compensatory)
power of the state to enforce a proportional
contribution from its subjects for public In this purpose, taxation is often employed as a
purposes. devise for regulation or control (implementation of
2. As a process – Taxation is a process of levying State’s police power) by means of which certain
taxes by the legislature of the state to
effects or conditions envisioned by the government THEORY and BASIS of TAXATION
may be achieved such as: 1. Lifeblood Theory or Necessity Theory – The
a) Promotion of General Welfare power of taxation proceeds upon the theory that the
b) Reduction of Social Inequality existence of government is a necessity.
c) Economic Growth ▪ The power of taxation is essential because
the government can neither exist nor endure
THEORY OF TAXATION without taxation. “Taxes are the lifeblood of the
government and their prompt and certain
• Every government provides a vast array of public availability is an imperious need”.
services including defense, public order and safety, ▪ The government cannot continue to
health, education, and social protection among perform its basic functions of serving and protecting
others. its people without means to pay its expenses. The
• A system of government is indispensable to every state has the right to compel all its citizens and
society. Without it, the people will not relish the property within its limits to contribute.
benefits of a civilized and orderly society.
• The government cannot exist without a system for 2. Basis of Taxation: Benefits Received or
funding. Reciprocity Theory - The basis is the reciprocal
• The government necessity is the theory of duties of protection
taxation. and support between the state and its inhabitants.
The state collects taxes from the subjects of taxation
THE BASIS OF TAXATION in order that it may be able to perform the functions
of the government.
• The government provide benefits in the form of ▪ The citizens pay taxes in order that they
public services and the people provide the funds may be secured in the enjoyment of the benefits of
that finance the government. organized society.
▪ This theory spawned the Doctrine of
Symbiotic Relationship which means taxes are what
we pay for a civilized society.

MANIFESTATION of the LIFEBLOOD DOCTRINE

a) Rule of “No Estoppel against the
Government”
b) Collection of taxes cannot be enjoined
Receipt of Benefits is conclusively presumed (stopped) by
c) injunction
• Every citizen and resident of the State directly and d) Taxes could not be the subject for
indirectly receive benefits from the public services compensation or set-off
rendered by the government. e) Right to select objects (subjects) of taxation
f) A valid tax may result in the destruction of
• These benefits can be in the form of daily free the taxpayer’s property
usage of public infrastructures, access to public
health or educational services, the protection and SCOPE of the POWER of TAXATION
security of a person and property, or simply the a) Comprehensive – as it covers persons,
comfort of living in a civilized and peaceful society businesses, activities, professions, rights and
which is maintained by the government. privileges

b) Unlimited – in the absence of limitations

prescribed by law or the constitution, the power to
tax is unlimited and comprehensive. Its force is so
searching to the extent that the courts scarcely THEORETICAL JUSTICE OR EQUITY – Taxpayers
venture to declare that it is subject to any ability to pay must be taken into consideration.
restrictions. ▪ The tax burden should be proportionate to
the taxpayer’s ability to pay.
c) Plenary – as it is complete, BIR may avail of certain
remedies to ensure collection of taxes ADMINISTRATIVE FEASIBILITY – Tax laws must be
capable of effective and efficient enforcement. A
d) Supreme – in so far as the selection of the subject good tax system required informed stakeholders
of taxation who understand how taxes are assessed, collected
and complied with.
ESSENTIAL ELEMENTS OF A TAX
▪ It should be clear to what is being taxed and
a.) It is an enforced contribution – Payment of tax is how tax burden affects them. The tax system should
not voluntary payment or donation, but an enforced be as simple as possible and should minimize
contribution, exacted pursuant to legislative gratuitous complexity.
authority.
▪ Complicated tax rules make the tax system
b.) It is generally payable in money – It is a difficult for citizens to understand. It also makes
pecuniary burden payable in money which must be harder for governments to monitor and enforce tax
in legal tender. collections and makes it easier for lawmakers to
enact and conceal targeted tax breaks benefiting
c.) It is proportionate in character – Payment of particular groups.
taxes should be based on the ability to pay theory or
theoretical justice. The use of a graduated tax rates THEORIES OF COST ALLOCATION
is in consonance with this rule.
BENEFIT RECEIVED THEORY – It presupposes that
d.) It is levied on persons, property, or the exercise the more benefit one receives from the government,
of a right or privilege (subjects or objects of the more taxes he should pay.
taxation)
ABILITY TO PAY THEORY – It presupposes that
e.) It is levied by the law-making body of the state. taxation should also considers the taxpayer’s ability
The power of “imposing” a tax, being purely to pay. Taxpayers should be required to contribute
legislative function. Congress cannot delegate such based on their relative capacity to sacrifice for the
power. This limitation arises from the doctrine of support of the government.
separation of powers among the three branches of
the government. Aspects of Ability to Pay Theory

f.) It is levied for public purpose. ▪ Vertical Equity – It proposes that the extent of
one’s ability to pay is directly proportional to the
ELEMENTS OF A SOUND TAX SYSTEM level of tax base. It is a gross concept.

FISCAL ADEQUACY – The fundamental purpose of Ex: A has P200,000 income while B has P400,000. In
taxation is necessary to raise the revenue necessary taxing income, the government should tax B more
to fund public services. than A because B has greater income. Hence B has
▪ It is necessary that the sources of revenues greater capacity to contribute.
must be adequate to meet governmental
expenditures and sustain the level of public services
demanded by citizens and policy makers
 THREE INHERENT POWERS OF THE STATE • As to Purpose:
▪ Taxation – For the support of the government
1. Police Power – it the power of the state for ▪ Police Power – Promotion of general welfare
promoting public welfare by restraining and through regulation
regulating the use of liberty and property. It may be ▪ Eminent Domain – The taking of private property
exercise only by the government. The property for public use
taken in the exercise of this power is destroyed
because it is noxious or intended for a noxious • As to Persons affected:
purpose. ▪ Taxation – Community or a class of individuals;
applies to all persons, property and excises that may
2. Power of Taxation – it is the power by which the be subject thereto
state raises revenue to defray the necessary ▪ Police Power – Community or a class of individuals;
expenses of the government. applies to all persons, property and excises that may
be subject there to
3. Power of Eminent Domain – it is the power of the ▪ Eminent Domain – On the individual as the owner
state to acquire private property for public purpose of the personal property; only particular property is
upon payment of just compensation. comprehended

SIMILARITIES OF THE THREE INHERENT POWERS • As to Scope:

OF THE STATE ▪ Taxation – Plenary, comprehensive, supreme
▪ Police Power – Broader in application, general
1. They are inherent in the State. power to make and implement law
2. They exist independently of the constitution ▪ Eminent Domain – Merely a power to take private
although the conditions for their exercise may be property for public use
prescribed by the constitution.
3. Ways by which the State interfere with private • As to Effect:
rights and property. ▪ Taxation – Contribution become part of public fund
4. Legislative in nature and character. ▪ Police Power – No transfer of title. There may be a
5. Presuppose an equivalent compensation restraint on the injurious use of property
received, directly or indirectly by the persons ▪ Eminent Domain – There is a transfer of title to
affected. property

DISTINCTIONS AMONG THE THREE INHERENT • Benefits Received:

POWER OF THE STATES ▪ Taxation – In form of protection and benefits
received from government
• As to Nature: ▪ Police Power – No direct and immediate benefit
▪ Taxation – Power to enforce contributions to raise but only such as may arise from the maintenance of
government funds healthy economic standard of society
▪ Police Power – Power to make and implement laws ▪ Eminent Domain – Market value of the property
for the general welfare taken
▪ Eminent Domain – Power to take private property
for public use with just compensation • Amount of Imposition:
▪ Taxation – No limit
• As to Authority: ▪ Police Power – Sufficient to cover cost of the
▪ Taxation – Government only license and the necessary expenses of police
▪ Police Power – Government only surveillance and regulation
▪ Eminent Domain – Maybe granted to public ▪ Eminent Domain – No imposition. The owner is
service/utility companies paid equivalent to the fair value of his property