Fri, Jan 21, 2000 - Page 12 News List

Editorial: Read Lien's Lips

Vice President Lien Chan (連戰), by promising an income tax cut as the centerpiece of his financial policy speech on Wednesday, is apparently convinced that taking a page from American campaign strategy is the secret to victory. This is a remarkable leap of faith, since Taiwan has been rated by the Economist Intelligence Unit as the country with the second lightest tax burden in the world among developed and developing economies. Whatever else Taiwanese complain of, high taxes are pretty low on this list.

In the US, indeed in most of the Western democracies, offering tax cuts is a sure-fire popularity move, and conversely raising taxes is a political kiss of death. Ever since Keynesian economics gained currency a half century ago, governments throughout the industrialized world have eagerly tried to use fiscal policy to flatten out the business cycle. Unfortunately, the deficits they incurred "temporarily" to stimulate the economy out of recessions proved to be politically difficult to reduce in normal times. Instead they kept growing, as each round of elections spurred parties and candidates to offer new or expanded goodies, more often than not to the middle class. Moreover, as we now know, these chronic deficits have deleterious effects, stunting economic growth and increasing unemployment. Today, nearly all OECD countries have identified deficit reduction as a top economic priority, but the political resistance remains stiff.

It would be galling if Taiwan had to repeat the same mistakes in order to learn these lessons. Unfortunately, it appears even the KMT, which used to wear responsible macroeconomic management as a badge of honor (after its debacle in China), has gone down the Santa Claus path. With this year's campaign breaking all records for expensive promises, one wonders whether the trend can be reversed.

There was a time when revenue and expenditure functioned according to an implicit understanding between Taiwan's government and its people: they weren't taxed much and got very little. Democracy changed that, with the realization that voters had to be kept happy with new spending on infrastructure and social welfare. This year, the unavoidable additional fiscal burden of earthquake reconstruction has accelerated the trend.

In this context, the consensus of many academic economists and responsible government officials is that tax increases should be an essential component of the next budget, no matter who wins the presidency.

The income tax cut Lien proposes is intended to be bundled with a hike in the valued-added tax and expansion of the tax base to offset loss in revenue. He is not therefore promising something for nothing. But we worry that an increase in tax on consumption would disproportionately affect lower and middle class wage earners who after all have to spend a greater part of their disposable income on daily necessities than do the wealthy. We would prefer to say any reform of the tax code begin with closing the egregious loopholes in the tax system that result in the magical ability of some of the island's largest corporations to avoid tax almost completely.

Now that Lien has put tax cuts on the election agenda, we can only hope that we do not see a "bidding war" between the candidates for who can offer the most generous package. We hope that the voters of Taiwan will retain their cool heads and continue to vote for responsible fiscal management.

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