The wealth of Mitt Romney, a candidate for the US Republican Party presidential nomination, is estimated to be about US$270 million, and with an annual income of more than US$1 million, he is one of the richest presidential candidates in US history. However, he has been accused of tax evasion by some of his opponents in the primaries, who demanded that Romney release his tax records.
After ignoring these demands for months, Romney said on Jan. 17 that his income tax rate was about 15 percent. Right after the announcement, White House press secretary Jay Carney came out and said that every hardworking person should receive fair treatment when it comes to taxes. Carney said that since wage earners who make between US$50,000 and US$100,000 a year have to pay tax rates of more than 15 percent, there is no reason why those who make more than US$1 million a year should only pay 15 percent.
Then, on Jan. 24, Romney finally released his tax records. Over the past two years, the average annual tax rate for Romney and his wife was about 14 percent — which is even lower than the average rate for US middle-class salary earners. Romney also has US$8 million in private investment funds in the Cayman Islands, an offshore tax haven. On the evening of Jan. 24, US President Barack Obama delivered his annual State of the Union address, in which he proposed a new base tax rate for the wealthy. Obama’s platform announcement was timely, as voters were not happy with rich people paying little in taxes.
During the 69-minute-long address, Obama brought up the issue of fair taxes a total of 34 times. He said that a billionaire should at least be paying the same tax rate as his secretary. This comment was of course aimed at Warren Buffett, whose yearly income mainly comes from dividends, which are only taxed at 15 percent.
Buffett’s secretary, who was invited to the speech, like all other average wage earners, must pay taxes as high as 35 percent. Obama reiterated the idea of the “Buffett rule” and emphasized that tax rates for people making more than US$1 million a year should not be lower than 30 percent, while those for 98 percent of households earning less than US$250,000 a year should not be raised.
In the US, capital gains are taxed at a preferential rate of 15 percent, much lower than the 35 percent maximum that wage earners have to pay. This distorts the principle of fair taxation.
In Taiwan, not only are capital gains from securities transaction exempt from taxes, there are also a series of tax exemptions for high-tech businesses. What is worse is the integrated income tax system — especially now that the income tax on profit-seeking enterprises exists in name only — which means that 80 percent of the NT$100 billion in annual tax deductions that is set off against aggregate income goes into the pockets of the stock owners who earn more than NT$1 million (US$3.4 billion) a year.
Add to this the amendments to the Income Tax Act (所得稅法), with the interest on stocks provided for the purpose of formation of, contribution to, or participation in public trusts, which used to be taxed at 40 percent, being halved to 20 percent. These factors have turned Taiwan into a tax haven for the wealthy.
Three years ago, Taiwan Semiconductor Manufacturing Co chairman Morris Chang (張忠謀) commented on the unfairness of the nation’s taxation system. At a business breakfast for leaders of industry and commerce, Chang told then-premier Liu Chao-shiuan (劉兆玄) that the 30 richest people in the country on average paid less than 10 percent tax on their yearly income, which is less than half the tax rate that average income earners pay. Chang therefore suggested that the wealthy pay more in taxes, while the less wealthy pay less.
Chen Ching-hsiou (陳清秀), a professor at Soochow University who specializes in human rights and taxes, Lin Terng-yaw (林騰鷂), an academic at Tunghai University who specializes in the Administrative Appeals Act (行政訴訟法), and myself are convinced that the nation’s taxation system has not only failed to narrow the gap between the rich and poor, but has in fact increased the unequal distribution of wealth in society and triggered problems that could lead to social unrest.
If fair taxation is to bring about social justice, the government cannot give special interest groups more tax benefits than others. Cutting taxes does not necessarily mean that the tax burden for the general public will be lighter because by easing the tax burden of some, the taxes of those who enjoy tax benefits and do not pay taxes will merely be transferred to those who do not enjoy such benefits.
For instance, in 2010, Taiwan’s tax burden was a low 11.9 percent — even lower than Singapore’s 13.4 percent, a country known for its low tax rates. However, 71 percent of the national aggregate income tax came from households that derive about 50 percent of their income from salaries. As such, there is no way the hardworking middle class will ever enjoy the benefits of Taiwan’s so-called “light taxes.”
This differential tax treatment for people in different income groups is both preposterous and infuriating. If the tax burden distribution in Taiwan is analyzed, one can see how things have severely distorted the normal operation of fairness and justice, factors that the taxation system should be based on.
Following the heavy criticism of Romney over tax issues and Obama’s focus on promoting fair taxation during his State of the Union address, new Minister of Finance Christina Liu (劉憶如) should make it a priority to assess whether the government should keep current tax break clauses, while also blocking the many loopholes in existing tax laws. Liu should promote social justice based on a fair taxation system, in which honest taxpayers do not get ripped off and clever individuals cannot dodge payments. This is what everyone in the country hopes for.
Huang Chun-sheng is a certified practicing accountant and is on the Tax Committee of the Taiwan Financial Services Roundtable.
Translated by Drew Cameron
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