When government leaders, central and local, talk about the Law Governing the Allocation of Government Revenues and Expenditures (財政收支劃分法), they invariably say they hope the financial cake, from which they all feed, will become bigger, since they all benefit if it does. But who is responsible for increasing its size? How can it be done? There is still no consensus.
The heads of the government's financial authorities and the leaders of local governments have different views about what increasing the size of the financial cake entails. This is because some taxes go to the central government and some to the general redistribution fund for local governments. For the central government's finance authorities, increasing the size of the cake means increasing the tax revenues that are allocated to the central government's budget. In the minds of local government leaders, however, it means increasing the tax revenues that are used in the general redistribution fund. Because of this, local government leaders have proposed that the proportions of the income and commodity taxes (貨物稅) that go into the general redistribution fund should be increased from 10 percent of each to 20 percent, or even 30 percent, while the proportion of the value-added tax (營業稅) revenue going to the general redistribution fund should remain unchanged.
Of course, if more tax revenues go to the general redistribution fund, then central government revenues would be correspondingly reduced. Local government leaders would therefore claim to have increased the size of the cake, while they would actually only be getting a bigger slice of it.
The fight for funds between the different levels of government has been going on for a long time. Local government criticism of the central government for monopolizing both power and money has never let up. However, people seldom consider how the government is organized. Is it a system with centralized power? Maybe it is a federation or a confederacy with a system of power division? It is not clear. Each kind of administrative organization has its advantages and shortcomings. The allocation of government revenues and expenditures should be decided according to the administrative organization and functional differences of each level of government. Once the framework of the administrative organization has been fixed and the duties of each level of government have been decided, the allocation of government revenues and expenditures must be distributed in accordance with these decisions. In countries with a centralized system, such as the UK, suspicions that the government is monopolizing both power and money are extremely rare. The central governments of federations or confederacies, such as the US or Switzerland, can't monopolize power and money since their local parliaments have the power to pass resolutions initiating new taxation or to use supplementary methods to obtain financial resources.
For a long time, central and local governments in Taiwan have fought incessantly over taxes, or a bigger share of the cake. But they have never clearly defined the responsibilities of the central and local governments. This means the different levels of administration are inefficient. Inefficient administration causes dissatisfaction at each level of government, regardless of how government revenues are allocated.
The Law Governing the Allocation of Government Revenues and Expenditures was first implemented in 1951. It has been amended eight times, and the 1981 and 1999 amendments made structural adjustments. Despite such major changes, the struggle over taxes between local and central governments, and between the different levels of local government, continues unabated.
Central and local government leaders emphasize the need to increase the size of the financial cake, but very few actually consider how it should be done. It is ironic that Taiwan's public finances are gradually shrinking, rather than growing. In 1990, government revenues made up 20.1 percent of Taiwan's GNP. In 1991, it fell to 17.4 percent, and last year it fell even further, to 13.2 percent. How can this be? Is it that the baker doesn't work hard enough? Or has the whole cake been divided and eaten even before it is ready? Has someone been generous with the government's resources and given away some pieces for free, meaning the cake left for redistribution has become smaller?
There are several ways to increase the size of the cake:
First, tax revenues will rise as the economy grows, meaning the cake will get bigger without the government having to do anything. Second, the number of items taxed can be raised, tax collection reinforced and tax evasion restricted. Third, tax privileges can be reduced to expand the tax base.
Since Taiwan's economic growth rate has fallen sharply, it is difficult to maintain tax revenues. In this situation, to talk about developing new tax sources is not realistic. So we can only wait for the economy to improve. Furthermore, our national leaders have been saying that there is absolutely no way taxes will be increased during their tenure so as not to increase the burden on the public. This version of good government also implies that apart from reinforcing collection, preventing tax evasion and relying on economic growth, the government has no intention of increasing the size of the cake.
If the number of people eating the cake does not increase, if their appetite can be restricted, if the general public doesn't want more and better cake, and if the government and people's representatives do not promise voters too much cake, then it shouldn't be a big problem that the cake doesn't get bigger. The problem lies in politicians being unwilling to increase the size of the cake while still promising the general public more of it. This leads to the gradual deterioration of public finances, and living off tomorrow's revenues and increasing debt seems to already have become the norm. Meeting government expenditures by issuing debt when the government is already unable to balance revenues and expenditures has undermined financial discipline.
The general public does not have a deep understanding of the potential problems of deteriorating public finances, such as falling national competitiveness, deteriorating income distribution and inflation. To make up for insufficient national income, government agencies are not above repeatedly amending the Public Debt Law (公共債務法) to lift the debt limit when allocating budget resources. This way of creating and amending laws makes a joke of legislation.
Anyone with financial experience will fully understand why taxes have been called a necessary evil. It is because the negative effects of the government's financial administration are outweighed by the negative effects of issuing public debt, borrowing from banks and printing money. Simply put, a responsible government does not look lightly upon its duties, and increasing the use of debt as a substitute for tax collection should be appropriately controlled even if used for constructive purposes. Bank financing or issuing money to obtain the necessary capital is even worse. On a deeper level, debt issuance is the same as spending future income today, and issuing money is the same as spending money without getting anything for it.
If the government does not change the way it bakes its cakes and instead continues the crowd-pleasing policies of the past, then it will be difficult to predict whether attempts by local governments to develop new financial sources would be successful. Enlarging the cake is really the joint responsibility of all government levels, and at the same time the people of Taiwan must also understand that there is no such thing as free cake. From this we can see that the conflict between central and local governments in trying to increase the general redistribution of tax dues and subsidies is really a fight for a larger slice of the same cake rather than a fight to make it bigger.
Chen Ting-an is an Examination Yuan member.
Translated by Perry Svensson
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