The big wealth gap problem finally gained some attention during the presidential election campaign, demonstrating the value of a democratic system. The wealth gap issue is much more serious than the numbers imply, mainly because calculating the wealth gap based on taxable income ignores capital gains income, which is of much greater significance to the wealthy.
The term “capital gain” covers a wide variety of incomes, but it mainly consists of income from securities, land and housing deals, all of which are very clear and distinct tax items. We have access to complete securities trading data and a satisfactory system for recording the real prices of real-estate deals.
This means that there would be no problem to include all income in the tax base — ie, including capital gains in individual consolidated income — or at least tax the real transaction value on such trades as separate tax items. Implementation of these changes depends on the government’s sincerity and determination.
Following the presidential election, a public consensus has been building around the view that capital gains income should be taxed. However, too much unimportant noise is interfering with the main issue. Examples are that rich people already pay a lot of tax, that a capital gains tax on stock transactions would affect the stock market or that a luxury tax should be levied on a regional basis. All this noise has set off a lot of controversy, creating unnecessary social costs, which has led to public distrust of the government’s sincerity and determination in handling the nation’s fiscal situation.
A few days ago, Minister of Finance Christina Liu (劉憶如) proposed the “win-win” view that cutting corporate tax would result in increased tax revenue. The view that the tax base can be expanded by cutting the corporate tax rate is questionable, both from an academic and a practical perspective. After corporate tax was cut to 17 percent last year, tax revenue was NT$365.3 billion (US$12.4 billion). While this was NT$80 billion more than the previous year, it fell far behind the NT$445.2 billion collected in 2008, when the corporate tax rate was 25 percent.
It only serves to highlight that there is no direct relationship between tax cuts and increasing or falling tax revenue. The problems of this reasoning were experienced first-hand by the US in the 1980s when the tax reduction policies of the administration of then-US president Ronald Reagan created a massive budget deficit.
Since there is growing public support for a capital gains tax, the government should not make irrelevant and trivial proposals that only confuse the issue and then declare that any decision will be made by the “team for healthy finances.” Does organizing a team charged with creating a healthy fiscal system really mean that the government, which claims to have drafted a “happiness index,” does not have an opinion on the capital gains tax issue?
Introduction of a capital gains tax is a simple matter for the government to focus on. However, national finances do not consist of taxes alone, so while pondering the issue of a capital gains tax, there is also the need to discuss effective use of the government’s restricted resources.
For example, when signing the cross-strait Economic Cooperation Framework Agreement, the government talked widely about the importance of liberalization. After decades of relying on interventionist tax incentives to promote industrial development, can the government really avoid reviewing this policy?
Chiou Jiunn-rong is a professor of economics at National Central University.
Translated by Perry Svensson
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