Taxing on principle, not politics

KMT presidential candidate Lien Chan's (連戰) proposal to raise income tax deductions and lower wage earners' tax burden could have some positive consequences.

Taiwan still lacks a mature welfare system and an institutionalized system of civil rights. If the welfare benefits embodied in Lien's proposal can be realized it will be a milestone for citizens' rights.

The Ministry of Finance estimates that the government will be short NT$100 billion in tax revenue as a result of a number of factors: the domestic financial crisis that broke in 1998, the combination of the income and business tax systems and damage caused by the 921 earthquake.

Regardless of whether the policy is motivated by the upcoming presidential elections, or is a more refined type of "policy vote-buying," the tax break will benefit the majority of wage-earners who do not earn money through capital investments.

The policy also fits with the principle that tax revenue should come from the upper-income brackets.

So there is some merit to the proposal. However, the 921 quake worsened Taiwan's already precarious fiscal situation. This year's expected budget deficit has risen from NT$254.9 billion to NT$425.3 billion, or around 4 percent of GNP.

High deficit budgets are back. This year's deficit is expected to soar to 18.3 percent of the total budget, up from the previous estimate of 11.4 percent, making it the highest in seven years.

The administration was quite pessimistic about the financial situation a year ago during the war of words between the Council for Economic Planning and Development (CEPD, 經建會) and the Directorate General of Budget, Accounting and Statistics (DGBAS, 主計處) over whether Taiwan was experiencing a financial crisis.

Now, after the fiscal strain brought on by the quake, the government has suddenly taken an optimistic view of things.

I appreciate the ruling party's sudden change of heart in thinking about fiscal policy, but true tax reform consists of more than superficial fiscal changes.

Economic development and social welfare often appear diametrically opposed and it is the responsibility of tax policy and fiscal planning to come up with a method to break out of this zero-sum game.

This requires an integrated plan at the national level, and must be built on the principles of fairness and equality.

For the past two years, President Lee Teng-hui (李登輝), Premier Vincent Siew (蕭萬長) and Finance Minister Paul Chiu (邱正雄) -- the "finance trio" -- have pushed through a combination of income and business taxes and a 60 percent reduction in banking business taxes, lowering tax revenue by more than NT$100 billion.

The Statute for Upgrading Industries (促進產業升級條例) also cumulatively lowered industrial taxes by NT$12.2 billion by 1994, and as much as NT$29.5 billion by 1998.

Taxes on wages now make up 70 percent of all income taxes collected, while no tax is collected on stock market gains or foreign income, severely skewing the distribution of the tax burden.

Taiwan's income tax may still be a progressive tax, but stock market profits and foreign income make up a large portion of earnings in high-income households.

They thus enjoy tax breaks many times that of the deductions given to wage-earners. Most of the benefits in the end accrue to those in the higher income brackets!

This tax system was established, however, without the pressure from elections. Now, under the pressure from voters, tax reform for low-income households has finally arrived.