Payroll Taxation in Developing Countries: The Philippine Case

Recognising the need for increased tax revenues, especially direct tax revenues, and the inadequacy of their own revenues [ UNCTAD, 1967], governments of many developing countries have been seeking to increase the proportion of national income collected in taxes. This study evaluates the possibility of using the payroll tax as a means of increasing tax revenues in developing countries. Payroll taxes have never been seriously considered as a major source of general tax revenue by development economists or in developing countries such as the Philippines ¹ even though in some cases they have yielded significant revenues for financing Social Security expenditures. ² There seem to be two major reasons for this state of affairs. First, payroll taxation in developing countries has not received the attention it deserves because it is believed that this is inherently a regressive form of taxation. ³ Thus, economists who have been urging progressivity in developing countries have generally ignored payroll taxation. This conclusion results from the incorrect generalisations about the experience of developed counlries where the payroll tax is predominantly a regressive tax, considerably more so than even a flat rate tax on income [ Pechman et al., 1968: 180–81]. Secondly, there is a widespread, but mistaken, view that payroll taxation is likely to increase the cost of labour to the employer thus increasing unemployment by encouraging the substitution of capital for labour.