The proposed capital gains tax on securities transactions has caused all kinds of trouble for the government. Everyone, including investors, the Cabinet, the Presidential Office, the Chinese Nationalist Party (KMT) and opposition parties, have their own opinions on the issue.
The main arguments for levying such a tax are fairness and justice. While these are values we all believe in, they can also lead to disaster. When Marxism was first espoused, many embraced its supposed pursuit of justice and fairness, but the last century offers more than enough examples of how the pursuit of such lofty ideals brought disaster to millions of people, both those who lost their lives to communist tyrants or everyone else who ended up in poverty.
In the past, a capital gains tax on securities transactions might have been a good idea, but times have changed.
With the liberalization of capital flows, stock markets worldwide are increasingly linked and in order to spur market activity, governments started offering incentives to foreign investors and tax exemptions on futures trading. As a result, the principles of fairness and justice were quickly forgotten. This is especially true in Taiwan.
Beijing does not levy such a capital gains tax and while that certainly does stop the Ma administration from doing so, it is possible that insisting on the tax could have the same result as the communist pursuit of justice and fairness: everyone loses out.
Once those in power realize that times have changed, their tax reforms and theories will be revised accordingly. Tax on income is no longer levied on those who provide or create income, but on those who receive and benefit from that income.
Taxation should thus be based on the basic principle of taxing those who benefit from income, not those who create it. In other words, income gained from work or investment is a form of income creation and when necessary, the government should provide those who create income with investment incentives and deductions on income from interest.
At the same time, higher tax rates should be applied to those who use their income to purchase jewelry, luxury houses and yachts, or, in other words, those who profit from income.
While some view income derived from securities as a form of income gained without having to work, it remains a type of investment and income creation and it is therefore difficult to argue that offering incentives to encourage such activity is unfair.
This is especially true in Taiwan, where many industries have relocated to China. Despite this, the TAIEX has maintained a higher price-earnings ratio than many other Asian nations, which is why not levying this capital gains tax would help to promote the raising of capital in Taiwan.
Ma’s recent statement that he is serious about the capital gains tax on securities transactions clearly highlights the government’s ignorance and shows that it is living in the past by viewing capital gains tax exemptions as a sin. This is the same approach taken by the Chinese Communist Party when it took power 60 years ago and treated capitalists as immoral exploiters.
I am not saying that we should not have a capital gains tax on securities transactions; it is just that given the current situation, such a tax runs the risk of killing the goose that lays the golden egg. It would not only fail to raise revenue for the government, it would cause the price-earnings ratio to drop and undermine the market’s ability to attract capital.
These are things that will eventually affect all of us. However, if the government’s proposed capital gains tax is intended to force Taiwanese money into the Chinese market and speed up unification, then that’s a another story altogether.
Huang Tien-lin is a former national policy adviser to the president.
Translated by Drew Cameron
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