Sun, Feb 19, 2012 - Page 8 News List

EDITORIAL: Capital gains tax, step by step

A gradual move toward taxing capital gains on securities transactions — known as a securities income tax — could be just what the Cabinet led by Premier Sean Chen (陳冲) needs in terms of tax reform.

Chen said last week that the government had not decided whether to levy a securities income tax, but would openly discuss all viable options for securities transaction taxation during the next meeting of the national tax reform committee.

Also in the past week, Chinese Nationalist Party (KMT) Legislator Tseng Chu-wei (曾巨威), a National Chengchi University finance professor, said that imposing a capital gains tax “is a road Taiwan must take” and that he would rather resign from his post if the Cabinet does not move forward in this direction, while Financial Supervisory Commission Chairman Chen Yuh-chang (陳裕璋) said the commission would be “actively involved in future discussions of the securities income tax,” a reversal of his previous stance that there were no such plans under consideration by the government.

It seems the odds of the government imposing a securities income tax are increasing and that the public will support the levy without hesitation.

Not so fast: While the good news is that a growing number of people have been willing to consider such a tax, it has to be asked whether the nation — and more importantly, the stock market — is ready for it.

Government data show that many of the nation’s top income earners pay much less individual income tax than the salaried middle classes, because they have a higher proportion of their income derived from securities transaction gains. However, an outright push to impose the tax will look like a rushed move, which could spook investors and increase opposition from groups with vested interests. Political pressure to veto the tax would rapidly emerge.

Three years ago, National Taiwan University associate professor of economics Lee Hsien-feng (李顯峰) proposed a staged introduction of a securities income tax. He suggested that the government could initially tax corporate stock gains to enlarge the nation’s tax base, while exempting individual investors to mitigate any negative impact on the stock market. Lee’s proposal also included other options, such as abolishing the present securities transaction tax and making investment losses tax-deductible.

Lee also had an important suggestion to make on the timing of the new measures — he said the government should introduce the securities capital gains tax when global economic conditions are bad and the domestic stock market is less upbeat.

Lee’s proposal concluded that full introduction of a securities income tax might take time to achieve and the government might end up collecting close to zero revenue from a securities income tax during a market slump, but a measured move to introduce the tax would have much more merit than if it were immediately adopted. It would allow the government to increase communication with the public and propose a sunrise clause to create a grace period before the new tax would take effect, thereby reducing the risk that imposition of the tax would spook the stock market — an overriding concern.

A gradual move to impose a securities income tax would also give the government time to revise the current tax system, which gives overgenerous preferential treatment to certain industries and allows tax deductions or exemptions for the rich; factors which only work to undermine the nation’s tax base.

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