The deadline for filing taxes has come and gone. Many people are complaining about high taxes, apparently unaware that they are the ultimate beneficiaries of this money. The fact is that the basic tax burden in Taiwan is among the lowest in the world.
Last year, the tax rate was 11.9 percent, lower not only than that of European countries with large welfare states, but also lower than those of the US and Japan, which stood at 19.5 and 17.3 percent respectively. If you add social security contributions, the 2009 figure goes up to 18.8 percent, but it was still lower than in Japan, South Korea or the US. In the context of these figures, there must be another reason why the majority of the population believes the tax burden is excessive in Taiwan.
Payroll tax accounts almost entirely for comprehensive income tax. According to the figures for comprehensive income tax receipts for 2008, salaries and wages on average accounted for 70 percent of taxable income. This is particularly true for the 3.1 million households which have an annual income of less than NT$1 million (US$35,000) and are still liable to pay income tax. With salaries accounting for more than 76 percent of the taxable income, there is the rather strange situation in which most do indeed have a heavy tax burden.
Another reason employee tax burdens seem quite heavy is that, since it came to power, the Chinese Nationalist Party (KMT) government has introduced a string of measures to reduce non-payroll taxes. First there was the inheritance tax reform of early 2009, which replaced the progressive tax rate with a flat rate, entirely negating the Robin Hood element of the previous system and wiping NT$6.6 billion from inheritance tax revenue the year the policy was introduced.
In April last year, the government went on to reduce the corporate income tax rate from 20 percent to 17 percent — lower than the rate in China, Japan and the US — arguing that this would attract more foreign investment. The result was that direct foreign investment last the year fell 20.56 percent, with even more capital flowing into China while Taiwan bled NT$48.5 billion in tax revenue. The loss to Taiwan’s coffers was significantly higher than the NT$34.3 billion predicted by the Ministry of Finance. In addition, comprehensive income tax fell by NT$2.1 billion. It seems the ministry got its sums horribly wrong vis-a-vis encouraging both investment and salary increases.
The government has elected to reduce taxes rather than improve national infrastructure and facilities, much like a company that chooses to boost sales by slashing prices rather than focusing on product quality.
At the end of the day, that company is still going to have to think about what this means for its profit margin. If the state bears the brunt of cutting costs for companies by reducing taxes, it is going to have to increase its own expenditure on payments to manage its huge accumulated debt. It could do this by cutting social welfare commitments, such as subsidized preschool education, but this would present its own challenges as the public begins to question where its money is being spent and whether taxpayers’ dollars are going to the right place.
If the government truly wants the public to feel at ease with paying taxes, it needs to stop helping the comfortably well-off to cut costs and concentrate instead on a thorough reassessment of the past few years’ tax-cutting measures, which are damaging the nation’s finances.