Estate tax reforms and the oligarchs

The need for tax reform in the Philippines is beyond question. The only matter that remains for discussion is the extent of the reforms. One of the subjects that need to be addressed is estate taxes. The rate in the Philippines is too low.

Estate tax is levied by the government on the estate (properties/wealth) of a deceased as the ownership of the properties is transferred to the surviving heirs. At its current rates, the estate tax in the country is regressive, discourages the optimal use of resources and promotes the concentration of the country’s wealth in the hands of few families.

Since the enactment of the National Internal Revenue Code (NIRC) in 1997, the marginal rates of the estate tax in the country are historically low, at a top rate of twenty percent (20%). The top bracket for an estate of more than Php10 million is taxed at Php1,215,000 for the first P10M, and any excess of Php10M is taxed at a marginal rate of 20%. This means that an estate of P15M, for example, is taxed at P2,215,000.00, or at an effective tax rate of 14.76%.

The current top marginal rate of 20% is the lowest in the country since 1973. Compared with other countries, the tax rate in the Philippines is atrociously low. The top rate in United States and United Kingdom is 40%, Japan’s is 55%, and Canada has a deemed sales tax on estates at 50%. In the US, had erstwhile Democratic Presidential candidate Bernie Sanders had his way, the top estate tax rate would be 65%.

The rationale of imposing a higher tax rate on estates is to provide a mechanism for the distribution of the society’s wealth, promote the circulation of resources back to the economy, and prevent excessive concentration of wealth in the hands of few families. Thus, in the US, it is not unusual to hear news about endowment or charitable contributions by wealthy individuals either during their lifetime or through their wills. Apart from good intentions, such endowments are part of tax planning, to minimize estate taxes, and enjoy the freedom and ability to decide on where one’s wealth would go rather than wait for the IRS to collect estate taxes. The higher estate tax rates are also meant to encourage transfer of properties as such other transfers usually have lower tax rates.

In countries where strong family ties abound, like the Philippines, it is customary for parents to work hard and save for their children as much properties as possible. It is part of human nature, and estate tax system acknowledges this need. Exceptions/deduction are allowed in addition to certain deductible expenses, to alleviate the impact of estate tax.

Unfortunately, the allowable deduction in the Philippines is very low, as estates are taxed starting at Php200,000.00. For ordinary families who may have their ancestral home as their deceased parents’ only estate, this always presents a problem. Without any cash available to pay the required estate tax, payment and registration for the property’s transfer are usually deferred, only to accumulate surcharges and interests resulting to even lesser inheritance.

Proponents of lower estate taxes would usually argue that one’s estate is the fruit of hard work, and it is unfair to excise taxes again when the wealth may have already been previously taxed by the state, such as in the form of income taxes. This argument is debunked by advocates of higher estate taxes on social justice principles and for more equitable access to the society’s wealth; that it is unfair that certain select few would have a windfall solely by birth while others had to toil hard just to survive; that the accumulation of wealth was not the sole stroke of genius by one’s family, but it involves the collective participation of society. Without the infrastructure and protection provided by the government, contribution of workers and the consuming public, businesses will not flourish.

It is disturbing that out of more than 100 million Filipinos, only 40 families control 76.5% of the country’s GDP growth. For almost two decades, they have short-changed the Filipino people. It is about time that these few individuals who control the economy, and could whimsically decide on where to invest their vast riches, were made to pay their fair share to the society’s burden. This would not be easy though. With policy makers and members of Congress who may be adversely affected with estate tax reforms, any increase of the estate tax rate will surely meet stiff opposition.

The recent pronouncement of President Duterte to destroy the oligarchs should help these reforms get some traction. But, he should be cautioned. The last President who imposed higher estate taxes in the country got the ire of the wealthy, and was bolted out of office.

Eubert Marc T. Hilario, Esq. is a member oft the Philippine Bar and the New York State Bar and is working on my Master of Laws Program at the Villanova Law School. 

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