TAXATION

STRATEGY
AT THE END OF THE LESSON, THE STUDENT
MUST BE ABLE TO:

• Analyze the principles and implications of earning

tax, property tax, corporate tax, and employment-
related taxes in financial decision-making.
• Differentiate the various types of taxes and their
impact on individuals, businesses, and the economy.
• Apply fundamental tax concepts in assessing
financial responsibilities and planning strategies for
tax efficiency.
• Understanding the principles and
implications of taxes—such as
earning tax (income tax), property
tax, corporate tax, and
employment-related taxes—is
crucial in financial decision-making
for individuals, businesses, and
1. Earning Tax (Income Tax)
Principles:
• Based on an individual’s net income, with progressive tax rates (higher
income = higher rate).
• Deductions, exemptions, and credits can reduce taxable income.
• Administered by national tax authorities (e.g., BIR in the Philippines, IRS in the
U.S.).
Implications in Financial Decision-Making:
• Personal budgeting and investment planning must account for after-tax income.
• Tax planning strategies, like deferring income or maximizing deductions, help
reduce liability.
• Affects consumption and savings behavior—higher taxes may reduce
disposable income.
2. Property Tax
Principles:
• Imposed on real estate holdings (land and buildings), based on
assessed value.
• Local governments typically levy this to fund public services like
education, roads, and safety.
Implications in Financial Decision-Making:
• Impacts the cost of owning property, influencing decisions to
buy, lease, or invest.
• Investors consider property taxes when analyzing return on
investment (ROI) in real estate.
• Property owners may appeal assessments or engage in property
tax planning.
3. Corporate Tax
Principles:
• Levied on a corporation’s net profits (revenues minus expenses).
• Rates vary by country and may include national and local taxes.
• May allow for tax incentives, such as for R&D or investing in
specific zones.
Implications in Financial Decision-Making:
• Affects net income, dividend distributions, and shareholder value.
• Influences capital structure decisions—debt vs. equity financing—
due to interest deductibility.
• Companies may engage in tax avoidance (legal) or evasion (illegal)—with
major ethical and legal consequences.
• Tax planning can impact location decisions, especially for multinationals.
4. Employment-Related Taxes
Principles:
• Includes withholding taxes (income tax withheld from employees),
social security contributions, Medicare/health insurance, and
other statutory contributions.
• Shared by employers and employees.
Implications in Financial Decision-Making:
• Increases the total cost of employment—important for HR and
budget planning.
• Affects take-home pay and employee benefits.
• May influence outsourcing vs. in-house hiring, automation, or
location of operations.
• Compliance is essential—non-compliance can result in penalties,
reputational damage, and litigation.
Summary Table

Tax Type Key Principle Financial Implications

Affects disposable
Progressive taxation of
Earning Tax income and savings
personal income
decisions
Influences property
Property Tax Tax on real estate value investments and
ownership cost

Impacts profitability,
Corporate Tax Tax on company profits dividend policies, and
business structure
Influences hiring costs,
Shared taxes on wages payroll management,
Employment Taxes
and social contributions and compliance
obligations
CONCLUSION:

Understanding these tax types and their

effects helps in making strategic financial
decisions—from investing and business
planning to staffing and budgeting. Proper
tax planning ensures compliance,
maximizes efficiency, and enhances long-
term financial sustainability.
I. Types of Taxes

Tax Type Description Examples

Tax on earnings of individuals Individual Income Tax,
Income Tax
and businesses. Corporate Income Tax
Tax on the sale of goods and VAT (Value-Added Tax), GST
Sales Tax
services. (Goods and Services Tax)
Tax on property ownership,
Property Tax Real Estate Tax, Land Tax
usually real estate.
Tax on specific goods, often Alcohol, tobacco, gasoline
Excise Tax
considered harmful or luxury. taxes
Tax on wages to fund social Social Security, Medicare
Payroll Tax
insurance programs. contributions
Tax on profits from the sale of
Capital Gains Tax Stock sales, property sales
assets.
Tax on the transfer of wealth
Estate/Inheritance Tax Estate Duty, Inheritance Tax
after death.
Customs/Duties Tax on imports/exports. Tariffs on imported goods
Environmental/Carbon Tax to discourage environmental
Carbon tax on emissions
Tax harm.
Business permits, franchise
Business/License Taxes Levies to operate legally.
II. Impacts of Taxes
A. On Individuals

Impact Explanation

Disposable Income Income tax reduces take-home

Reduction pay, affecting consumption.
High excise taxes may reduce
Behavioral Change
consumption of harmful goods.
Progressive income taxes aim to
Inequality Adjustment
reduce income inequality.
Wealth Transfer Estate taxes can limit
Implications intergenerational wealth transfer.
B. On Businesses

Impact Explanation

Corporate taxes and payroll taxes

Cost of Operations
increase business expenses.
High taxes may discourage
Investment Decisions
expansion or investment.
Sales and VAT taxes may lead to
Pricing Strategy
higher prices for consumers.
Administrative costs increase with
Compliance Burden
complex tax systems.
C. ON THE ECONOMY
Impact Explanation
Taxes fund public services and
Revenue Generation
infrastructure.
Economic Behavior Tax incentives can encourage
Influence investment or innovation.
Indirect taxes (like VAT) can
Inflationary Effects
raise prices.
Taxes help balance income
Redistribution of Wealth disparities through social
programs.
High corporate taxes may
Global Competitiveness
discourage foreign investment.
III. SUMMARY TABLE
Individual Business Economic
Tax Type
Impact Impact Impact
Reduces net Lowers profit Major revenue
Income Tax
income margins source
Can be
Increases cost Affects pricing
Sales/VAT regressive;
of goods strategy
inflationary
Financial Affects real Funds local
Property Tax burden for estate government
owners investment services
Discourages Cost increase
Helps control
Excise Tax harmful for specific
consumption
behavior sectors
 Adds to Funds social
Reduces take-
Payroll Tax employee insurance
home pay
cost programs
Impacts May reduce
Capital Gains Discourages
investment speculative
Tax asset sales
timing bubbles
Reduces
Minimal direct Reduces wealth
Estate Tax inherited
impact concentration
wealth
Affects supply Protects
Customs Raises import
chain and domestic
Duties costs
pricing industries
Encourages Supports
Environmenta Increases
eco-friendly sustainable
l Tax production cost
choices development
FUNDAMENTAL TAX CONCEPTS FOR
FINANCIAL RESPONSIBILITY & TAX PLANNING
1. Taxable Income
• Definition: The portion of income subject to tax after allowable deductions
and exemptions.
• Importance: Understanding what constitutes taxable income helps in
accurately forecasting tax liabilities and avoiding underpayment penalties.
2. Tax Deductions and Credits
• Deductions: Reduce taxable income (e.g., business expenses, charitable
donations).
• Credits: Reduce tax liability directly (e.g., education tax credits, energy-
efficient investments).
• Strategy: Maximizing deductions and credits reduces the overall tax burden.
FUNDAMENTAL TAX CONCEPTS FOR
FINANCIAL RESPONSIBILITY & TAX PLANNING
3. Tax Brackets and Marginal Tax Rates
• Progressive Tax System: Higher income is taxed at higher rates.
• Marginal vs. Effective Rate: Marginal is the rate on the last dollar earned; effective is
the average rate paid.
• Strategy: Plan income and deductions to remain within lower tax brackets where feasible.

4. Capital Gains and Losses

• Capital Gains: Profits from the sale of assets; taxed differently based on holding period
(short-term vs. long-term).
• Losses: Can offset gains to reduce taxable income.
• Strategy: Utilize tax-loss harvesting and hold assets long enough to benefit from lower
rates.
FUNDAMENTAL TAX CONCEPTS FOR
FINANCIAL RESPONSIBILITY & TAX PLANNING
5. Depreciation and Amortization
• Depreciation: Allocation of the cost of tangible assets over time.
• Amortization: Similar treatment for intangible assets.
• Strategy: Use appropriate methods (e.g., straight-line or accelerated)
to optimize timing of deductions.
6. Deferral of Income
• Concept: Postponing income recognition to a future tax period.
• Strategy: Helps manage tax bracket exposure and cash flow (e.g.,
deferring bonuses or using retirement plans).
FUNDAMENTAL TAX CONCEPTS FOR
FINANCIAL RESPONSIBILITY & TAX PLANNING
7. Tax Compliance and Reporting
• Filing Requirements: Timely and accurate filing prevents penalties.
• Recordkeeping: Essential for substantiating deductions and handling audits.
• Responsibility: Ensuring compliance is part of financial accountability.

8. Legal Entity Structure

• Types: Sole proprietorship, partnership, corporation, LLC.
• Tax Implications: Different entities have varied tax treatments (e.g., pass-
through taxation vs. corporate tax).
• Strategy: Choose a structure that aligns with income levels, risk, and long-
term goals.
FUNDAMENTAL TAX CONCEPTS FOR
FINANCIAL RESPONSIBILITY & TAX PLANNING
9. Withholding and Estimated Taxes
• Withholding: Taxes withheld from wages or payments.
• Estimated Payments: Required for self-employed or those with significant non-
wage income.
• Responsibility: Maintain adequate withholding to avoid underpayment penalties.

10. Tax Planning vs. Tax Evasion

• Planning: Legal methods to minimize tax liability.
• Evasion: Illegal practices to avoid paying taxes.
• Ethical Strategy: Ensure all strategies are compliant with current laws and
regulations.
TAX EFFICIENCY PLANNING STRATEGIES
• Income Shifting – Transfer income to family members in lower
tax brackets.
• Expense Timing – Accelerate or defer expenses based on
expected income changes.
• Retirement Planning – Maximize contributions to tax-
advantaged retirement accounts.
• Investment Allocation – Use tax-sheltered accounts for high-
yield or taxable investments.
• Use of Tax Professionals – Engage tax advisors for complex
planning and compliance.
Thank You!