After Chen Shui-Bian (
The following is several US empirical studies on the capital gains tax, which might offer a better picture for the presidential candidates to consider before imposing the controversial tax.
The first question is, who is going to pay the capital gains tax?
Many think that the rich people will pay most of this tax, but actually the middle class will carry the biggest burden. Although Taiwan has little experience levying such a tax, the US does.
According to an empirical study by the US Tax Foundation, in the half-century between 1942 and 1992, over half (53 percent) of all taxable capital gains were reported by taxpayers earning under US$200,000 in constant 1992 dollars. (see chart)
The study conducted by the Tax Foundation, was titled 50 Years of the Federal Capital Gains Tax Burden. According to the study, well over a third of all taxable capital gains during that period (38 percent) were reported by taxpayers with under US$100,000 in annual income.
The study's conclusion was that America's upper middle class has realized this form of income far more than is generally presumed -- and therefore bears a substantial portion of the capital gains tax burden.
In the chart, it shows that taxpayers earning under US$200,000 annually paid just under half of the capital gains taxes in the 50 years between 1942 and 1992. Those earning under US$100,000 paid just under a third (30 percent) of these taxes.
There are currently over 6 million stock trading accounts in Taiwan, according to the Taiwan Stock Exchange.
If the capital gains tax was levied now, millions of middle-class investors would have to kick in a large share. It's not just a rich man's game.
The second question is, what should the tax rate be? In answering this question, our next president might take some advice from Alan Greenspan, chairman of the Federal Reserve Board, before making the decision.
"The appropriate capital gains tax rate," chairman Greenspan said in congressional testimony before a group of hard-nosed budgetters in 1997, "is zero."
"The net effect of reducing the capital gains tax, as it impacts total revenue -- corporate income taxes, individual income taxes, and such -- could very well be a positive. I view the capital gains tax as a poor means of raising revenue ... and I certainly do not think it effectively functions for any other purpose," said Greenspan.
The Fed chairman then hastened to make the even more critical point that he does not believe "the issue of capital gains taxation is a revenue question.... It is an issue to the extent to which it affects entrepreneurial activity."
If we are interested in improving economic growth, Chairman Greenspan said, the real question is one of how to encourage "productivity-increasing investments."
Later that year, President Clinton lowered the top capital gains tax rate from 28 percent to 20 percent.
The third question might be, why does Alan Greenspan recommend a zero capital gains tax rate?
It could stimulate productivity -- increase investment -- and make the economy grow faster. Two empirical studies conducted by World Bank and OECD demonstrate this point.
A recent international comparison by the World Bank suggests that countries with high levels of investment experience faster growth than countries with relatively low levels of investment. (See Table)
According to the American Council for Capital Formation, a lower capital gains tax rate makes a major contribution in promoting capital formation, entrepreneurship, and new job creation. The US, in spite of these findings, taxed capital gains more harshly than almost any other industrial nation before 1997.
A survey by the OECD of twelve industrialized countries shows that the US capital gains tax rate on long-term gains on portfolio securities exceeds that of all countries except Australia and the UK, and these two countries index the cost basis of an asset.
After indexing the cost basis of an asset, the cost will be adjusted by the inflation rate and therefore reduce the real rate of capital gains tax. (See Table)
The last question the next president might ponder on this issue is how the government can increase its tax revenue without hurting the economy?
A better choice would be a consumption-related tax, like a value-added tax, which would have a less significant effect on economic growth than an investment-related tax, according to academics of public finance.
Ironically, Taiwan's history of ineptitude in levying a capital gains tax has in part resulted in Taiwan's post WWII economic miracle.
Any new president elected in March would be wise not to impose a capital gains tax, since it would likely be a drag on Taiwan's economy and might even cost him a second term.
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