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Make a pie before cutting it up

The Ministry of Finance has decided to adjust the allocation of the tax redistribution fund beginning in fiscal year 2003. The portion allotted to the "special municipalities" of Taipei and Kaohsiung will drop from the current 43 percent to 36.22 percent. Meanwhile, the portion allotted to other city and county governments will rise from the current 39 percent to 45.92 percent. Basing calculations on a total budget of NT$150 billion, cities and counties will obtain an additional NT$10.4 billion in financial resources. This may be of some small help to their annual budget deficit of nearly NT$50 billion.

However, given that tax resources are limited, the allocation of government revenues and expenditures appears to be a zero-sum game. If the other cities and counties receive more, the special municipalities must get less. Of course, Ma Ying-jeou (馬英九) and Frank Hsieh (謝長廷) loudly challenged the central government.

The way to solve the financial dispute between the central and local governments is to increase the size of the pie and make everyone happy. How to make this pie, however, is a problem that demands political wisdom.

The allocation of government revenues and expenditures has long been an insoluble political problem. The most recent amendment to the Law Governing the Allocation of Government Revenues and Expenditures (財政收支劃分法) was made in 1999. The last amendment prior to that was made in 1981. Between these two amendments, proposals were twice raised by the Cabinet and later withdrawn. Obviously, the allocation of government finances is not a purely financial problem. Amendments were successfully made in 1999 because after downsizing the provincial government, provincial tax allotments had to be redistributed. And the amendments made at that time were quite peculiar. On such an important legal matter, the legislative committee deliberated for less than two hours.

The legislators' fear of more expansive discussion didn't stem from closed-door dealings. Rather, it resulted from legislators finding themselves caught in the middle of the wrestling between the central and local governments.

From the local perspective, there is naturally a desire for financial autonomy, but this implies a corresponding decrease in central government subsidies to local areas, and legislators' ability to make a contribution to their own constituencies would thus be diminished. Under these peculiar conditions, enacting laws to resolve disputes surrounding the allocation of government finances may only make matters worse.

According to 1998 statistical data presented by the Ministry of Finance for the purpose of amending the law, after adjustment, the proportion of self-generated financial resources would be 81.22 percent for the central government, 97.33 percent for the special municipalities, 65 percent for the other cities and counties, and 52.75 percent for the townships. Looking at this distribution, reducing the proportion for the special municipalities and increasing the proportion for the other counties and cities is clearly in accord with the principle of reducing disparities. But the redistribution fund does not include central government subsidies. Taking more from one source might well mean getting less from another. Mayor Ma's so-called making the pie bigger may be little more than an accounting trick played with the limited resources at hand.

Ma has proposed expanding the size of the pie by increasing the size of the redistribution fund from NT$150 billion to NT$300 billion. Basically, his proposal ignores the stipulations of the law governing allocation of government revenues and expenditures. The revenue sources of the redistribution fund include 10 percent of income tax revenue and commodity tax revenue, as well as 40 percent of business tax revenue (minus the portion for lottery-prize money). This year the fund also began receiving 20 percent of the revenue from the alcohol and tobacco tax and the land value increment tax.

Unless the economy recovers and tax income increases sharply so the size of the pie naturally grows, it would be necessary to amend the law in order to adjust the allotments of tax revenue and make the central government's piece of the pie smaller. If central government finances remain lackluster and the upper limits on borrowing can't be relaxed, the only alternative will then ultimately be to respond by reducing subsidies.

Local governments will get more from the redistribution fund but less from subsidies. In the end, with the two effects cancelling each other out, everyone will have done little more than play a numbers game. The money circus will continue.

Judging from past experience, local governments are more excessive than the central government in paying for vehicles, official residences, or trips abroad for government heads, and there has also been more corruption involving construction contracts at the local level. Increasingly autonomous finances at the local level make one worry whether "policy vote-buying" (政策賄選) will only become more prevalent. Thus the allocation of government revenues and expenditures requires considering not only the redistribution of national tax revenues but also that a start be made in improving the effectiveness of resource use.

Quantitative analysis of central and local government administrations should be conducted, and according to the distribution of work expenses, tax revenue should then be distributed proportionately. Moreover, in accord with the growing scope of support from the center, there should also be a proportional increase in the locally-generated part of the annual budget. However, in the process of inspecting whether local government expenses are completely legitimate, I'm afraid local government finances will not be able to enjoy autonomy. Even their administrative work will be restricted by the center, letting the central government gather more money and power. This will violate the spirit of local autonomy.

The four major principles regarding the allocation of government revenues and expenditures are: first, rationally allocate limited resources; second, look after the financial stability of each level of government and maintain the central government's ability to give appropriate subsidies; third, increase local financial autonomy; and fourth, implement policies to take care of impoverished counties. Among these four principles, however, the central and local governments each select only those which are beneficial to themselves.

If local governments want to extricate themselves from the awkward situation of needing to ask the central government for money, they can only enlarge the pie by themselves. Under the authority of the law governing allocation of government revenues and expenditures as well as the Law on Local Government Systems (地方制度法), they could start collecting local taxes.

If Mayor Ma could emulate the big cities of Europe and the US by tacking a "municipal tax" onto the business tax, then given the population density of Taipei City and its developed state of commerce and industry, it should be easy to achieve annual tax revenues of NT$20 billion to NT$30 billion. Why should he haggle with the city and county governments over NT$7 billion or NT$8 billion from the redistribution fund?

In Taiwan's electoral culture, raising taxes has become politically taboo. No candidate who advocates raising taxes will be elected. But the central and local governments all want to play Santa Claus without paying heed to their political responsibility to raise taxes. Increasing the size of the pie isn't a matter of seizing someone else's portion. Otherwise, we are all doing nothing more than feeding on illusions.

Shen Fu-hsiung is director of the DPP's policy committee and a legislator.

Translated by Ethan Harkness
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