Back in late 2005, Taiwan Semiconductor Manufacturing Co (台積電) chairman Morris Chang (張忠謀) joined a group of industry leaders in calling on the Democratic Progressive Party (DPP) government to scrap a proposal to revoke tax incentives for the high-technology sector. Chang and other business executives argued the tax policy was necessary to maintain market competitiveness.
At the time, Chang and his colleagues also suggested the government reduce income tax rates for individual taxpayers, as the government planned to impose its alternative minimum tax scheme in 2006.
But on May 30, the 76-year-old Chang dramatically changed his stance on tax policies when he addressed a forum in Taipei. Chang said the Chinese Nationalist Party (KMT) government should put an end to taxes that grant unfair, preferential treatment to companies by not renewing the Statute for Upgrading Industries (促進產業升級條例) after it expires in December next year.
The state coffers could gain around NT$100 billion (US$3.3 billion) in additional tax revenue annually by scrapping the tax breaks offered in the statute, Chang said.
Perhaps even more surprising, the chipmaker tycoon suggested that the new administration raise taxes for the wealthy and cut taxes for lower-class tax payers. Chang said the trend toward an “M-shaped” society had strengthened over the past few years, causing frustration as the middle class shrinks and the rich-poor gap widens.
Chang’s remarks drew a mixed response, with some economists praising him for taking a courageous stand that is unpopular among his colleagues. These analysts urged the government to heed Chang’s advice, saying that big business has exerted too much influence on government policies, regardless of which party has controlled the presidential office. Other economists attacked Chang’s opinion as deviating from a successful global trend in tax policy.
Those who back tax cuts usually argue that low tax rates are necessary to promote investment and boost economic growth, and that low taxes — by boosting business and in the end profits — eventually lead to higher tax revenues. Low taxes for companies are a win-win situation, they say. By the same token, they warn that raising tax rates will discourage business investment and reduce productivity, resulting in a weaker economy and hitting the state coffers.
But the dominant argument among companies and economists is not tantamount to truth. The presumed advantages of tax cuts are essentially the rhetoric of “supply-side” economics and no one can say how long it will take to see these benefits materialize.
Chang’s bold call to work for a more equitable economic system sought to open a new window on tax reform. And if even wealthy people like Chang are stepping forward in support of higher taxes, the government should seize this opportunity to face the very real problems in the tax system and push for tax reforms such as levying taxes on capital gains and on profit from overseas investment.
The public is no doubt skeptical about whether our Cabinet and lawmakers are up to the task. Many countries use tax cuts as a way to win votes. But if the new administration is fiscally responsible, it will consider the fact that its debt is expected to reach NT$3.8 trillion by the end of this year. It cannot afford to continue excessive tax breaks for the wealthiest members of our society at the expense of those who truly need tax relief.
Tax reform is complex and politically sensitive and the government must proceed with determination. Mitigating the rich-poor gap while promoting economic development is a delicate project and should be guided by the goals of building a fair, transparent and simplified tax system. But the government will not be able to please everyone no matter how insightful and effective its policies are, so it should brace itself for criticism as it confronts this urgent task.
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