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Editorial: An end to haggling over tax?

A group of experts recently came up with an idea that could bring an end to the seemingly ceaseless haggling over tax exemptions and deductions.

In a public hearing organized by the Ministry of Finance last Thursday, these experts suggested that the ministry replace the existing personal exemptions and 12 itemized deductions with a unified tax structure -- they called it the "basic living cost exemption."

The idea of this basic living cost exemption is to offer a fixed amount of exemption for all taxpayers, regardless of their wealth. The amount would be set according to the Ministry of the Interior's definition of the so-called "monthly minimum living cost."

The aim of the proposal is to simplify the income tax system while broadening the tax base.

However, tax is a contentious subject -- as can be seen from the fact that, last session alone, legislators proposed 20 amendments to Article 17 of the Income Tax Law (所得稅法) to increase the amount of exemptions and deductions.

While these amendments are music to taxpayers' ears, their proposals -- such as increasing insurance premium deductions from NT$24,000 to NT$48,000 per year per person, allowing a NT$25,000 educational deduction per person rather than per household and even allowing taxpayers to claim deductions for alimony -- would have a noticeable effect on state coffers. In fact, the finance ministry said the amendments would probably cost the national treasury about NT$77 billion (US$2.3 billion) a year.

The beauty of the proposed basic living cost exemption is that it would ease the tax burden on low- and middle-income earners while also helping to reduce the cost of tax collection.

The new plan would also make it more difficult for high-income earners to avoid tax, while at the same time posing a challenge for those who prefer to file their taxes via the "itemized deduction" method.

Itemized deductions have long allowed taxpayers -- and especially high-income earners -- to avoid tax on donations, medical expenses, losses from disasters, mortgage interest and education fees, among other things. The new plan would not only force these people to pay higher taxes, but also deprive them of their ability to convert otherwise taxable income into nontaxable or deductible items.

But if anyone doubts that basic living cost exemption is meaningful and constructive, consider this: According to tallies shown by a tax professor at the hearing, the deductions and exemptions claimed by taxpayers in 2000 accounted for a massive 88.75 percent of total individual income that year. In other words, only 11.25 percent of total individual income that year was taxed.

The new plan is undoubtedly innovative, but that is part of the problem. There exists no precedent elsewhere in the world that Taiwan could examine and learn from. The manner in which the basic living cost exemption is calculated will always be contested, and will become a matter of much debate.

Either way, the finance ministry needs to rethink the nation's income tax system with the principle of fair contribution from taxpayers in mind. Last week's proposal was just the beginning and the finance ministry should encourage interested parties to consider all options to improve the tax system. What it should avoid, however, is rushing to implement any quick fix solutions before they have been properly examined.
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