The role of capital in economic activities is becoming increasingly crucial, while compensation for labor is shrinking, causing severe income inequality. Many young people suffer from low wages as housing and commodity prices continue to rise. The government’s taxation policy is supposed to narrow the gap between rich and poor through wealth transfer. Unfortunately, the current regime only widens the gap.
The government could follow the following suggestions to implement tax reforms in pursuit of equity and fairness.
First, income tax rates should be determined by original income. The most common tax avoidance method is reducing taxable income through donations or tax deductions, which allow people to pay taxes at lower rates. However, if tax rates were determined by original income, high-income earners would unavoidably be taxed at higher rates.
Second, tax credits should be implemented, as they would ensure equality for all. With equal tax deductions, those who pay taxes at higher rates would have a greater advantage.
For example, if the tax deduction is NT$90,000, people paying a 5 percent tax rate would receive a deduction of NT$4,500, while those paying 12 percent would get a deduction of about NT$10,000. In other words, individuals paying higher tax rates would benefit more. The same applies to other types of deductions, such as deductions for dependents.
Progressive tax has turned into regressive tax; low-income earners end up paying more, which is not only unfair, but also widens the wealth gap. However, if a tax credit of, for example, NT$30,000 is granted to everyone, equality would be achieved for all. The amount of the tax credit can be determined by the tax rate and the amount payable, which are calculated based on original income. If the payable tax is greater than the tax credit, people would be obliged to pay the difference. If the payable tax is less than the tax credit, the government should reimburse the individual for the difference.
The third suggestion is imposing limitations on itemized deductions and implementing a universal deduction rate.
It is commonplace for wealthy people to try to avoid taxes. Some establish foundations as a legal means for tax avoidance, while spending foundation money for private purposes. On the other hand are low-income earners who make donations, but see only a part, or even none, of their income tax deducted, which is unfair. Hence, a universally applicable deduction rate should be implemented to attain equality.
Fourth, tax brackets between 5 percent and 50 percent should be set up at 5 percent intervals. Long-term inflation has left low and medium-income earners paying high tax rates. If the interval is too wide, the public would suffer from excessively heavy tax burdens. Hence, the interval should be set at 5 percent, and 10 tax brackets between 5 percent and 50 percent should be established for the income ranges between one and 10 times GDP per capita.
For example, if GDP per capita is X, the 5 percent tax rate would apply to incomes from 0 to X; the 10 percent rate to incomes from X+1 to 3X; the 15 percent rate to incomes from 3X+1 to 6X and so on. If a tax credit of NT$30,000 was applied, anyone who earns less than GDP per capita would probably pay nothing in income tax. Also, no one would be pushed into a higher tax rate bracket due to inflation or an increase in national income.
Fifth, stock investment taxes should be levied, which would be included in the individual income tax. The stock investment gains are a type of capital gains, which, along with profits realized on the sale of real estate, are subject to income tax. Therefore, there should be no argument that capital gains from stock investments be incorporated into individual income taxes.
However, to maintain the stability of the stock market and encourage investors to select stocks with care, those who hold a stock for more than six months should pay half the tax and those who hold a stock for more than a year should be taxed for only 25 percent of their profits.
Sixth, the annual license-plate tax and the annual fuel charge fee should be reformed. The license-plate tax should be levied at 1 percent of the value of the vehicle, which would cause rich people to contribute more to government revenue.
Mid-range vehicles should be taxed less because the vehicles are worth less. The annual fuel charge fee should be cut by half, while every liter of fuel should be taxed at NT$2, which is not only in line with the “user pays” principle, but reaps the benefits of the energy tax.
Rich people have much more resources to maneuver, garner political influence and avoid taxes. In contrast, poor people are in a disadvantageous position. Implementing the suggestions might empower the disadvantaged, bring the “user pays” principle into reality, narrow the wealth gap and let those who are more capable shoulder the burden of government expenditure.
Perhaps then, for a majority of the public, equity would be a goal worthy of pursuit and well within reach.
Yang Der-yuan is a professor in the Department of Money and Banking at National Kaohsiung First University of Science and Technology.
Translated by Ethan Zhan
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