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The brief, harsh history of the capital gains tax

For the last three decades, the stock capital gains tax has led to many a painful experience for Taiwan's finance ministers.

Chen Shui-bien (陳水扁), the DPP presidential candidate, proposed a capital gains tax on stocks (證券交易所得稅) in his financial white paper earlier this week. But in less than 24 hours he quickly withdrew the proposal after strong rejection from voters. He is not the first Taiwanese politician to be rebuffed on this idea. Over the last three decades, two finance ministers have tried and failed to impose a capital gains tax.

The first one was Lee Guo-ding (李國鼎), former finance minister in early 1970s. In 1974, he instituted the first, though short-lived, capital gains tax in Taiwan. Any individual who held a registered stock for less than a year had to pay a capital gains tax. Meanwhile, there was also a securities transaction tax (證券交易稅) with a 0.15 percent tax rate for anyone who sold a stock.

Then later, Lee waived the tax for anyone whose annual sales in stocks was less than NT$300,000 (US$7,500) or whose annual capital gains were less than NT$30,000 (US$750).

The first capital gains tax was intended to curb short-term trading and prevent excessive speculation. But the compromise that exempted small investors led to the creation of numerous dummy accounts (人頭戶) that large investors used for tax-evasion.

Hundreds of thousands of dummy accounts remain one of the major obstacles preventing a capital gains tax today.

By 1976 Lee Guo-ding had suspended the tax. And it remained suspended for the next nine years until 1985, when Finance Minister Lu Ruen-kang (陸潤康) announced that any unlisted stocks would be subject to a capital gains tax, while listed stocks would remain exempt.

The next finance minister to impose a capital gains tax was Guo Woan-rong (郭婉容). She announced the tax in 1988, when the TAIEX broke 8,000 points for the first time. The tax was aimed at curbing the stock market from rising too fast and creating a speculative bubble.

Right after the announcement, the TAIEX fell continuously for 19 days -- from 8,000 to 4,763, or by more than 40 percent -- and daily trading volume was less than 5 percent of a normal trading the day before the announcement.

Finally, the minister softened her stand by announcing that anyone with a trading volume of less than NT$10 million (US$250,000) was exempted from the tax. And a family of four could enjoy tax-free trading volume of NT$40 million, the minister suggested. This almost exempted everyone, as dummy accounts were semi-officially recognized as legal.

By the end of 1989, the finance ministry announced that since dummy accounts prevail, the capital gains tax would once again be suspended.

From the painful experiences of his predecessors, Paul Chiu (邱正雄), the present finance minister, has learned a lesson. He opposes levying a capital gains tax and has provided several reasons.

The most important reason is that dummy accounts, still popular at present, would make imposing one futile.

Secondly, the revenue from the securities transaction tax has been quite reliable, normally over NT$100 billion (US$3.3 billion) a year. The cost of the levy is relatively low, and it helps the stock market remain active.

Chiu also has said that tax reform requires not only good theory, but pragmatism as well. Idealism alone will not work.

"Before we can levy a capital gains tax, a complete legal framework for the securities market is required," said Norman Yin (殷乃平), professor of Cheng-chi University. "To remove dummy accounts, for example, we need strict laws and regulations to punish the behavior, as in South Korea. Any person involved in such behavior will also ruin his record for the rest of his life. Without an improvement of discipline in the securities market, we will not be able to collect a capital gains tax in Taiwan."
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