Ahead of his inauguration, Vice President Vincent Siew (蕭萬長) asked the Ministry of Finance to prioritize the passing of a negative income tax system after he and President Ma Ying-jeou (馬英九) took office yesterday. Initial estimates are that 900,000 households — 3,200,000 people — would benefit from such a system, while the government would have to spend an extra NT$25 billion per year.
Minister of Finance Lee Sush-der (李述德) has said that a negative income tax system would include a clause to exclude the wealthy and that social welfare measures like the national pension plan and the age pension would be integrated into the new system.
The advantage of a negative income tax system is that it is a social welfare measure. But so far, the plan has only been included in the white paper on tax policies that Ma and Siew used in their presidential campaign, and neither social welfare groups nor labor rights groups have been consulted. The differences between the current welfare system and the proposed system should be carefully examined.
The term “negative income tax” was made popular by US economist Milton Friedman in the 1960s. It doesn’t mean a tax on negative income, but an income tax that is negative. In the system, which has not been implemented, the government would hand out subsidies to compensate for differences in income levels so that each household has the means to pay for basic living costs. Money that the public pays to the government is called tax and money that the government gives to the public is named “negative tax” to avoid labeling it “assistance.”
Apart from the intent to give poor people more incentives to work, another primary argument for negative income tax was the hope that the US government could use the existing system for tax payments and refunds to integrate and replace the complicated and inefficient social assistance system in place in the US at the time. Other social welfare systems based on similar ideas are the basic income system and a subsidy system for basic wages.
When discussing a negative tax system with respect to Taiwan’s current income tax and social assistance system, the following ideas should be made clear: Declared income is not the same as real income; annual income from labor is not the same as disposable income; annual income is not the same as assets; and individual or household income and assets is not the same as family assets.
The first two points are related to the consolidated income tax return and tax collection efficiency, while the last two points are related to the definition of taxpaying households. This is why a negative tax system must be combined with a clause to exclude the wealthy and it is likely that it would be necessary to rely on the welfare administration part of the social assistance system to determine who is eligible. How much this would cost would depend on the number of eligible households.
At the end of last year, 90,682 households consisting of 220,990 people received subsidies in accordance with the Public Assistance Act (社會救助法) — about 1.21 percent of all households, or 0.96 percent of the population. But data from the Financial Data Center of the Ministry of Finance show that of the 5.2 million households that declared their income taxes last year, about 2 million households had an annual income below the taxable level. These households would be the targets of a negative income tax system. The huge difference between these figures clearly shows that the group addressed by a negative income tax system is far larger than the legally defined group of low-income households.
Apart from the fact that the government might need to recalculate how much funding is needed for a negative income tax system, there is also the question of whether the current Public Assistance Act is too strict in recognizing low-income households, or if there is a problem in the design of the negative income tax system. In any case, the definition of the poverty level should be the same in the negative income tax system as in the Public Assistance Act.
In the past few hundred years, public finance experts have pleaded for a flat tax in order to make governing less complicated and to lower taxes. Friedman hoped the negative income tax system could be combined with the social assistance system. Over 40 years have since gone by, and this ideal has still not been realized. Opinions vary on whether a negative income tax system would successfully give low-income workers more incentive to work. But the world can only improve if there is change. Taiwan’s income tax system and social relief system need to be reformed, but to avoid needless overlap, any reform should be well thought out.
Chou Li-fang is professor and dean of the Department of Public Finance at National Chengchi University.
TRANSLATED BY ANNA STIGGELBOUT
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