After the Democratic Progressive Party’s (DPP) victory in the Nov. 29 elections, people are talking of another transition of political power in 2016.
If things turn out that way, there is some cause for concern. While the Chinese Nationalist Party (KMT) favors big business excessively, it is not as if the DPP would stand up to large conglomerates either. History has shown that neither party has done anything to further tax reform, but instead, both have moved in the opposite direction.
The past DPP government reduced the Land Value Increment Tax (土增稅) by half for two years, and that set the tone for further tax reductions. Luckily, the Alliance of Fairness and Justice (泛紫聯盟) proposed a minimum tax system, and it was only after that was supported by then-minister of finance Lin Chuan (林全) that the DPP began to refocus on the issue of social justice.
Since President Ma Ying-jeou (馬英九) took office, there have been two tax reforms. Serving in the Ministry of Finance’s Tax Reform Committee (賦稅改革委員會) and Task Force on Sound Finances (財政健全小組), I suggested that the Unified Tax System (兩稅合一制) should be abolished and that a capital gains tax be introduced.
Instead, the ministry has reduced the Estate and Gift Tax (遺產及贈與稅) from 50 percent to 10 percent and the Profit-seeking Enterprise Income Tax (營利事業所得稅) from 25 percent to 17 percent. The average tax burden in Taiwan has dropped from 20 percent in 1990 to 12.8 percent, and now has one of the world’s lowest taxes.
Tax data show that wages make up 75 percent of the government’s tax revenue. The same figure is 49 percent for Organisation for Economic Co-operation and Development countries and 55 percent for the US. The fact that wage-earners are the government’s main source of fiscal revenue is the result of the very low capital gains tax. This failed tax system is resulting in the wealth gap.
The implementation of the Capital Gains Tax (證所稅) has now been delayed for three years, courtesy of our legislature. DPP legislators Hsueh Ling (薛凌) and Wu Ping-jui (吳秉叡) both supported the postponement to 2019 of the bill for a unified tax, which requires that a company’s profit-seeking enterprise income tax deductions from tax on stock dividends be reduced to 50 percent. That delay results in the wealthy paying NT$300 billion (US$9.45 billion) less in taxes. With legislators from both main parties supporting the super-wealthy, it is not very surprising that tax reform is moving backward.
When the Unified Tax System tax was created in 1998, Su Huan-chih (蘇煥智) and I were the only two legislators opposing the law. Big business sent lobbyists to the legislature telling us that company profits had already been taxed under the profit-seeking enterprise income tax, and that also taxing shareholders’ tax dividends would amount to double-taxation, saying it therefore was necessary to pass the Unified Taxation System. Most legislators said nothing.
Since 1995, the UK, Germany and Singapore have abolished their unified tax systems, and other EU countries have followed suit. The EU treats companies and individual shareholders as disparate entities, with differing rights and interests, that should pay taxes on their income, thus eliminating the issue of double-taxation. With the exception of New Zealand, Australia, Canada, Mexico, South Korea, the United Arab Emirates and Taiwan, no other country has a unified tax system.
Taiwan is the only country in which shareholders can deduct all company income taxes from their individual income tax. In South Korea, shareholders can only deduct 15 percent of company income taxes.
The unified tax system and the now abolished Statute for Upgrading Industries (促進產業升級條例) were implemented in tandem for a dozen years. According to the statute, shareholder investments were tax exempt for four years, and with no taxes on dividends from which company income taxes could be deducted, shareholders could apply for a tax refund. The wealthy did not only not have to pay taxes, they could even apply for a tax refund.
When the Ministry of Finance announced the 40 individuals with the highest income in 2005, 17 of them paid less than 1 percent in taxes, eight of them not paying a single cent. The real tax for the wealthy only amounts to 8 percent, far lower than the nominal tax rate of 40 percent.
The wealth gap is the biggest cause for public complaint. To diminish the gap, the government has several tools at its disposal. It can raise the minimum wage to raise salaries. Probably most effective would be to implement a strict progressive tax system, increasing taxes on the wealthy.
The only tool applied by the government is welfare subsidies, and it relies almost entirely on this tool to shrink the wealth gap. If excessive tax exemptions for the wealthy are not promptly abolished, and taxation on actual real-estate transaction prices and a fair tax system are not established, it would be impossible to continue welfare subsidies, which would exacerbate the wealth gap.
Young people on low wages must shoulder a national debt of NT$22 trillion, pension payments for the elderly 15 percent of the population and the costs of elderly and childcare. This situation could result in serious inter-generational conflict.
The DPP, which now has a chance to return to government, must focus its efforts on innovation and study the book Capital in the 21st Century by French economist Thomas Piketty and ways of implementing social democracy to return to its founding principles, lest it allow the nation to descend into dangerous social unrest.
Chien Hsi-chieh is executive director of the Peacetime Foundation of Taiwan.
Translated by Paul Cooper and Perry Svensson
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