Analysts mixed on tax cut proposal

Academics and government officials said yesterday that an income tax cut proposed by Vice President and presidential candidate Lien Chan (連戰) is not likely to create a deeper budgetary deficit.

However, the cuts may lead to an increase in value-added tax rates, which in turn would sharpen the gap between rich and poor. In addition, future tax increases would be unavoidable, they said.

According to the Ministry of Finance (財政部), the implication of Lien Chan's proposal means that tax payers would be able to write off NT$80,000 from their annual salaries, up from NT$60,000 today.

According to Lin Chuan (林全), former Taipei City finance director and finance professor at National Chengchi University, the increase in the income tax exemption "is a move in the right direction."

At present, up to 70 percent of the government's income tax revenue comes from salaries and wage earners, Lin said. The remaining 30 percent comes through taxes on other sources, such as bank interest income and capital gains.

However, "This proposal is more for the presidential election than for an economic reason," Lin said, adding that few economic benefits to the nation's economy would result, as lower tax revenues means the government would have less with which to provide incentives for private-sector investment.

In addition, Lien's proposal avoids the challenge of lowering tax rates while expanding the tax base -- one way of correcting the structural problem of the income tax system, Lin said.

Meanwhile, the Ministry of Finance is considering a hike in the value-added sales tax to offset the tax revenue loss that would come with Lien's proposal. The increase in the salary tax write-off would lower inflows into the government's coffers by NT$7.4 billion a year, according to the ministry.

Currently, Taiwan's VAT is 5 percent. The finance ministry has the right to raise VAT to as much as 10 percent, according to Lin.

However, he said, if the VAT is raised now, there would be little room to raise it further down the road when other anticipated tax cuts put pressure on the government's balance sheet.

A better solution, Lin said, would be expanding the tax base. One idea is to change the current land tax system, whereby the government assigns values to property at valuations far less than the market value. Such a move from the "government announced price" system to a "market price" system would affect the nation's richest citizens most.

But "too many interest groups would be offended [by the change]," Lin acknowledged, and therefore would block the move.

While a hike of VAT rates may save the government from deeper budgetary deficit, the measure would create a bigger gap between rich and poor, according to Norman Yin (殷乃平), banking professor at National Chengchi University.

"The measure translates into a regressive tax (累退稅) -- a tax that takes a higher percentage of earnings from a low-income family than for a high-income family" Yin said.

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