The fraud and insider trading case involving former ING Securities Investment and Trust Co vice president Sam Hsieh (謝青良), who used the government’s Labor Insurance Fund and Labor Pension Fund to manipulate share prices, has already entered the judicial process. Before the final details are clarified, it is hard to come to a conclusion on the case.
However, when asking how and why this major fund manager got involved in such a legal mess, the answer is that it is most likely the result of Taiwan’s distorted tax system.
Fund managers generally have annual incomes of several million New Taiwan dollars. Combined with the bonuses they receive, this figure can reach into tens of millions of NT dollars. Salaries are subject to income tax, the highest rate of which is 40 percent.
Many hard-working salaried employees are expected to give the government part of their income in tax — as much as 40 percent if they earn over a certain amount — while gains made on trading stocks are tax exempt and traders do not have to pay a single cent in tax on any income from these transactions.
This means that all kinds of improper economic temptations are created. If even a highly paid fund manager cannot afford to buy property in the city with his own earnings, and has to resort to stock speculation and embezzlement of public funds to buy property to speculate on, property prices in Taipei have clearly become divorced from reality.
Given how complex the Republic of China (ROC) tax code is, it is difficult to believe that there are no taxes on capital gains from stock and property speculation.
The tax system is totally distorted. It does not take a degree in finance or economics to understand how detrimental this is for the fair distribution of economic resources in society, and how much temptation it puts in front of these “celebrity fund managers.” It is blindingly obvious.
It is little surprise, then, that an opinion poll conducted by the Chinese-language China Times showed that 63 percent of respondents supported a capital gains tax on securities transactions, and 71 percent supported levying taxes based on the actual transaction prices of properties.
Inflated property prices are the result of Taiwan’s unfair tax system and the public is angry about this. The wealthy are not paying enough tax, while others have a disproportionately high burden and are unable to get on the property ladder despite working themselves ragged. The public have therefore been calling for the creation of a fairer tax system.
In a democracy, everyone is entitled to their own opinion. If 60 percent or 70 percent of the public support a politician or political issue and less than 30 percent are against them, we can safely say this represents a clear and solid form of public support.
However, even after the government has made all sorts of compromises over the capital gains tax, why is it that we have seen a majority of people say they are against such a tax when so many of them were originally in favor of it?
Those against the idea have ignored the various uncertainties inside and outside of the economy and have linked the poor performance of Taiwan’s stock markets with the soon-to-be-implemented capital gains tax. This has made many individual investors hesitate, giving them the impression that a capital gains tax is a bad idea, with even those who do not own stocks arguing against it. It is this sort of ill-informed and baseless talk that has seen capital gains tax become a universal scapegoat.
We have all seen how the US stock market has been one of the better performing stock markets this year despite a capital gains tax being in place there. Anyone who buys stocks in Apple, Google or IBM and makes money on them will have to pay capital gains tax to the US government.
The China Times opinion poll revealed another interesting fact. It found not only that a disproportionate number of respondents who supported the tax were more highly educated, but that around 68 percent of respondents who had purchased stocks were strongly in favor of levying a capital gains tax, compared to 60 percent of support among those who had never purchased stocks. This means that those who own stocks are more in favor of a capital gains tax. Why is this?
Most people know it will be hard to make money from stocks when they first purchase them. The majority of individual investors lose money in the stock market and even those who make money have a hard time making enough to have to pay tax on it.
The actual effect of a capital gains tax is therefore extremely limited.
In addition, investors may not only lack any taxable income from trading in securities, they may actually lose money and then be able to turn around and claim tax deductions on their losses. If someone is really able to make tens of millions of NT dollars in the stock market and be taxed at 15 percent on that revenue by the government, this is nothing compared with the 40 percent an individual might have to pay in tax if they made the same amount from employed income.
There are many financial researchers in Taiwan who use data from the US stock market in their research and publish their findings in international academic journals. If the government encouraged academics to conduct research on investors in the local stock markets, they would discover that if a capital gains tax was adopted, the tax burden of the vast majority of people would be lighter and only the minority of investors who speculate in stocks, and make massive amounts of money doing so, would encounter any problems paying the new tax.
With the benefit of empirical research, the government is capable of standing up to criticism and negative commentary saying that there is a relationship between capital gains tax and stock prices, and with the volume of stock transactions. By employing such research, opposition to the capital gains tax would disappear and praise for it would naturally come.
Capital gains tax is not harmful to the majority of the middle class and is also has benefits for wealth distribution and putting the right kinds of economic incentives in place. There would be far less opposition to a capital gains tax if it were explained clearly and correctly.
Jason Yeh is an associate professor of finance at the Chinese University of Hong Kong.
Translated by Drew Cameron