The legislature's Finance Committee passed the first reading of an alternative minimum tax (AMT) proposal last week. This proposal, if it becomes law on Jan. 1, would allow the government to tax overseas income of high-income earners starting in 2009. The issue is important because it marks the nation's first tax hike in nearly five decades, after years of widening budget deficits.
According to government forecasts, the budget deficit will worsen to a record NT$337.3 billion (US$10.07 billion) this year from an estimated NT$304 billion last year, while general government debt approaches 40 percent of GDP. To hold down growing pressure on public finances, President Chen Shui-bian (
If the new regulations becomes law, about 5,000 companies with annual profits over NT$2 million, and between 16,000 and 17,000 individuals whose annual income exceed NT$6 million would be affected. Most importantly bonus shares would be counted at market value, instead of par value on personal tax returns. The government's coffers could rake in around NT$11 billion in additional tax revenue in the first year the new regulations take effect.
The tax-hike issue is especially noteworthy because it also shows a political consensus on tax reform, in contrast to the persistent stalemate between the executive and legislative branches of government on many other issues -- such as the elimination of the 18 percent preferential interest rate given to retired military personnel, civil servants and school teachers.
Like their counterparts elsewhere in the world, most Taiwanese politicians favor tax cuts to appease their constituencies. But the preliminary passage of the AMT bill seems to suggest a growing consensus on lowering the generous subsidies (in the form of tax incentives) that the government offers to high-tech industries, since most of these companies have moved their factories to China.
Advocates of supply-side economics may still be suspicious of the higher-tax idea, arguing that the move will inevitably lower household spending, business investment or both. But they should answer the following questions. Can we get individuals and corporations to increase their productivity through tax cuts? How fast can we see firms really beef up investment and build more plants in this country?
Supply-side economics works best in theory and the supply effect usually comes around rather slowly. The reality facing this country, however, is that tax cuts lead to higher, not lower, budget deficits.
The AMT proposal must pass two more legislative reviews. Business groups are sure to continue lobbying lawmakers to lower the proposed tax rates to 7.5 percent. Nonetheless, further reviews appear to be just a formality and the government appears to have the political capital to continue its tax reform efforts.
Hopefully the government's tax reform will strengthen the nation's fiscal capability in the longer term. But politicians should also act to support public policies for the people's interests instead of battling for partisan concerns -- be it tax reform or the 18 percent preferential interest rate on savings.
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