Transitional justice not achieved by tax proposal

By Huang Tien-lin 黃天麟  / 

Tue, Sep 12, 2017 - Page 8

Reform is about correcting an unreasonable or unjust state of affairs. The Chinese Nationalist Party’s (KMT) possession of illicit assets was unjust, and the government has a responsibility to ensure that this is corrected. The pension system, with income replacement rates as high as 98 percent — sometimes 102 percent — brought the pension fund close to bankruptcy and needed to be reined in.

The Ministry of Finance has proposed income tax reforms. A close look reveals that they will reduce taxes, but they fail to address “economic transitional justice.”

The point of this reform is not cutting taxes. Rather, it is to create a fairer and more just system that could be called economic transitional justice.

Over the past decade or so, under the influence of international political and business interests, the economic framework and tax system has come to favor Taiwanese businesses relocating to China at the expense of those who contribute to the domestic economy.

They are not favorable to Taiwanese investing in Taiwan, nor to enterprises that remain in Taiwan. This needs to change.

First, there is the unfair differential in tax burdens on domestic and overseas capital markets.

For many years, share dividend tax levied on Taiwanese investors has been incorporated into the overall deducted progressive tax rate, whereas taxes on foreign investors — the majority of whom are not actually foreign — are deducted at a flat rate of 20 percent, leading to differentials in tax paid of as much as 17.9 percent.

Second, there are unfair differences in business conditions for companies that remained in Taiwan and those that relocated to China.

The capital markets offer generous incentives to Taiwanese businesses relocating their production lines to China, where they can enjoy a range of preferential terms, such as tax exemptions, use of land, cheap labor and exchange-rate benefits.

While the government offers these businesses incentives to return, lower costs in China give them an unfair advantage.

The flip side of this is that manufacturers who chose to stay in Taiwan find it nearly impossible to compete.

This is the main reason that, for the past 10 years or so, domestic investment has stagnated and the level of investment has declined.

This difference between the business conditions for Taiwanese businesses in Taiwan and China is not down to the businesses themselves — it is the government’s responsibility to come up with a solution.

Taiwan needs a form of economic transitional justice to address unfairness and injustices hiding in the effects of globalization and improve the stagnation in domestic investment.

The reform proposal offers a plan A and a plan B to address unfairness in tax on dividend income.

With either plan there will still be a differential of 5 to 7 percent, depending on whether the taxpayer is in Taiwan or overseas, and nothing is mentioned about how to right the unfairness in business conditions between companies in Taiwan and those that located to China.

There could at the very least be some kind of differentiation between the business tax rates to incentivize businesses in Taiwan.

If the Cabinet continues with business as usual and pushes the ministry’s tax reform proposal, then its professed intention to stimulate the economy will be no more than indulgent banter, and the nation will be consigned to more slow growth and mediocrity.

Huang Tien-lin is a national policy adviser and former managing director and chairman of First Commercial Bank.

Translated by Paul Cooper