Tax authorities in Taiwan are considering increases in taxes to offset over NT$10 billion in revenue losses arising from increased income tax deductions. According to an announcement by the Ministry of Finance (MOF), plans are afoot to raise taxes on foreign companies with business interests in Taiwan.
Under the new package, taxes on revenue earned by foreign companies would increase from 15 percent to 25 percent. Taxes on revenue earned for providing technical assistance to local firms would incur a levy of 6.25 percent rising from 3.75 percent, an increase of over 60 percent. New levies would also be placed on income from patent rights and royalties granted to foreign companies by their Taiwanese licensees while branchless foreign banks will lose a tax exemption on interest earned from loans extended to local firms.
Of course these actions come with a cost. First, it will make it more expensive for Taiwan firms to secure foreign loans, and it could retard improvements in manufacturing technology by slowing the importation or licensing of foreign high-tech products. Unfortunately, raising taxes might be the worst possible solution for restoring balance to the public treasury.
The singapore model
Look at Singapore, arguably the country least affected by the Asian financial crisis. It continues to look for ways to reduce the overall tax burden. In keeping with plans for greater liberalization of its financial markets, a concession on tax earned from bond trading will be extended to income derived from interest-rate and currency swaps. There will also be an expansion of exemption from withholding tax on income earned by non-residents from financial market transactions. It has also announced a cut in corporate taxes by half a percentage point even though it ended a temporary rebate on company and personal income taxes.
Consider the political costs and economic consequences of increasing the overall tax burden. It is no secret that the previous government wasted resources and misdirected public funds due to corruption and cronyism. Taking and squandering more of the hard-earned income of Taiwan's citizens would violate the mandate granted at the last election.
In the case of Japan, the imposition of a consumption tax is widely viewed as the final straw that brought on the current recession by reinforcing negative forces in its economy. And in the US, an economic slowdown brought about by higher levies cost George Bush his re-election bid when he broke his famous "no new taxes" pledge. Yet there are many better ways to reduce public-sector budget deficits that could provide larger amounts of funds more quickly or reduce outflows.
On the one hand, improving collection procedures to reduce leakages due to tax evasion can generate additional funds. On the other hand, increasing efficiency and reducing mismanagement of state companies could lighten the burden on the state treasury. A concerted effort to halt unnecessary expenditures on government schemes would be highly beneficial.
Privatizing state-owned assets would generate ready access to substantial funds. Besides an immediate injection of funds from sales, conversion to private enterprises will create new taxpayers and remove a drain on government financial resources.
Another improvement would arise from increasing user fees and prices paid to state enterprises. Note that such steps can actually decrease the overall tax burden since reductions in public subsidies would bring down the amount of tax revenues required for government operations.
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