Mon, Jul 28, 2008 - Page 8 News List

Tax reform is crucial to improving economy

By Tseng Chao-chang 曾肇昌

The most important aspect of tax reform is that it makes a tax system more reasonable. Taiwan has had an unreasonable and much criticized tax system for many years. At present people either pay unreasonable taxes or take risks to avoid tax. The backward tax laws are the cause of much unfairness.

At the moment, the unfair tax exemptions for military personnel and public school teachers have made it impossible to make tax payments an obligation of each citizen as outlined in the Constitution. The weakness and impotence of our government officials is clearly evident in the promise to meet the demands of protesting teachers that they be given as much in subsidies as they had to pay in taxes.

The system also has many other shortcomings that hurt less wealthy citizens. For example, the system “punishes” people for getting married because single people declare their taxes for themselves, while married couples have to declare their combined salaries and all other combined sources of income. Another example is that single people receive a special interest deduction on savings accounts worth NT$270,000, while married couples only receive a combined interest deduction on savings accounts worth NT$270,000.

Many people have pointed out that a reasonable tax system encourages investment. Tax rates do not necessarily have to be increased for the government to increase tax revenue, which is clearly evident from the year before and after the land value-added tax was cut in half. Taking a dynamic view of the economy, inheritance tax and land value-added tax are taxes for poor people and they should therefore be greatly reduced. On the other hand, land tax and value-added tax are taxes for rich people and should be increased. The inheritance tax rate is too high at 50 percent, much higher than Singapore’s 10 percent and Hong Kong’s 15 percent.

As a result, taxpayers come up with different ways to get around the system. Then, in order to prevent this, the entire tax system becomes increasingly complicated. To avoid paying inheritance tax, rich people come up with ways to reduce their tax, often by moving their wealth overseas, which causes capital outflows. Taiwan’s capital outflow is now estimated in the hundreds of billions.

Many small and medium enterprises set up shell companies in order to distribute their business income. This is a downside of overemphasizing progressive tax rates.

The economy has been declining in recent years while experiencing large capital outflows because people are not interested in investing locally. These circumstances caused the government to think about tax reform a few years ago.

When Hong Kong was under British rule, an emphasis was placed on the efficiency of law. For example, the procedures for establishing a company in Hong Kong can be completed in about two hours. Companies only have to pay 18 percent business tax. There are no foreign exchange controls and any currency can freely be brought in and out of Hong Kong. Economic activities are decided by free competition and survival of the fittest.

The amount of administrative irregularities and the lack of administrative efficiency in Taiwan are obstacles to improvement. The thick layers of red tape in administrative procedure are not aimed at improving performance and are in desperate need of being reviewed.

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