The Impact of Inflation on Taxes
By Jessica Mae Gois
GLOBAL inflation breached 7.4 percent this year, according to Statista.
This is the highest since 1996 and even surpasses the 6.3 percent caused
by the 2008 financial market crash. While the pandemic led to a drop to
around 3.23 percent, factors such as supply chain issues, economic volatility,
rising commodity prices, and the war between Russia and Ukraine have led to the
current rise.
The Philippines, which is still rebuilding its pandemic-hit economy, expectedly
isn't immune. Inflation hit a four-year high of 6.9 percent in September, above
a Reuters poll forecast of 6.7 percent and the central bank's full-year target
of 2-4 percent. While the Bangko Sentral ng Pilipinas is working to bring the
percentage down, Filipino consumers are feeling the pinch. In connection to the
field of accounting, the question to ask is how will this current crisis affect
Philippine taxation?
To put it simply, the state enforces the principle of taxation to collect money
from the people. The rate depends on what is being taxed. It can either be
graduated, varying depending on the amount, or it can be fixed. While there
are many types of taxes, one thing is common — taxes can only be paid in cash.
During times of high inflation, the purchasing power of cash decreases. The value
of money cannot keep up with the rising prices of products hence, more money is
needed to pay for certain goods. Because of this situation, a large amount of money
with lesser value circulates in the economy, giving a distorted view of increase in
taxable income.
Taxation ignores the idea of the substantive value of cash — instead, it focuses on
its nominal form. This pushes taxpayers into higher taxation income brackets due
to a false increase in income, resulting in higher tax payments and a reduction
in value of tax credits. This is otherwise known as "bracket creep." It is an
excessive burden for taxpayers as consumption spending increases while tax due
also unjustly increases.
Taxpayers, however, can still take advantage of the existing law such as Republic Act
11534, also known as the "Corporate Recovery or Tax Incentives for Enterprises Act"
(Create), which provided temporary tax exemptions and reduced certain tax percentages
until 2023.
Jessica Mae Gois, is the audit manager of Paguio, Dumayas & Associates, CPAs (PrimeGlobal Philippines),
and an institutional member of the Association of CPAs in Public Practice (ACPAPP). The views and opinions in this
article are hers and do not represent those of PDAC and ACPAPP.
Source: The Impact of Inflation on Taxes - Manila Times