After the recent labor law revisions, the most visible change under President Tsai Ing-wen’s (蔡英文) administration is likely to be tax and pension reforms, as the Democratic Progressive Party (DPP) government aims to raise funds to build a better social safety net and make the nation’s pension system sustainable.
On Thursday last week, when Vice President Chen Chien-jen (陳建仁) unveiled details of the government’s draft pension reform plan, Minister of Finance Sheu Yu-jer (許虞哲) confirmed that the ministry has made income tax reform its top priority this year, echoing what had been revealed by Premier Lin Chuan (林全) in media interviews earlier this month.
However, unlike Lin, who said that the reform will be carried out on the condition that total tax revenue remains unchanged, Sheu said that tax losses appear unavoidable for the sake of economic growth.
His tone reflected a change in the ministry’s attitude toward the tax issue, showing that the government will no longer stand by the requirement to keep overall tax revenue unchanged as it pushes forward with reform. It is not a matter of yielding to political pressure, but of following a reality check on the matter, both economically and socially.
The ministry plans to hold two public hearings next month following the completion of a medium-term tax reform study by academics last week. The ministry is to finalize the study in late April and present a bill to the Cabinet in early May.
According to media reports, the reform will focus on raising the corporate income tax rate and lowering the tax ceiling on personal income, as well as assessing changes and deductions on dividend taxes.
The legislature also needs to approve bills to levy an additional tax on tobacco products, and increase gift and inheritance taxes to finance the nation’s long-term care services.
Normally, a healthy economic and fiscal standing relies on a healthy tax system, but Taiwan has long been plagued by weak taxation — sometimes it pushed the issue too hard too soon, while at other times the measures it took to deal with the issue were largely insufficient.
During the past eight years under the Chinese Nationalist Party (KMT) administration, the government first lowered the gift and inheritance tax from 50 percent to 10 percent, and cut the corporate income tax rate from 25 percent to 17 percent, but the outcome was a surge in housing prices and a decrease in total tax revenue.
Two years ago, the KMT government increased the highest marginal income tax rate to 45 percent on yearly incomes of more than NT$10 million (US$317,128) and halved the tax credits shareholders receive on their dividends to address wealth inequality in the nation, but it only caused the tax base to keep shrinking as high-income earners emigrated.
In the meantime, the widening difference in the tax burden on domestic and foreign investors caused an immediate withdrawal of big players from the local stock market and caused a sharp drop in retail investor activity.
The after-effects of the KMT government’s reform measures on the economy was continued capital outflows, thin turnover on the local equity market and the establishment of numerous dummy companies registered as foreign firms.
It is not an easy task to implement tax reform, but even though policymakers face pressure to implement policies that seek to deliver social justice and wealth redistribution, the reform needs to be balanced by a healthy tax base and an efficient management of the national taxation system.
Moreover, policymakers must avoid another painful swing of the regulatory pendulum taking a toll on the economy.
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