Why are you paying taxes?


This question(and its other related questions) might be one of the top questions Human Resources and Accounting might have if they tally all the questions personnel and bosses ask them.

Let me quote a Bible verse that might help you accept this hard truth, Mark 12:17:

Then Jesus said to them, “Give back to Caesar what is Caesar’s and to God what is God’s.” And they were amazed at him

The fact is tax is one of the unnecessary evil that a nation’s citizens must bear in order for its government to function. Unfortunately not all government are as efficient and as truthfully in handling the taxes you and I hand over in order for it to do its job in building and protecting our economy and national interest. Lots of you might be dismayed every payday. When you see your pay slip with a big chunk of what you work hard for just going to WTAX or withholding tax.

But again I direct you back to the Bible verse, even God has a good reason why we pay taxes what happens after we pay is something you and I have to deal with. But this post is not about the inefficiency of our government in handling the proper use of taxes paid, I leave that to public watchdogs to make sure all taxes goes to the better things in our nation.

One reason why I am writing this post is hat lately lots of questions were sent to my comment box regarding tax. So I tried my best to answer some and I again caution you that I am not a tax expert and I don’t claim hat I am a specialist on tax matters. I am just sharing whatever knowledge I have in order to help you understand our tax system.

I guess I should narrow this down to two issues for the meantime: your withholding tax on your salary and your final withholding tax on your stock transactions.

Governments all over the world promulgate or create laws to ask its people to contribute money so that it can function and do what they are supposed to do(of course except for nations and kingdoms whose government are self-sufficient like Brunei & United Arab Emirates). The top item taxed to citizens is their income. Income could be in the form of an active income of which salary is the top example and passive income of which stock transaction tax is an example. These two examples are called withholding tax and I bet many Pinoys don’t really understand the nature of withholding tax.

Withholding tax on salary

Every pay-day your company withholds a portion of it and remits it to the government. The Bureau of Internal Revenue(BIR) has this tax table that acts as a guide so that the amount withheld will be the most nearest amount so that at the end of the year what was withheld will be equal to what you are supposed to pay. Yes our tax system is designed to make sure no tax refund to employees is made. Though there is a table, some programmers have designed software that will accurately compute your withholding tax which often times differ from the tax table.

Withholding tax is actually an advance collection for the tax that you should be paying come April 15 of the following year. The government needs that much that is why every pay you are deducted tax on your income. Our income system is progressive thus as your salary goes up so is your tax base on the tax bracket your net income might fall into. That is why lots of employees complain that their pay increase have no effect and at times has a bad effect because more tax was deducted.

Stock transaction tax

First of all what is stock transaction tax?

It is a tax levied on the investors stock transaction at 1/2 of 1% and it is a final tax. Final tax is tax that does not need to be accumulated and compared to what you are supposed to pay like that in the case of income tax from salary. I have mentioned before that this is one of the reasons rich people get richer even more because the tax they are paying on their investments is a fix rate of 1/2 of 1%. Yes of course as their investment grows the tax on stock transaction also grows but at a very small and fix rate.

If you are buying and selling only 5,000 pesos worth of stocks this might look small but imagine if you buy and sell stock at millions in a day or even in a second? The profit you will reap is big enough since you will just pay .005 of the total selling or buying price.

Again there is a good reason why you are paying your taxes. So next time you get your pay slip or your stock transaction slips from your stockbroker put a smile in your face and think that the tax you are paying will contribute to your government’s nation building efforts. Let’s make sure that taxes are used for what they are meant to be for because if you are earning you contribute to the nation building effort.

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About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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