Premier Lin Chuan (林全) last month said that once the budget for the Forward-looking Infrastructure Development Program has been passed by the legislature, tax reform would get under way.
On Friday last week, the Ministry of Finance took the first step by announcing a draft tax reform bill.
The tax system and its reform have far-reaching effects. The system determines the government’s main source of income, and affects economic and industrial development, as well as the nation’s international competitiveness.
It is easy to imagine that the announcement of the tax reform bill would set off intense debate throughout society.
While the proposed draft bill is only partial, the focal points include reform of the comprehensive, dividend and business income taxes, making it a pragmatic beginning to tax reform and a preliminary response to public expectations.
Taiwan’s economy and industry have been sluggish in recent years and domestic investment must now be revived. Tax reduction is an effective tool to boost investment and in other nations tax reductions or exemptions have become a method to actively attract foreign investment.
One example is Hon Hai Precision Industry Co’s investment in Wisconsin.
Taiwan cannot stay away from this international trend and we do not have the luxury to work against it.
Everyone is hoping that tax reform will improve investment, boost the economy, and help retain talented people and capital, while at the same time being fair to all taxpayers.
Tax reform will bring different benefits and have various effects, and the proposal can be evaluated from four different aspects: Whether the tax burden is reasonable, improves the economy and simplifies the tax system, as well as overall estimated tax revenue.
For workers in general, the draft proposal raises three consolidated income tax deductions which helps reduce the tax burden on low and medium-income workers.
In particular, the basic wage income deduction is to be raised from NT$128,000 to NT$180,000. This would benefit more than 5.4 million people, or 88 percent of all households that submit a tax declaration, so it is a reform that benefits almost every Taiwanese.
At the same time, the highest consolidated income tax rate would be lowered from 45 percent to 40 percent. Lowering this tax, which is sometimes said to be a tax on the wealthy, is aimed at attracting and keeping talented people. In particular in comparison with Hong Kong, where the tax rate stands at 17 percent, and Singapore, where it is 12 percent.
Furthermore, the proposal is a response to the widely criticized tax on dividends, which it addresses by abolishing the unified tax system which was adopted in 1998 and allowed shareholders to deduct the business income tax paid by a business from their consolidated income tax.
While it is true that the separate taxation rate on capital is 26 percent, which is higher than the 20 percent that foreign investors pay after adjustments, it has at least diminished the difference in taxes levied on domestic and foreign investors, which perhaps could be helpful to reduce the problem with “fake foreign investment” and bringing more flexibility to the securities markets.
In addition, the business income tax, which is the concern of the business sector, would be raised from 17 percent to 20 percent, and the 10 percent tax that is levied on undistributed surplus earnings would be lowered to 5 percent.
Raising one tax and lowering the other will have a different impact on different companies and different industries, so there will be some gains and some losses.
From an international perspective, a 20 percent business income tax rate is not particularly high, but it is higher than Singapore at 17 percent and Hong Kong at 16.5 percent.
It is to be expected that there will be some protests.
As to lowering the tax on undistributed surplus earnings, that should be helpful in promoting domestic investment.
Now that the proposal has been announced, different sectors of society are certain to air their opinions. It must be stressed that although the draft bill was proposed by the finance ministry, Taiwan must do all it can to adopt a reasonable tax policy and system to revive domestic investment and the economy, while preliminarily reducing the tax burden on low and medium-income workers.
As long as the market is active and there is healthy and brisk economic development, there is a possibility that the government’s tax revenue deficit would shrink.
At the same time, it is not the case that higher tax rates necessarily must bring more tax revenue. Today, capital and talent are moving freely across borders, and international tax comparisons and competition is a fact of life: Higher taxes are a deterrent and make it more difficult to induce foreign and domestic capital to remain in Taiwan.
For a nation like Taiwan which is facing strong international competition, high taxes is a self-imposed burden that will be difficult to overcome. The kind of long-term economic environment that we need is one of uncomplicated politics and low taxes.
Lin — who specialized in finance and taxation as an academic — has said that once the tax reform bill has been announced, the government would face the different opinions from different sectors of society, and the public would be given time to discuss, clarify and debate the draft before a final decision is made.
Now that the ministry has announced the draft bill, it is crucial that the Cabinet follows up by communicating with the public.
The government must not repeat the mistakes of the implementation of the five-day workweek.
While it was a good thing, the failed planning and communication in the run-up to its implementation, as well as its rigidity after, together with the problematic implementation itself, resulted in dissatisfaction among employees and employers, and a wave of public complaints.
Tax reform is equally universal and complex, and if the government is going to be able to move forward with the reform it must learn from its mistakes, and take a humble and sincere approach.
Translated by Perry Svensson
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