Manuel L. Quezon's Third State of the Nation Address

Gentlemen of the National Assembly: The state of the nation remains practically the same as reported in my annual message to your Honorable Body at the beginning of your last regular session on the 16th of October, 1937.

We are earnestly concerned with social justice. Without a strict application of social justice to all elements of the community, general satisfaction of the people with their government is impossible to achieve. Here, in the just and equitable solution of social problems, is the real test of the sufficiency of democracy to meet present-day conditions of society.

Social justice involves many and varied questions, such as taxation, wages, land ownership, insurance against accidents and old age, etc.

I desire to direct your attention at this time to one subject only—taxation—which we are solemnly committed to revise in order to place the burden upon those who should and can best carry it.

Taxation is imposed in the interest of the nation: to keep peace and maintain order; to repel invasion; to prove the living conditions of the people; to educate them; to promote agriculture, industry and trade.

The power to tax may also be used to prevent the accumulation of vast wealth in a few hands. This is not to deny the right of property of the individual, but it is to affirm that this right may be limited by the State when social well-being demands it. The root of the worldwide discontent among peoples, which gave birth to communism in Russia and which has been at the bottom of every revolution of the last forty years, has been the utter disregard by governments of the social purpose of property. Selfish interests have been allowed to dictate government policies affecting social and economic life.

In the past, taxation has not been concerned with principles of justice and rarely has it been concerned with bettering the people. Rather it has sought only to produce revenues and to place the burdens on the backs of those least able to remonstrate. It has done this by taxes on consumption, on sales, on licenses to engage in business, trade or profession, and by excessive charges on services which should be rendered by the Government and for which only a sufficient charge should be made to cover the cost. Those who rule have not paid their share. They have exempted the wealth they owned and the incomes they enjoyed almost wholly from taxation. This has been true throughout the world. It has been true of the Philippines as well.

Our tax system, unlike our political system, is still a heritage of earlier centuries, out of harmony with those principles which should guide progressive nations today. The Filipino people have one of the most progressive constitutions in the world. That Constitution is built not only on the principle of political equality but also on the added principle of social justice.

It remains for us to parallel our achievement in the realm of political science by a similar achievement in the realm of economic and social justice.

The present system of taxation in the Philippines is a source of the greatest injustice from which our people suffer. It may properly be said that our burdens of taxation rest most heavily upon the masses, and very lightly upon the rich. Bearing in mind the income of the rich as compared to the earnings of the labouring class, it is a fact that the richer the taxpayer the less he contributes proportionately to the maintenance of the Government. The picture of the distribution of taxes in the Philippines is this: The wage earner and the small farmer as a class carry most of the burden, then comes the middle class, and lastly the upper class. This wealthy upper class constitutes a very small percentage of our population.

In your last session you have done away with the one direct tax which was imposed upon the poor in the same amount as upon the rich— the cedula tax. But even after the elimination of this odious tax which accrued exclusively to the provincial and municipal governments, it is still true that as far as the National Government is concerned, its income comes mostly from customs duties, the tax is ultimately paid by the consumer, and in the case of internal revenue taxes, with very few exceptions, the bulk of the tax is also paid by the consumer. Needless to say, if most of these taxes are paid by the consumer, it is the great mass of the people who are carrying the burden.

The extent to which the Commonwealth is supported by the great mass of the people through taxes on consumption is not generally realized. Taxes on consumption are of necessity taken almost entirely from the poor. These taxes are added to costs as are all other elements of the cost. Thus, in 1936 the total revenue of the National Government, including the customs, amounted to approximately P85,000,000. Of this sum less than P5,000,000 came from direct taxes on incomes while the total taxes paid by inheritances and wealth amounted to less than P1,000,000. Deducting incidental revenues and other earnings, there remained P52,500,000 in the form of indirect consumption taxes on the things the people used, and for the most part had to use. They were in the form of customs taxes, excise taxes, license taxes, sales taxes, and similar charges.

The revenues of the provinces and municipalities, excluding contributions from the National Government, amounted to P46,000,000. Except for such taxes on real estate as are ultimately borne by the owners of the real estate, the great bulk of these taxes were consumption taxes or charges on the living costs of the people.

In other words, approximately P100,000,000 have been taken from fifteen million people not according to their ability to pay but according to their need to exist. This burden is equivalent to possibly P40 per family. And this burden is borne by millions of our people whose total family income is between P100 and P200 a year. There is no escape from the fact that the Commonwealth is supported in large part by those who are already on a low margin of subsistence.

In forty years’ time we have taken from these classes a sum which approximates the accumulated wealth of the entire Philippines, agricultural as well as industrial. Within the past generation these consumption taxes have rebuilt the Commonwealth. They gave us our docks and harbours, our streets and highways, our schools and public buildings. The taxes from the poor have in fact made possible the Commonwealth which we now enjoy. It is their contributions that have given us security. They have paid for our courts of justice. They have preserved our health. They are maintaining our military establishments. They have made the Philippines a safe and comfortable place in which to dwell. It is the centavos of the millions that have created the conditions which have made our industries possible. Almost alone the masses have built the Commonwealth by their sacrifices. This has been going on for more than three hundred years. It is a system which we inherited from Old Europe, in which a few enjoyed all the privileges while the people did the work and also paid for the support of the state.

It is not social justice alone, it is ordinary justice that demands correction of this age-long injustice.

While in the case of the customs duties, we are not free at this time to introduce radical or even any important change in our laws, we are not placed in the same position with reference to the internal-revenue taxes. We must proceed at once to reduce and, whenever possible, to eliminate altogether, every internal-revenue tax which is passed on ultimately to the consumer, such for instance as the sales tax. The sales tax is not paid by the merchant but by the public who buys the articles for its consumption. The merchants, in paying the sales tax of 11 per cent for every sale that they make, no matter how many times, are only acting as collectors for the Government, and the real person who pays the tax is the last purchaser, the consumer. The sales tax, moreover, is not only unjust to the poor; it also is injurious to the healthy growth of business. There are historian-economists who attribute the ruin of Spanish industries in the sixteenth century to the sales tax. In the United States, the Federal Government imposes no sales tax, and only a certain number of States impose it. But regardless of how other governments secure their revenues, it remains true nevertheless that the sales tax is unfair to the poor and harmful to the business. I, therefore, recommend the amendment of the sales tax law so as to eliminate completely the sales tax on every article that is of prime necessity and leave it only for luxuries, in which case, the tax should be materially increased. However, in no case should the sales tax be cumulative, but rather it should be paid only once at the source.

Another advantage to the Government in the amendment of the sales tax law as suggested is that there can be no evasion of the payment of the tax as in the past. Nor will there be any need for a large number of internal-revenue collectors and inspectors who, in the performance of their duties, are unavoidably causing annoyance and irritation especially among the small merchants. Many small merchants, insufficiently trained to handle complicated accounts, waste time and energy in keeping their sales books in order. I am sure that the relief which thousands and thousands of small merchants all over the Philippines will receive from the abolition of the cumulative sales tax and of any tax on articles of prime necessity, will in itself compensate, in terms of satisfaction with their Government, for the loss, if any, that the treasury may suffer. I believe, too, that it is in part due to the difficulties that the average small Filipino merchant finds in keeping his books and paying his books and paying his sales tax that the retail trade is not largely in Filipino hands. It is my hope and belief that the abolition of the sales tax will encourage and facilitate the entry of more Filipinos with little capital into the retail business.

There are other internal-revenue taxes that should be abolished or amended, such for instance as the license fees on the various professions. It is evidently unfair that a new lawyer or anew doctor should be made to pay the same amount of license as those most experienced and accredited in the profession they are paying. If it is the preference to keep this tax, at least there should be an exemption for those who have not been in the profession more than five years. In order that the Government may have a record of these practicing professionals, they may be compelled to pay only what is necessary to defray the cost of keeping that record.

There are still other taxes on our cultural life that should be repealed or very materially reduced. One of these is the tax on radio sets which should not exceed P1 a year, except in the case of expensive sets which are luxuries. The radio should be available to every family. It is a means of political contact with their Government. It is a carrier of news, by which the people may be informed as to what is going on in the world. Through the radio adult education is possible. Through it, music and drama can be disseminated in every barrio. By means of the radio, police administration is made easier, and property and life made more secure. To tax such an instrument by an almost prohibitive charge to the poor is as indefensible as a prohibitive tax on the daily press.

In the case of the market licenses, I recommend that the National Assembly enact a law prohibiting the municipalities from collecting market and slaughterhouse fees in excess of what is necessary to pay for their maintenance and upkeep. If, however, the municipality is still in debt for the construction of its market, it may be permitted, if deemed necessary, to collect higher taxes only until such cost has been fully recovered.

The foregoing recommendations will mean a serious reduction in the income of the Government which we cannot afford to leave uncovered. Fortunately, there are many sources from which we can raise new taxes without causing any injustice to those who will have to pay, for we must see to it that these new taxes are just and fair, that they do not discourage initiative in sound business enterprises. Indeed, my very recommendation that the sales tax and licenses be done away with is in line with our purpose not to allow taxation to retard the proper economic development of the country nor to jeopardize the confidence of business in us.

In your first regular session, you passed an act increasing the rates of our income tax, but the most cursory examination of the income tax paid in the Philippines both by corporations and individuals as compared with the income tax paid in other countries shows that we are practically imposing a nominal income tax. The United States is not the country that imposes the highest income tax, yet as compared with America, the income tax in the Philippines is but a trifle. Following is a comparative statement of the rates of income tax levied in the United States and in the Philippines.

It should be borne in mind that besides the income tax which corporations and individuals in the United States pay to their Federal Government, they still have to pay income tax to their respective States. In the Philippines, however, the income tax is paid only to the National Government.

I advise against raising the income tax in the Philippines to anything near what is being collected in the United States. We are in the formative period of our national economy and we should not discourage the investment of capital. But we must increase the income tax because it is inexcusably low. Moreover, this is the time to adopt the policy of avoiding the accumulation of enormous wealth in a few hands and to force the return of excessive income to the public through the medium of government services supported by these taxes. It is in the case of corporations. Inheritance and income taxes that the Government must bear in mind the need of reverting to the nation large amounts of wealth that may be accumulated in a few hands. From the increase collections accruing to the National Government from the additional income tax that we contemplate imposing, an adequate proportion should be set aside for the provincial and municipal governments.

It is my firm belief that if the recommendations made in this message are carried out by the National Assembly, we shall have gone far in our efforts to lay down the foundations of a nation wherein each citizen will contribute his part in the maintenance of the Government in proportion to his ability or resources. As we reduce the burden that is being unduly placed upon the masses of our people, on the one hand, and give them the wage that they are entitled to earn, on the other, we shall ultimately raise the standard of living as we reduce its cost, and thereby increase the purchasing power of the wage earner.

We are liable to forget the fact that the business of the country does not come from great incomes that a few individuals residing in that country make, but from the earning power of the masses.

I hope that this Honorable Body will enact the laws herein recommended early in this session. We have talked enough of social justice. Even the walls have heard our speeches. We have made a good start. We have raised the wages of all government labourers. We have abolished the cedula tax. But we have not done enough. We have only begun. Now we are fully prepared to act and we must act at once, if our people are to continue placing their confidence for the remedy of the social evils which embitter their life entirely in our hands. The last general elections have proven beyond question that the people have wholeheartedly and enthusiastically approved of our avowed policies. The City of Manila, which, like every large city in the world, is usually in the opposition by large majorities, has voted practically for the whole Nacionalista ticket, the election of two councillors from the opposition being purely a vote for the individual rather than for the party to which each belongs. As for the rest of the country, all the newly elected governors are Nacionalistas; only one or two provincial board members and an occasional mayor belong to the opposition.

Gentlemen of the National Assembly: The time to act is now. Deeds and not words is what our people want. We dare not disappoint them. Manuel Luis Quezon