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Government fears further tax cuts will harm coffers

The Ministry of Finance plans to set up a mechanism to review the feasibility of any future tax-cut proposals that will cost the government over NT$50 million per year in tax revenues, Minister of Finance Lin Chuan (林全) said on Friday.

"Too many tax cuts have seriously damaged the central government's finances," Lin said at a press conference, adding that he hopes to kick-start the review mechanism within two to three months.

The tax-cut review mechanism is designed to invite related government agencies and independent tax experts to thoroughly calculate tax losses that may be incurred with any new tax-cut plans, which are proposed by either legislators or the government, and reach a final decision on whether the government can afford the tax losses, Lin said.

"If the government can't afford the tax losses or is unable to find other tax sources to make up the losses, the proposed tax-cut plans will be rejected," Lin said.

Bad breaks

The minister said that he hopes that the new mechanism will help prevent unnecessary tax breaks or future tax breaks that will erode the government's coffers.

Lin said that, for example, the government has lost a total of NT$830 billion in tax revenues as of 2001 because of tax breaks provided in the "Statute for Upgrading Industries (促進產業升級條例)."

The annual tax losses under the statute amounted to NT$65.3 billion in 2001, he said.

Any tax-cut proposals that are expected to cost the government less than NT$50 million, however, won't have to be reviewed under the mechanism, Lin said.

The finance ministry has submitted the proposal to the Cabinet for review.

Although he agreed that local businesses have enjoyed too much preferential tax treatment, Huang Yao-huei (黃耀輝), an associate researcher with the independent Chung-Hwa Institution for Economic Research, yesterday called the finance ministry's new mechanism "redundant."

"The new mechanism poses a challenge to the government's credibility," Huang said.

Legal basis

In the face of financial difficulties, Huang said that the Law Governing the Allocation of Government Revenues and Expenditures (財政收支劃分法) has stipulated that the government should come up with alternative options to make up for tax losses before implementing any cuts.

That is, the law has empowered the government to reject tax-cut proposals on the basis of financial difficulties with or without the proposed review mechanism, Huang said.

Nevertheless, he said that the cash-strapped government should stop using tax breaks as incentives to boost private investment or stimulate the economy.

"Businesses need to understand that the government needs to allocate budgets for infrastructure projects," Huang said.

Tax income accounts for less than 13 percent of the nation's gross domestic product, which is relatively low compared to those of foreign countries, he said.
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