Tax cut would likely make it through the legislature

A proposed cut to the "land value increment tax," or capital gains tax for property transactions, would likely pass if sent to the legislature.

Business leaders have proposed halving the tax for two years as a way to stimulate the nation's real estate market.

The levy charges as much as 60 percent on the capital gains of a property when it is sold -- a prohibitive expense that has suppressed the property market, they said.

But while rival camps agree that the tax should be cut, they differ on the proposal's specifics.

The levy -- which ranges between 40 percent and 60 percent depending on the size of the capital gain -- contributes about NT$90 billion annually to the coffers of local governments.

Proponents argue that a cut would lower real estate prices, boosting demand for property.

"Without incentives, the real estate industry will continue to contract, as evidenced by the absence of large-scale land transactions in my constituency last year," said KMT legislator Tsai Chia-fu (蔡家福).

And though a tax cut would mean less receipts for local governments, some of the loss would be made up through higher transaction volumes, proponents say.

"The higher the number of deals, the greater the amount of land increment tax revenue," Tsai said.

The legislator estimated that a 50 percent reduction in the tax would result in a loss of NT$20 billion for local governments. Officials from the Ministry of Finance earlier this year put the figure at NT$40 billion.

Tsai said the NT$20 billion could easily be made up by the central government, though he did not offer specifics on how that would be done.

In the past, when market prices for real estate far exceeded the government's assessed values -- on which the tax was levied -- property sellers swallowed the high tax rates without complaint.

But the gap between the two has gradually diminished, and many property owners now challenge the fairness of the tax.

The high capital gains rate allowed the government to take advantage of the booming property market in the late 1980s, but those days are a distant memory and tax-cut proponents say a reduction is needed.

But opponents to the measure -- though acknowledging the unfairness of the tax -- say the cash-strapped government cannot afford a reduction.

"It is not right for the government to place a tax as high as 60 percent on a land deal," said New Party lawmaker Lai Shyh-bao (賴士葆). Still, Lai said he would oppose the reduction measure until the government can a find way to bring down the national debt.

The government has NT$2.93 trillion in outstanding debt, and is expected to run a budget deficit of NT$500 billion in the next fiscal year.

To strike a balance, Lai proposed raising property taxes on the one hand while lowering the capital gains tax on the other.

Others doubt whether a cut to the capital gains tax on property will contribute much to the economy, as it will do little to put money into the hands of consumers.

"The increased demand resulting from the planned tax cut would be short-lived," People First Party legislator Chou Hsi-wei (周錫偉) said. Chou said that many consumers would be reluctant to purchase real estate, especially now that many companies have frozen pay hikes in response to the economic recession.