The Ministry of Finance recently unveiled a package of mid and long-term measures to improve government finances, in which many tax increase schemes and plans were proposed. Meanwhile, it is reported that the national debt has reached NT$14 trillion (US$435.26 billion), or about NT$600,000 per capita. The biggest problem with Taiwan’s taxation system, however, lies in the rigidity of the system.
In terms of individual taxes, the tax rate for the rich in Taiwan is 40 percent, the second-highest among the six regional economies of China, Hong Kong, Japan, South Korea, Singapore and Taiwan. Only China has a higher tax rate than Taiwan, at 45 percent. Ironically, personal income taxes received by the ministry only account for 2.8 percent of the nation’s GDP, the third-lowest among neighboring countries and only higher than Singapore’s 2.2 percent and China’s 1.2 percent. Weak tax inspection allows the rich to evade taxes.
In 2006, for example, individual income taxes from about 8 million workers accounted for 73.5 percent of the government’s general income tax revenues. Taxes on stock dividends only made up 12 percent and property trading tax 0.2 percent. These numbers show that it is nearly impossible for a salaried person to avoid personal income taxes, while those who draw income from financial trading can do so with more ease. Sometimes a major case is investigated as a result of public pressure, but the government is still unable to levy taxes on most capital gains. The problem lies in loopholes in the taxation system and the government’s failure to inspect taxes.
There are numerous ways to evade taxes. One is a bourse tax exemption. Securities firms do not need to pay taxes for the profits made from stock trading in their proprietary trading departments; they need to pay taxes for revenues from their trade processing fees. Thus, when filing taxes, a company will try to list all its various expenses under the department where profits need to be taxed in order to reduce the profit of those departments. The tax authorities have noticed this situation and have begun looking into it, but litigation is costly and the government cannot recover all unpaid taxes.
The rich can also evade taxes through incremental land taxes. The assessed present value of a mansion worth hundreds of millions of NT dollars could be only one third or a quarter of its actual market selling price. Buyers can take a bank loan higher than the assessed present value of the house and give the property and the loan at the same time as a gift to their children. Since property and debt balance each other out, the buyer will not have to pay a single dollar in gift tax. In addition, if the children sell the property before the assessed present value is raised, they will not have to pay any incremental land taxes and can thus easily inherit hundreds of millions of NT dollars.
Government expenditure has exceeded revenues since the mid-1980s. Following the transfer of political power in 2000, the national debt began increasing 10 times faster than before. Now that public debt is approaching the statutory ceiling of 40 percent — it currently stands at 36.8 percent — it can be foreseen that budgets for disaster reconstruction, the proposed professional military system, programs to improve the domestic employment situation and public construction will accelerate the collapse of government finances. The government must start considering the root causes of these deficits before it is too late.
Chen Chang-hung is a doctoral candidate at the Graduate Institute of Political Science at National Taiwan Normal University.
TRANSLATED BY TED YANG
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