Sun, Jun 20, 2010 page8

• Taiwan needs a viable tax system

  • By Chien Hsi-chieh 簡錫
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  When the government first started paying benefits to the elderly, including farmers, the measures adopted included clauses that excluded the rich.

  Typically, people would ask, “Why should someone as rich as Wang Yung-ching (王永慶), the late chairman of Formosa Plastics, get an old-age pension?”

  Most people think it is fair to exclude the rich from state welfare benefits and believe that the national treasury should not subsidize the wealthy.

  Recently, the government put forward a proposal to make tuition fees for public and private high schools, vocational high schools and junior colleges the same across the board. The plan is to subsidize students attending private schools to the tune of NT$17,300 per semester. Premier Wu Den-yih (吳敦義) suggests that the terms of the subsidy should exclude the wealthy, saying that to pay the subsidy to everybody would amount to using taxpayers’ money to help the rich and that would be unfair.

  Originally it was proposed that the subsidy be withheld from students whose annual household income exceeded NT$600,000, but, faced with a backlash from the National Teachers’ Association and parents, the government raised the limit to NT$900,000. Repeated changes in the proposals provoked criticism from commentators and the general public.

  If people are taxed based on their ability to pay, with rich people paying their fair share on the basis of a progressive tax system, why should they be excluded from state benefits? If wealthy people like Hon Hai boss Terry Gou (郭台銘) pay hundreds of millions or even billions of NT dollars in taxes each year, what is so unfair about paying them NT$3,000 a month in old-age benefits or giving their sons and daughters the same benefits as other students?

  In Sweden, education is free. From preschool to university, there are no tuition fees. Moreover, Swedish people enjoy comprehensive social welfare covering healthcare, home care, unemployment benefits, maternity and child benefits, old-age pensions and so on, all funded by taxes. Tax rates for the rich go as high as 60 percent. Since the wealthy pay their fair due, they should be entitled to all the rights of citizenship. The Swedish social welfare system is sustainable because it makes society more equal and harmonious.

  Taiwan, in contrast, provides too many tax reductions and exemptions for corporations and the super-rich, so that the real tax burden on the rich and big firms is less than 10 percent on average.

  Ministry of Finance statistics show that eight of the country’s 40 richest people don’t pay any tax at all, while another 17 pay just one percent. These figures are a clear indication of how unfairly the tax burden is distributed. The government is supposed to redistribute wealth by means of progressive taxation, but income from securities trading and land transactions and overseas income, which together account for 70 percent of rich people’s wealth, are not taxed. Through capital gains, money attracts more money. This setup leaves the principle of taxation based on ability to pay in tatters.

  Statistical data on household income shows that taxation reduces the income gap between the richest and poorest 20 percent of households by a mere 0.3 percent. Compare that to the equivalent figures of 22 percent for the US and 35 percent for Europe and it is clear that Taiwan’s taxation system is ineffective in its supposed role of making income distribution more equal.

  Taiwan’s richest people already pay very low taxes, yet the ruling and opposition parties have connived in slashing the inheritance tax and business tax, as well as giving companies tax concessions through the Industrial Innovation Act (產業創新條例). The Treasury loses NT$250 billion (US$7.8 billion) in taxes each year through these concessions to the rich.

  Last year the average tax burden borne by each citizen relative to GDP, was just 12.2 percent. That is the lowest it has ever been in Taiwan and the lowest in the world. The idea that tax cuts can stimulate investment and promote economic growth, leading to growth in tax revenue, is so flawed there is no need to refute it.

  The main reason why the economy can grow without generating any additional tax revenue is that the tax base has been badly undermined. All the money flows into the pockets of the rich. The result — government finances are in a state of ruin as deficits mount and the national debt soars. That is why exclusion clauses for the rich are being applied once more in the school fee subsidy plan.

  The rich are to be excluded from the fee subsidy scheme, and a 12-year compulsory education system is unrealizable within the foreseeable future.

  Education is the way in which the quality of the national workforce is nurtured and maintained. With government finances deteriorating year after year, there are no funds available to increase the education budget. The budget for education in Taiwan is just 3.6 percent of GDP, comparing poorly with 4.4 percent in Hong Kong, 4.6 percent in South Korea and 5.2 percent in Japan and the US, and even further behind the 8.4 percent set aside by Denmark and Sweden.

  With such a tight budget, the Ministry of Education really has no choice but to deny school fee subsidies to the better off.

  Chien Hsi-chieh is executive director of the Peacetime Foundation of Taiwan.

  TRANSLATED BY JULIAN CLEGG
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