Sat, Jun 30, 2018 - Page 8 News List

Low tax income must be addressed

By Lee Po-chih 李博志

Pension and tax reforms are working in tandem. After completing a pension reform on July 27 last year, the Democratic Progressive Party government also announced a tax reform on Sept. 1 and the Legislative Yuan passed amendments to the Income Tax Act (所得稅法) on Jan. 18.

The tax reform measures take effect retroactively on Jan. 1 this year.

Key features of the tax reform include: an increase in the corporate income tax from 17 percent to 20 percent; a decrease in the undistributed earnings tax rate from 10 percent to 5 percent; and a reduction of the highest personal income tax rate from 45 percent to 40 percent.

An increase in the corporate tax from 17 percent to 20 percent is the right thing to do, because it is expected to increase total tax revenues.

Over the past 10 years, the corporate tax rate been reduced from 25 percent to 20 percent and then to 17 percent to attract more foreign direct investment (FDI), but it appears to have been ineffective.

The total inward FDI stock increased from US$46 billion in 2008 to US$69 billion in 2016, indicating an average annual net FDI inflow of only US$3 billion. This is significantly lower than US$74 billion for Singapore, US$12 billion for Thailand, US$11 billion for South Korea, US$23 billion for Indonesia, US$8 billion for Malaysia and US$5 billion for the Philippines during the same period.

It was time to restore the corporate tax to 20 percent — which remains competitive with other Asian countries: 17 percent for Singapore, 20 percent for Thailand, 25 percent for China, South Korea and Indonesia, 30 percent for the Philippines and 30.8 percent for Japan.

However, it is not right to reduce the undistributed earnings tax rate from 10 percent to 5 percent, as it will not only reduce total tax revenues, but also increase income inequality in the country.

The Chinese-language Liberty Times (the Taipei Times’ sister newspaper) reported that Taiwanese firms are sitting on about NT$4.6 trillion (US$150.8 billion) in undistributed earnings, and a reduction to 5 percent of the tax rate is expected to generate NT$230 billion in windfall profit for investors, which are in turn likely to fuel more speculation in the real-estate market, driving up housing prices, which are already higher than average citizens can afford.

According to the Directorate-General of Budget, Accounting and Statistics’ Report on the Survey of Family Income and Expenditure 2016, personal income consists of wages and salaries, entrepreneurial income, property income and transfer payments.

Of these sources, wages and salaries have been stagnant in recent years; entrepreneurial income has been declining since 1991, while property income, including rent, capital gains, dividends and transfer payments, have steadily increased.

The nation’s Gini coefficient, a measure of the degree of income inequality, increased from 0.30 in 1991 to 0.34 in 2016 and is approaching the critical value of 0.40.

Arthur Laffer, who was an economic adviser to then-US president Ronald Reagan’s administration in 1980s, developed the Laffer curve, which shows the relationship between tax rates and tax revenue. When the tax rate is very high, decreases in tax rates will increase tax revenues.

The new law reduces the highest tax bracket for personal income from 45 percent to 40 percent, which is expected to increase tax revenues. However, a top tax bracket of 40 percent is still too high when compared with the US’ 37 percent; Canada’s and New Zealand’s 33 percent; and Singapore’s 22 percent.

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