Tue, Sep 02, 2008 page8

• Low taxes do not help economies

  • By Chien Hsi-Chieh 簡錫土皆
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  The Chinese National Federation of Industries (CNFI) is running a TV commercial urging tax cuts to stimulate the economy. The federation has spent large sums on propagating spurious theories in a tedious campaign to brainwash the public and pressure the Cabinet’s Tax Reform Committee in an attempt to manipulate the direction of tax reform. Is the commercial telling the truth?

  First, it claims that low taxes equal economic growth, and that high taxes equal economic decline. If this theory is correct, shouldn’t tax havens such as the Virgin and Cayman islands be the world’s most developed economies?

  Take Sweden, a high-tax country, for example. Thanks to government transparency and integrity, the public are willing to pay high taxes to enjoy great benefits, such as complete social welfare and a high standard of living. Education is free, they have a skilled and creative work force, and the world’s highest government research and development investment per capita has created several world class corporations. Who says high taxes inhibit economic development?

  During the terms of former US presidents Ronald Reagan and George Bush between 1981 and 1992, the US adopted the advice of supply-side economists and implemented tax cuts. At first, this stimuli boosted the US economy, while also broadening the income gap. In 1989, the richest 1 percent of US households owned 39 percent of the nation’s total assets. The government deficit surged, causing a rapid increase in interest payments, which became the second-highest budget item. The massive debt weighed heavily on national development, and almost crashed the economy. The result was that the Republican Party lost presidential power to the Democratic Party.

  Looking at Taiwan’s situation, the average economic growth rate was 8 percent between 1980 and 1990. However, after the government implemented the Statute for Upgrading Industries (促進產業升級條例) and cut the business tax in 1991, the growth rate dropped to between 5 percent and 6 percent. When taxes were further cut in 1998, the growth rate dropped to 4 percent, and a negative growth rate of 2.17 percent appeared for the first time in 2001. This proves that tax cuts did not boost economic development in the past.

  The misleading commercial also says that low taxes can broaden the tax base, and therefore increase the government’s tax revenues. The fact is that US government revenue dropped from the world’s highest to 13th place following Reagan’s and Bush’s tax cuts, while debt rose sharply from more than US$1 trillion to US$6.7 trillion. The deficit remained until former president Bill Clinton started to levy taxes on the rich. The US government was still unable, however, to deal with the enormous debt.

  For the people of Taiwan, the average tax burden rate was 20.1 percent in 1990. Because of the tax cuts, the rate has gradually dropped to between 12 and 13 percent today, while debt has risen sharply to NT$13.8 trillion. This implies that the failure of government finances is a result of tax cuts.

  The commercial says low taxes create wealth and employment. Let’s use Sweden as an example again. It has implemented a full employment policy, reducing reliance on government subsidies and increasing tax revenue. It is the country with the world’s highest employment rate, much higher than any low-tax country.

  On the other hand, Bush promised to add 15 million jobs during his term, mistakenly believing that tax cuts can boost investment as well as employment. But the opposite happened, as more than 14 million people were thrown into unemployment, while employment participation rates dropped from 64 percent to 62 percent.

  Prior to 1992, Taiwan’s participation rate was 58.4 percent, but after the two major tax cuts, the rate dropped to 56.54 percent, and then to 55.7 percent in 2006. This proves that tax cuts do not necessarily create jobs.

  Taiwan’s actual tax burden is lower than in Singapore and Hong Kong. Business income tax, for example, is 18 percent in Singapore and 17.5 percent in Hong Kong. The nominal rate for this tax in Taiwan is between 15 percent and 25 percent, but due to tax cuts implemented through the Statute for Upgrading Industries and the Unified Taxation System (兩稅合一制), the effective tax rate is 17 percent. If we do not fill these loopholes in time and instead lower the nominal tax rate to 17 percent, the effective tax rate may drop to below 10 percent.

  As for personal income tax, the marginal tax rate is 17 percent in Hong Kong and 20 percent in Singapore. Although it is 40 percent in Taiwan, the average effective tax rate is lower than 13 percent. Since capital gains are tax free in Taiwan, the tax rate for the nation’s 30 highest income earners is even lower than 10 percent. This would be an impossibility in Hong Kong and Singapore.

  Most serious of all, income from securities and land transactions is also tax free here. Hong Kong levies a 16 percent capital gains tax on such transactions, and Singapore includes them in the general income tax. So the commercial actually contradicts fact by claiming that Hong Kong and Singapore are more competitive because their tax rates are lower than Taiwan’s.

  The premise for lowering tax rates is to cover up loopholes that make it possible to evade taxes and to build a fair tax system. This is the only way to achieve the tax reform goal of broadening the tax base, streamlining government and lowering taxes.

  Chien Hsi-chieh is executive director of the Peacetime Foundation of Taiwan.

  TRANSLATED BY EDDY CHANG
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