The government's pledge last week to reduce its growing budget deficit through tax reform won't be easy, and its plans to increase taxes do not seem politically palatable. The trouble is that almost no one is happy with the matter. Not the rich, not the poor, and not the many opposition politicians who welcome any opportunity to vent their resentment towards the Chen Shui-bian (
But the recent public uproar over the government's planned hikes to value-added tax (VAT), and opposition politicians' accusation that this measure is stealing from the poor and giving to the rich is an over-reaction. It also ignores other reform schemes the government has initiated to reduce the deficit, such as the levying of a "minimum tax" on high-income corporations.
The "minimum tax" scheme proposed by the Ministry of Finance is a mechanism new to Taiwan, but is has been applied to taxpayers in the US, Canada and South Korea for many years.
The US Congress first enacted a minimum tax measure in 1969 following testimony by the secretary of the treasury that 155 people with adjusted gross income above US$200,000 had paid no federal income tax, according to their tax returns. In 1978, the US also passed the Alternative Minimum Tax (AMT) legislation to ensure that high-income earners pay at least some minimum amount of tax, regardless of deductions, credits or exemptions. The US currently has a minimum tax rate of 20 percent on companies, while South Korea offers two rates -- 10 percent and 15 percent.
In Taiwan, some tech firms have long enjoyed tax exemptions because of tax breaks the government offers to encourage investment. As demands for preventing high-income companies from paying little or no tax become louder, the ministry hoped to collect a minimum 10 percent tax from these companies. If they are already paying at least that much because of the regular income tax, they don't have to pay extra tax under the minimum tax scheme. But if their regular tax falls below this minimum, they have to make up the difference by paying the extra.
So far, there's no consensus among government agencies and industries regarding the minimum tax rate. The Ministry of Economic Affairs suggested that the rate should be set at between 5 percent and 7.5 percent, while industry leaders asked for a rate between 3.75 percent and 7.5 percent to maintain competitiveness. Therefore, what the government needs to do is quickly establish a tax rate and offer a heavy punishment for tax avoidance.
The government has been running a budget deficit for a decade. If you ask how big the budget deficit is, the answer is: Very big. And the figure has increased by leaps and bounds, to NT$337.3 billion this year from NT$5.1 billion in 1990. It is understandable that the government wants to adjust VAT rates. Likewise, people also have good reasons to worry about a planned 1 to 2 percentage point increase on VAT, because it is a consumption tax which is added to a product at each stage of its production or distribution and, in theory, would ultimately be passed on to the consumer. But will producers really want to do so?
Economically speaking, this is a question about "economic elasticity." The elasticity refers to how producers and households respond to price changes. If higher prices lead households to cut back their purchases, or switch to alternatives, then the demand of such goods is elastic. In a competitive market, producers therefore may not want to entirely transfer VAT hikes to consumers, out of fear that competitors may decide to absorb the extra costs to secure customers.
The public's concern over the planned VAT hikes may be exaggerated, as the government has proposed lowering taxes on commodities entertainment, and the stamp tax as supporting measures that could offset the increase in VAT. But the public's concern does serve as a wakeup call for the government that it must stick to its long-term plan of revising the tax system.
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