Since being established in June, the Tax Reform Committee has felt pressure from various interest groups.
Some people are asking for tax cuts to help attract the repatriation of funds from abroad; others are focusing on the fairness of the tax system and hope that the less wealthy will pay less tax while the wealthy pay more; and many also focus on healthy finances and want tax reforms to help bring about an improvement in the national financial infrastructure.
International economists often talk about an “unholy trinity,” which states that it is impossible for a country to exhibit all of the following criteria at the same time: a fixed exchange rate, free capital movement and an independent monetary policy.
For example, China wants to keep a fixed exchange rate while maintaining an independent monetary policy, which means it must accept restrictions on the movement of capital.
The US wants the free flow of capital and an independent monetary policy, which means it must adopt a floating exchange rate.
Hong Kong, known for having the world’s most free economy, has both free capital movement and a fixed exchange rate.
This has meant that concessions on monetary policy have been necessary and its monetary policy now follows the US.
This triangular relationship explains the basic principle of the international economy: You can’t have your cake and eat it, too.
For policy, this implies that some sacrifices have to be made and some things have to be prioritized.
This also seems to apply to the tax reforms that have been discussed lately.
Essentially, tax reform should be in line with three main goals — the development of industry, fairness of the tax system and healthy national finances.
First, if the tax environment is to encourage industrial development, it is inevitable that tax rates will be lowered to attract investment.
This is the main focus of the Tax Reform Committee.
Secondly, in terms of the fairness of the tax system, apart from the unfairness caused by the Statute for Upgrading Industries (促進產業升級條例), the most contested problem is the tax exemption on capital gains.
However, after seeing the Taiwanese stock market plummet for 19 consecutive days late in the 1980s after then-finance minister Shirley Kuo (郭曉玲) announced the adoption of a capital gains tax on securities transactions, our politicians are still unwilling to get involved in the issue of capital gains tax, despite constant calls from experts, academics and the media for taxes to be levied on capital gains.
Finally, the nation’s financial health is a serious issue that needs to be solved if Taiwan is to prosper economically.
The quickly rising debts accrued by the government over the past few years are in need of urgent attention.
In addition, the National Pension Act and the new measures for the Labor Insurance Annuity, which are ready to be put into place, have also made many people worry about the financial situation and have made people question just how long the national pension can be maintained.
Therefore, if we see the three major focuses of tax reform as an unholy trinity, it is possible to provide a few policy objectives that the Tax Reform Committee can focus on when drafting policies.
First, by emphasizing industrial development and giving up the idea of a fairer tax system — by not changing capital gains tax and inheritance tax while continuing to use lower taxes and tax exemptions to attract investment and become a regional wealth management center — our government would be emulating the governments of Hong Kong and Singapore.
In this way, our government could increase its tax revenue because of the increased amount of investment, which would in turn lead to healthier national finances.
Second, by emphasizing a fairer tax system, reinstating a capital gains tax, increasing income tax rates and terminating subsidies and other beneficial measures to industry, our government could create a fairer tax system.
In the short term, the increase in tax revenue and new tax items would improve the national finances.
However, such moves could also see Taiwanese industry move overseas more quickly and cause foreign investors to lose interest in investing in Taiwan.
Finally, if the government were to make industrial development and a fairer tax system a combined goal, the result could be that the national treasury could end up taking money out of the treasury to directly compensate businesses for losses caused by the introduction of a fairer tax system.
This would ultimately bankrupt the government.
Thus, viewing tax reform as an unholy trinity — instead of asking the Tax Reform Committee to meet all of its policy goals — shows us that it would be better if the goals were prioritized.
Do we want to make economic development the primary goal? Or do we want to minimize the rich-poor divide created by an M-shaped society? Or do we want healthier national finances to allow us to establish a more complete social security system?
These are all important issues that the Tax Reform Committee needs to think about long and hard.
Louis Liu is an assistant professor of public administration at Tamkang University.
TRANSLATED BY DREW CAMERON
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