Next year, the income threshold for the alternative minimum tax for Taiwan’s high-earning households will be increased from NT$6 million (US$204,000) to NT$6.7 million. This will reduce the number of households in that bracket from 4,300 to 1,000. Minister of Finance Chang Sheng-ford (張盛和) said this upward adjustment is linked to the Consumer Price Index (CPI) and should not be seen as a tax break for the wealthy. However, under the alternative minimum tax system, 3,300 households will be exempt from paying tax, which will result in a huge reduction in tax revenue and greatly undermines tax justice.
The alternative minimum tax system originated in the US, which had problems taxing the wealthy because a large number of tax breaks allowed rich people to engage in tax planning and avoid the progressive income tax. To keep things fair, the US introduced its Alternative Minimum Tax in 1969 that applied a proportional tax rate on the part of the income that exceeded a certain threshold.
However, after the introduction of this tax, commodity prices rose, which caused nominal incomes to increase as well. The tax exemption level was not adjusted and resulted in “bracket creep” — as commodity prices rose, incomes increased, but although real incomes remained unchanged, the progressive tax system moved taxpayers up in the tax bracket system so they paid higher income taxes.
In addition, many people who were originally below the tax exemption level entered the tax base because they moved into a higher bracket. The number of taxpayers in the upper brackets, which kept expanding, is now over 450,000 households, many of them middle-income taxpayers. This is seen by many as unfair.
Last year, the US Congress passed the American Taxpayer Relief Act, which raised the tax exemption threshold from US$50,600 to US$51,900.
The US prefers to adjust the tax exemption level through legislation every year rather than rely on a CPI-linked mechanism because it is laden with flaws. While a flexible adjustment might seem fair, in practice it is not capable of catering to real economic situations. When a CPI like the one used in Taiwan increases by 10 percent or more without consideration of the time frame of the increase, the number of wealthy people can be sharply reduced, as has happened, to less than 1,000 households. This defeats the purpose of the alternative minimum tax system.
The CPI-linked mechanism is also applied to the Inheritance Tax deduction. Since the CPI has increased by more than 10 percent, next year the deduction in the inheritance tax for each decedent will be between NT$50,000 and NT$600,000, while the tax exemption for the inheritance as a whole will be raised to NT$15 million. In theories of tax justice, an inheritance tax is a matter of intergenerational justice.
However, as the highly progressive tax rate has in effect been reduced to a 10 percent proportional tax rate, intergenerational justice is next to nonexistent because the overly generous CPI link reduces the function of the inheritance tax.
Together with the cut in the progressive tax rate of the Land Value Increment Tax (土地增值稅) carried out by the previous administration, this has shattered the structural design intended for land ownership and wealth equality.
The comprehensive income tax exemption is also linked to the CPI. This year, the exemption was raised by NT$3,000 and the deduction by NT$6,000, which benefited 3.49 million taxpayers. A closer look shows that wealthy people paying a 40 percent tax could deduct NT$1,200, while poorer income earners paying a 6 percent tax rate only could deduct NT$180. This kind of system always benefits the wealthy.
Taiwan’s tax system was originally based on the progressive framework of Sun Yat-sen’s (孫逸仙) theory about people’s livelihood, and the nation’s income distribution has always been among the most equitable in the world.
However, in recent years, a wave of tax exemptions and deductions has destroyed the tax structure as the average tax burden has decreased and income distribution has become more inequitable.
The two tax reforms carried out after President Ma Ying-jeou (馬英九) took office have not been successful. What the public hopes for now is that Ma, who now lacks re-election pressure and has a strong desire to leave a historical legacy, will be brave and resolute, and correct the chaotic tax system to leave a fair tax system to coming generations.
Norman Yin is a professor of financial studies at National Chengchi University.
Translated by Perry Svensson