The Directorate-General of Budget, Accounting and Statistics (DGBAS) has published its Report on the 2011 Survey of Family Income and Expenditure. The report reveals a 6.19-fold difference between the top and bottom fifth of income earners in this country. If welfare subsidies and other government transfers are excluded, that difference rises to 7.7 times.
Why does it seem to be so difficult to effectively diminish the wealth gap? We cannot avoid the fact that the current tax system is one of the sources to the problem because it takes from the poor and gives to the rich.
According to current income tax regulations, the corporate income tax that a company must pay on the dividends it issues to shareholders can be fully deducted from a shareholder’s general income tax — this is what is known as the “unified taxation system.” The result is that the corporate income tax is used simply as a deduction on a shareholder’s general income tax, which in effect means that the tax exists on paper only.
A big shareholder who also runs a business often gets more than 80 percent of their income from their company’s share dividends. That should nominally place them in the highest tax bracket — 40 percent. However, since the company has already paid the 25 percent corporate income tax on the share dividends issued to its shareholders, that percentage can be deducted from the shareholders’ share dividend income, thus lowering the effective tax rate to 15 percent.
Small shareholders with little income will only be able to make this deduction on a 6 percent income tax rate, while a large shareholder with high income can offset it against a 40 percent income tax rate. Adding in a plethora of other minor tax exemptions, the unified taxation system means that big shareholders with high incomes only pay about 10 percent income tax.
It is not very strange, then, that some entrepreneurs with a social conscience, such as Taiwan Semiconductor Manufacturing Co chairman Morris Chang (張忠謀), and others, have suggested that taxes should be increased for the wealthy and cut for the poor, after seeing that the average income tax rate of the nation’s 30 highest income earners is less than 10 percent.
This kind of system clearly does not meet the need for a fair taxation system. On July 23, 1990, the European Economic Community (a precursor of the EU) issued a directive on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, saying that companies and individual shareholders are separate entities with different rights, so there could be no talk of double taxation.
In 2007, none of the 27 EU member states had a system similar to Taiwan’s unified taxation system. Neither did the US, the Netherlands, Hong Kong or the 10 countries in eastern Europe that have a single tax system use a system similar to Taiwan’s. The unified taxation system clearly does not conform to mainstream international tax systems.
While a majority of workers are losing their will to work and have their ability to save severely circumscribed by excessive taxes, high-income shareholders, who do not have to do hard labor for their income, enjoy tax exemptions and preferential treatment.
Such a preposterous tax system is a source of anger and it further aggravates Taiwan’s uneven income distribution. It is high time the public took an interest in these issues.