The government is considering different responses to the ever increasing wealth gap, now greater than it has ever been. These responses include raising the poverty line and taxing the wealthy, an option that has recently received a lot of attention.
Superficially, at least, the government seems to want to deal with the wealth gap. A comprehensive overview of government policy, however, reveals logical inconsistencies and implies a deliberate attempt to avoid the real problem.
Taxation of the wealthy falls under three different tax categories: income streams, assets and consumption. Government statements imply that it leans toward adding luxury taxes to the two latter categories, that is, taxation of luxury housing and taxation of specific kinds of consumption.
Disregarding for a moment the more difficult technical issues, such as how luxury commodities are to be defined or how the taxes are to be levied, on the surface at least, it seems plausible that levying luxury taxes and raising the level for poverty subsidies would help reduce the gap between the extremes of poverty and wealth. Unfortunately, it’s not that simple.
Luxury taxes are unlikely to bring in much extra tax revenue and act better as a declaration of the government’s intent than as a means to bring about any appreciable change. In addition, in January last year, the legislature slashed inheritance and gift taxes and increased tax exemptions after coming under pressure from the Chinese Nationalist Party (KMT).
Estimates showed that this reduction in taxes will cost the nation more than NT$20 billion (US$645 million) in tax revenue, causing the government to come under fire for reducing the taxes on the wealthy. Today, the government plans to levy largely ineffective luxury taxes on the wealthy.
This not only raises questions about the government’s determination to diminish the wealth gap, it also highlights logical inconsistencies in its policies. Such inconsistencies have occurred before, for example, when the government said it would remove the tax exemption for military personnel and teachers, while at the same time deciding that all the money levied as taxes should be returned in the form of subsidies.
If the government really wants to make good on its determination to bring about reform and diminish the wealth gap, it should apply taxes to income streams. Ministry of Finance taxation data shows that stock dividends account for 30 percent of the income for people with an annual income of between NT$3.72 million (US$120,155) and NT$5 million, 39 percent for those with an income of between NT$5 million and NT$10 million and 71 percent for those with incomes above NT$10 million.
This clearly shows that stock dividends are the main source of income for the nation’s wealthy. At the moment, Taiwan only taxes securities transactions themselves and not the income made on such transactions. This has considerable implications for the income inequality and the size of the wealth gap.
Taiwan is one of only a handful of countries in the world that does this. Other countries, such as the US, the UK, Japan, South Korea, Hong Kong and Singapore, tax the income made on securities transactions.
Levying a luxury tax on the wealthy will do little to improve the income inequality situation or lessen the wealth gap. At the very most all it will do is dissipate some of the resentment felt toward the rich by the wider population.
If the government really wants to improve the situation, it must get to the crux of the issue. If it fails to do this, people are going to start to question the government’s commitment to reform.
Lu Chun-wei is a researcher at the Taiwan Thinktank.
Translated by Perry Svensson and Paul Cooper
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