The land price and land-value increment tax framework has always been flawed. When the land-tax system was created in the early 1900s, in an attempt to implement Sun Yat-sen’s (孫逸仙) ideas about the equalization of land rights and the idea that price increases should be borne by the state, it was discovered that if the state absorbs any increases in price, land use rights could be separated from ownership rights so that the land owner could transfer the right of use, but still make a profit.
The Land Evaluation Committee was established to determine land prices, replacing the absorption of land prices by the state with a highly progressive tax rate.
In other words, instead of the state absorbing price increases, they were wed to the private sector.
When the law was implemented, the committee announced official land values once every three years, and these values were used as a basis for the land-value tax, while the land-value increment tax was based on the current land value which was announced once a year.
The substantial differences between real market values and the two other land values on which taxation was based created an unreasonable situation with three different prices for any lot of land.
This confusing system was in use for 60 years. Beginning in 1986, real-estate bubbles came and went, which lead to social injustices as landlords who were not involved in production sat idle and waited for prices to go up to increase their wealth.
If the suggestion that taxes should be levied on real transaction prices could begin with luxury housing before spreading down to the general public, that would be a great step forward. The problem is that the crippled tax system is full of problems that need solving.
First, one of the things most commonly discussed in the media is that the average overall tax burden is too low at 12.8 percent.
However, a closer analysis shows that many past taxes have been replaced by fees, and the fees have the same effect as taxes although they are not counted as such.
In addition, health insurance premiums and state-owned enterprise profits are all quasi-taxes.
At the same time, today’s government debt is tomorrow’s taxes. Including taxes that are created by today’s debt issuance, the average tax burden is not 12.8 percent.
Most of that burden is probably made up for by issuing currency, which forcibly creates purchasing power.
This is also no different from a tax, and inflation induced by currency policy is yet another quasi-tax.
People with greater economic resources should carry a greater part of the lax burden. This is what is called “vertical fairness.”
The tax system offers the wealthy an enormous number of ways to cut or evade taxes, and despite the minimum tax system, the tax burden on the middle class is far greater than it is on the wealthy.
Ironically, some wealthy people are announcing that they want to pay a bit more in taxes, but according to tax laws they do not have to. If the income tax exemption point and the standard deduction are raised, the wealthy will benefit even more.
“Horizontal fairness” means that those with equal economic resources should face an equal tax burden.
However, thanks to the considerate efforts of the tax office, a wage earner’s every source of income is taxed, while capital gains on security transactions remain untaxed despite a short period of chaos in the legislature.
Although social fairness demands intergenerational equality, that has all but evaporated after the estate and gift tax was changed from a highly progressive tax into a 10 percent proportional tax.
Without the wealth tax and the estate and gift tax to adjust the wealth gap, and with a lame income tax and a regressive consumer tax, the unfairness and the divide between rich and poor has become an overwhelming social problem.
Tax fairness must be judged based on the changes to the progressiveness of the overall tax structure. Over the past 30 years or more, incentives, deductions and benefits have destroyed the tax framework and reduced the tax base.
Functions originally established to promote social fairness no longer exist and this remnant of a system is only capable of catching wage earners while it is incapable of maintaining fairness.
Tax reform requires daring and resolution and a complete makeover, and small surgical changes to this or that individual tax subsystem will not do.
Norman Yin is a professor of financial studies at National Chengchi University.
Translated by Perry Svensson