Tue, Jan 17, 2012 - Page 8

Property and taxes

During the 1990s, when then-president Lee Teng-hui (李登輝) was midwifing the birth of Taiwan’s democracy, he essentially made a grand bargain. In return for their silence in his struggle to fend off the Chinese Nationalist Party’s (KMT) regressive right wing and its last-ditch defense of the party-state, it was decided that those who had grown wealthy by suckling off the party-state teat would not have their wealth taxed away through a progressive tax system, particularly a tax on Taiwan’s most important investment, land. Subsequent administrations have also found it politic to keep this bargain.

This type of deal was an important component of transitions to democracy in other right-wing authoritarian states. As Vicente Navarro pointed out in CounterPunch a few weeks ago, one reason that the southern tier of Europe — Italy, Spain, Greece and Portugal — are in a debt crisis is that the price of the right’s acquiesce to democratization was that its wealth would not be fairly taxed.

The result is the lack of revenues that helped create their current debt problems. In Taiwan, we are in the middle of a similar, but more slowly unfolding, debt and revenue crisis, delayed by the fecundity of the nation’s economy and the high savings rates of Taiwanese, and masked by the fact that it is taking place most severely at the local government level, which few pay attention to.

Fast forward 15 years. Taiwan’s tax system is highly regressive.

According to an article in Commonwealth magazine last year, of the nation’s 7.54 million households, only 5.38 million actually pay taxes. A good proportion of those households that do not pay taxes are in fact extremely wealthy. They gain wealth from land and stocks, pay low or no capital gains taxes and pay the minimum fee for Taiwan’s fantastic health insurance system. Many of them are also eligible for low-interest loans and grants from the government to pay for their children’s college education , since on paper they have no taxable income.

Another remarkable trait of this class is its restraint — it keeps a low political and social profile, preferring the safety of silence and anonymity.

One way that wealthy investors avoid taxes is by parking their wealth in land, one of the key drivers of Taipei’s massive property bubble. They can do this because the tax on land, the assessed value assigned by the government, has not been upgraded since the 1980s. Land has thus become a tax shelter. Other practices tolerated by the government, such as the submission of different prices for property to the bank for the mortgage and to the government for tax purposes, contribute to this bubble. Longstanding government policies of unbalanced regional development that favor Taipei, where this class largely lives and invests, also add to its wealth.

The unpopularity of the regressive tax system is an important cause of resentment against the government. It is also an important cause of the nation’s rising income inequality, which in turn was a key issue in Democratic Progressive Party (DPP) chairperson Tsai ing-wen’s (蔡英文) calls for social justice during the presidential campaign. The DPP has also long supported addressing the regional imbalances in Taiwan’s government spending.

Tsai’s promises of social justice must have struck fear into the hearts of many local asset holders. For anyone who wants to reform Taiwan’s economy, obvious moves might include raising capital gains taxes, implementing a stock transaction tax, more closely regulating the sale of land and housing, and, most urgently, raising the government’s assessed value for fixed assets, as well as reducing development funding that goes to Taipei. Not only do a great many people own property, but a large number also play the stock market.

Such individuals might have concluded that, if Tsai had won Saturday’s election, there would have been a significant reduction in their wealth if a fairer tax system were implemented, especially the paper wealth generated by the Taipei property bubble. Since Ma can be trusted to make noise about fairness, but to do little concrete, he was their obvious choice.

The property bubble is doing more than distorting the economy; it is distorting the nation’s politics as well. Observers have often remarked on Taiwan’s unfinished transition to democracy, yet they have seldom overtly argued that a critical factor in this is the regressive tax system.

As social inequality continues to grow, expect this wealthy class and its class interests to be a silent, but powerful driver of KMT success.

Michael Turton

Greater Taichung