Sat, Mar 12, 2011 - Page 8 News List

Luxury tax, a band-aid to a flawed tax system

By Chen Ching-hsiou 陳清秀

In order to combat speculation in the real-estate market, the government is planning to levy a luxury tax. This move will increase the tax burden on real-estate deals and it should have an effect on efforts to prevent short-term speculative deals.

Real estate is a scarce resource in this nation. Its value is mainly linked to overall social development and government infrastructure projects. It very rarely comes from the real-estate owner’s personal labor or capital contributions. Therefore, profits derived from an increase in the value of real estate should go to the state, as dictated by the Republic of China (ROC) Constitution in accordance with the will of the founding father of the ROC Sun Yat-sen (孫逸仙).

This is also why the Equalization of Land Rights Act (平均地權條例) and the Land Tax Act (土地稅法) regulate the levying of land value increment tax. This was done with the express purpose of levying heavier taxes so as to realize the fundamental national policy goal of returning price increases to the state.

However, because a transaction tax is not levied on the actual price of a real-estate trade, but on the difference between that price and a previously announced value, the systemic design of the land value increment tax system makes it impossible to attain the goal of returning price increases to the state.

Even more worthy of note is that amendments to the law made a few years ago lowered the tax rate of the land value increment tax. This means that as long as the currently listed value of a piece of real estate does not double in value, even if the income from a deal on it reaches several hundred million New Taiwan dollars, the tax rate is capped at 20 percent, much less than the highest rate on income tax, which is 40 percent. Also, if ownership of the piece of real estate changes hands within one year, there is no need to pay any value-added tax or income tax, even if the income from that deal reaches into the tens of millions of NT dollars.

Such a distorted tax system not only causes an increase in real-estate speculation, it is also unfair to hardworking wage earners who have to pay tax on every dollar they earn.

The recently proposed luxury tax can only be considered a band-aid solution at best. The real unfairness lies in the land value increment tax system itself, as it is part of a legal system that benefits the rich. It makes it impossible to put the principle of fair taxation into practice and it is therefore against the spirit of equality as stipulated in Article 7 of the Constitution.

Therefore, a fundamental solution should involve the abolishment of the land value increment tax. Instead, comprehensive income tax should be levied on all income made from property transactions. This is the only way to distribute wealth across society and implement the ideal of a fair taxation system.

Chen Ching-hsiou is an associate professor of law at Soochow University.


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