At the latest session of the Economic Development Advisory Conference, trade associations called for a one-year suspension in the collection of the securities transaction tax in order to restore the stock market. The associations' reasoning for such a suspension sounded logical at first hearing, but after giving it some careful thought, I'd be surprised if it really did work. Looking at the proposal from theory and experience, the association's flawed reasoning disintegrates without even an attempt at attacking it.
The trade associations based their call on the following reasons. One, tax reductions are conducive to reviving the economy. Two, suspending collection of the tax would remove a burden from stock investors and heat up the stock market, which in turn would help the economy rebound. Three, once the economy rebounds, other tax income will make up for the loss of the securities transaction tax.
First, using tax reductions to stimulate consumption and increasing consumption to stimulate production will go some way toward reviving the economy. The question is, however, whether the economic slowdown has been caused by cyclical economic changes or structural economic problems. Should it be the former, a tax reduction would be of some help, but in the latter case, it would do no good at all, since it would not raise competitiveness.
Next, there is the question of what kind of tax is being reduced. Were it a large income tax reduction it would lead to some stimulation of consumption among the general public, but what would be the point of suspending the securities transaction tax? The tax is only 0.15 percent -- on a transaction of NT$1 million, it will bring in NT$ 1,500. Is this amount such a burden to an investor? It is difficult to believe that a measly NT$1,500 would affect the activity of the stock market.
Whether or not a one-year suspension of the tax would heat up the economy is something that will be decided by many factors. Furthermore, if the market is still in a state of confusion at the end of the year, or if it has been active for a short period, should the suspension period be extended?
Taiwan's stock market is in a state of confusion today -- a solution can only be found by examing the fundamentals.
If a company has financial problems, or its products are not competitive, or it finds itself in a slump, its share price will naturally fall. If the political situation is unstable and everyone lacks faith in the future, stock prices are likely to fall.
A majority of Taiwan's traditional industries are no longer competitive. Any and all companies running an uncompetitive business will loose money; share prices of any and all money-losing companies will also fall. Prior to last winter, technology companies were still experiencing unprecedented growth, but when the bubble of the US' new economy burst, our high-tech shares also fell, long and hard. These are all fundamental problems.
Then there is the question of the two sides of the Taiwan Strait. If direct links are established and the "no haste, be patient" policy is loosened up, this would no doubt be a great encouragement to business. It would also stimulate the stock market. Since none of these stimulating factors exist today, it will be very difficult to achieve the results expected by tax reductions and suspensions.
Even though Taiwan finds itself in a slow period, any change to laws and regulations regarding people's behavior should still be handled fairly. Otherwise, the side-effects created will be difficult to put right.
If, as a matter of fairness, the decision is made to suspend the securities transaction tax, then the capital gains tax on stocks should be reinstated for the duration of the time the transactions tax is suspended. That would mean that if one makes money, one pays taxes; if one doesn't make money, one pays nothing. This is perfectly reasonable, and also leaves no reason for non-stock traders to complain.
Given the confused state of the stock market, it would make more sense to have different tax rates depending on how long stock has been held. For holdings above 30 days and below 100 days, the tax rate should be lower. For holdings above 100 days but below one year, the tax rate should be the lowest. When holding on to stock for longer than one year, no tax should be collected, encouraging share holders to see stock purchases as an investment tool and not as a speculative tool. In this way, the stock market would become a real capital market instead of a speculative market.
What is most frightening when attempting to stop an economic decline, is the arbitrary use of inappropriate means, or using steps that actually may turn out to worsen the situation. The side-effects could prove difficult to cure. People are a selfish lot, so who wouldn't be dreaming of a tax-free paradise? But first we need an efficient government, able to act!
Yu Tsung-hsien is a researcher at Academia Sinica.
Translated by Perry Svensson
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