Fri, Jul 01, 2005 page8

• Alternative tax plan may be useful

  • By Christina Liu 劉憶如
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  The consultative committee of the Ministry of Finance held a discussion last week on issues of tax policies and regulations, and as expected, a minimum taxation scheme was the center of the debate. Although the minimum tax system recently proposed by the government has been broadly discussed, the public and local industries may still not understand the extent of the impact it will have on them as soon as it is passed into law and put into practice.

  Basically, the minimum tax system is a kind of business or personal income tax system that runs parallel to the regular income tax system. The ministry's recent plan to promote the Alternative Minimum Tax (AMT) system is the same as the one long used in the US, and has been adopted in South Korea and Canada.

  Although the AMT operates parallel to the regular income tax, taxpayers will be required to select one or the other. In other words, corporations and individuals are required to calculate both their regular tax and what they would owe under the alternative system, and then pay the higher of the two figures. This is somewhat similar to the computations of single or joint filing of tax returns for married individuals, though generally in this case, the lower of the two amounts is levied.

  But if the new system is adopted, the public will have to do both regular tax and AMT calculations, and be required to pay the higher figure.

  Therefore, how the AMT is calculated should be a matter of concern to many individuals and corporations. Many people mistakenly think the AMT applies only to high-income groups, but this is not necessarily the case, since the AMT may reach more and more people every year, including a broad section of the middle-class.

  For example, the US Tax Reform Act of 1969 was passed and established individual and corporate AMT, which was originally designed to prevent the very wealthy from dodging taxes through shelters and deductions.

  However, according to many research studies, more and more middle-class families are starting to become subject to the AMT, the amount of which can be even unreasonably high.

  The reason is that, unlike the regular tax system, the AMT has not been indexed with inflation. As a result, more and more people are falling under the AMT scheme as a result of economic growth and inflation. For example, in the US, the AMT only affected 130,000 people in 1990, but in 2000, the number rose sharply to 1.3 million.

  It is predicted that, by 2010, as many as 13 million to 17 million people will be subject to the AMT system.

  In light of the US experience, our government should act with prudence in the preliminary planning of the AMT system.

  The major difference between regular income tax and the AMT system is the specifics used in calculating the net amount of taxable income. Under the current tax system, taxable income is the amount remaining for a given period after all allowable deductions have been applied. But the AMT does not allow many deductions.

  For example, if the regular tax system allows 10 items for deductions, the AMT system may only allow three deductible items.

  The ministry has recently sought to create a public consensus on the government's AMT plans over the next month. When they do, the ministry should focus on discussing what items are subject to deductions in the AMT system and make the public understand what qualifies as deductible income.

  Anomalies such as income earned overseas -- which is not taxable income and not subject to deductions -- should be discussed separately to prevent complicating the discussion on the minimum tax system. The AMT is assessed at a lower tax rate than regular income tax because the base of taxable income under the AMT scheme is higher.

  Beginning next year, the US will adopt a four-tier marginal tax rate for personal income tax. They fall under 10, 15, 25 and 33 percent tax brackets. In contrast, the personal AMT is assessed at two tiers of a marginal tax rate -- 26 and 28 percent of income.

  Finally, before introducing the AMT, the government should make sure that the public does not misunderstand the AMT system, because its introduction is more symbolic than practical.

  Although more and more Americans are feeling the impact of the AMT system, the additional tax revenue received by the government is relatively limited.

  Whether in the US or in Taiwan, the disdain felt for the very wealthy who evade taxes is actually a result of flaws in the AMT system in its current form. Although the AMT system cannot mend the growing wealth gap, as long as it is carried out properly, it should still be useful as an "alternative" tax policy.

  Christina Liu is a People First Party legislator and a member of the legislature's Finance Committee.

  TRANSLATED BY LIN YA-TI
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