Wed, Feb 26, 2014 - Page 8 News List

EDITORIAL: Tax reforms to battle the deficit

It is good to see that the government is striving to map out a more balanced and equitable tax system and working to fix the dire budget deficit situation in its latest tax reform package, which was unveiled on Monday.

The proposed measures show that the government is determined to fix the unfair taxation rules that have been in place for a long time and demonstrate its urgent need to tackle the increasing budget deficit as it closes in on the debt ceiling of 38.6 percent of GDP. The deficit stands at NT$300 billion (US$9.9 billion) a year at the most, according to the Ministry of Finance.

However, there are doubts over whether the government is doing the right thing in choosing the easier path of raising some tax rates rather than expanding the taxable base, including requiring that small, but lucrative food vendors be taxed at the same rates as formal businesses.

In devising the plan, the government has not sought to raise the low transaction and gain taxes on home owners and real-estate investors. Instead, it has again targeted stock investors, which could dampen investors’ appetite for local shares. To some extent, this runs counter to the efforts made by the Financial Supervisory Commission to spur trading by relaxing a slew of rules.

Under the new scheme, the government plans to halve income tax deductions for stock investors’ cash dividends, which follows a tax on cash dividends implemented last year as part of a wider plan to finance the struggling National Health Insurance system.

The package proposes a striking tax hike of 3 percentage points on business income for local lenders and insurers as well as a 45 percent income tax bracket for people classified as wealthy.

The ministry estimates that these three rules alone will boost the national coffers by NT$81.4 billion a year, while the proposed tax increases on banks and insurance companies are expected to generate NT$20 billion.

However, the planned hikes have spooked investors. Financial Supervisory Commission Chairman William Tseng (曾銘宗) has said that every percentage increase in business tax on lenders and insurers will reduce the financial sector’s net profit by NT$10 billion a year. The financial sub-index fell 0.25 percent yesterday, while the TAIEX gained 0.18 percent overall.

Smaller banks and financial service providers will suffer the brunt of the hike, as increasing the business tax from 2 to 5 percent will erode annual profits by between 2.5 and 9.6 percent, Morgan Stanley analyst Lily Choi (蔡麗麗) said.

Those that depend heavily on loan interest as a major source of revenue will see an even bigger profit erosion, Choi said, but added that the impact from the tax increase should be short term.

E. Sun Financial Holding Co saw the greatest decline yesterday, dropping 1.04 percent, while First Financial Holding Co and Taishin Financial Holdings Co slipped 0.55 and 0.35 percent respectively.

Apart from imposing higher rates on existing payers and giving major tax breaks for research and development for local businesses, no details about expense and debt management were disclosed on Monday, which was regrettable. Controlling debt and careful spending are important parts of improving the deficit, while policy execution and political interference are problems.

The hikes will not go into effect until they are approved by the legislature. With the nation’s seven-in-one elections — which will see a new mayor in Taipei and new faces in other local government positions — scheduled for late November, it is unclear whether Chinese Nationalist Party (KMT) legislators will risk losing votes by pushing through unpopular tax hikes.

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