Since President Ma Ying-jeou’s (馬英九) re-election in January, consumer prices have continued to rise while the stock market has continued to fall. The TAIEX has shed more than 1,000 points over the past three months, losing more than NT$1 trillion (US$33.4 billion) in value. Deducing the reason for this decline is not very difficult: It is due to the impact of the combined rise in fuel prices and impending hike in electricity rates as well as the European debt crisis. Another crucial reason is the proposed controversial capital gains tax on securities transactions, as can be seen by wild fluctuations in the stock market and the presence of five different proposals for the tax.
Obviously, the proposal of the capital gains tax in the name of reform is far from the government’s goal of promoting fairness and justice. While the government still appears to be pushing the tax, it is poised to fail. If we look at the tax in terms of a medical prescription, the government has made two mistakes.
First, this powerful medication is too heavy for a weak patient. The local stock market is not very healthy to begin with and it is rife with opportunistic speculative retail investors. That means that if there is the slightest commotion causing big investors to pull out, retail investors often follow. When news first broke in February of plans to revive an attempt from 1988 to introduce a capital gains tax on securities transactions, the government immediately vowed to “get the big investors.” Then-finance minister Christina Liu (劉憶如) repeatedly brought up Hon Hai Precision Industry chairman Terry Gou (郭台銘) as an example, talking about how much money he has made on the stock market and how little tax he had to pay on his gains. This unnerved investors, and as a result both volume and prices declined, causing 90 percent of small retail investors to sustain losses.
In traditional medicine, doctors treat a patient carefully and slowly administer mild medication to gradually improve the patient’s condition. They should never give strong medication because the patient’s body may not be able to cope. The proposed tax is unquestionably akin to powerful medication applied to an unhealthy stock market, thus hurting, rather than curing, the patient.
Second, the government is applying the medicine at the wrong time. Before the capital gains tax comes into effect, Taiwan will have to sustain the impact of domestic fuel and electricity rate increases as well as the full-blown European debt crisis internationally, placing the local stock market under a two-pronged attack. These circumstances should make it clear that the implementation of any tax on profits would have a big impact on the local bourse. This should have been a warning for caution, but instead the Ministry of Finance chose to resolutely push for the tax, while the Presidential Office has taken a firm stance against its withdrawal.
If the proposed tax really is the right remedy, a physician should know when to apply it to cure the illness and avoid any side effects. An allergy medication used in traditional medicine, sanfutie (三伏貼), for example, should be applied at proper times or it would be ineffective and even potentially harmful. The government, however, did not consider the timing because it was in a hurry to impose the tax. This is a big taboo when applying medication.