The Ministry of Finance has finally announced its taxation reform plan that will combine housing and real-estate taxes, but it seems to have failed to address the doubts that many have expressed. Tax regulations are continuously being revised to meet the needs of certain interest groups, such as the rich, investors and the construction industry, but policymakers have completely disregarded public opinion.
The plan was welcomed by people from many of the industries involved, including investors and luxury home owners, which is interesting in itself.
Owners are currently required to pay a “luxury tax” of between 10 and 15 percent of the transaction price in addition to the land value increment tax and others. However, with the combined housing and real-estate tax they will only have to pay 30 percent of the gains on transactions, which can be used to deduct the land value increment tax.
Delighted by the big difference the proposed reform will make, short-term investors may be forgiven for thinking Christmas has come early.
Furthermore, owners who live in properties worth NT$40 million (US$1.26 million) would be exempt from tax, but the average person will find it difficult to think of a NT$40 million home as a “basic” housing need. This measure was apparently devised by the government to protect the housing demands of the rich. How can such “false equality” be fair?
The finance ministry said that capital gains in relation to assets other than primary residences can enjoy a tax rate of just 17 percent because the current income tax of a legal corporate entity is 17 percent, and so it is necessary to impose the same rate on capital gains to prevent the average person from arbitraging and exploiting loopholes by establishing companies.
However, how can the government tolerate the establishment of companies that are solely designed to arbitrage the housing markets?
Instead of addressing the cause of the problem by fixing the corporate income tax or strictly auditing such arbitrage companies, the government is catering to the arbitrageurs’ needs by lowering the tax rate to 17 percent. Is this reasonable?
In addition, those who profit from real estate investments not only distort the distribution of wealth, affecting housing needs — and therefore should not be encouraged — but also enjoy a much lower income tax than hardworking people.
Is this fair?
The ministry also felt that although a progressive tax is fairer and more reasonable, it is harder to implement than a flat tax. Given that capital gains from real-estate investments in Taiwan are so unfair and unreasonable, should the tax reform prioritize a progressive tax, which is fair and reasonable over a flat tax, which is easier to practice?
The public will have its say, and the government should pay attention.
Some people also thought that accumulated capital gains from real-estate transactions made over the years are not the same as money earned by working for one year. The implementation of a flat tax rate can average out the tax paid over the years.
However, is it possible to average out capital gains from real estate transactions over the years to an average annual capital gain?
In this way, the annual progressive labor income tax rate can be applied. Is this a fairer and more reasonable tax policy that would meet public expectations?
The ministry also said that holding a property for more than two years can be called long-term ownership, which would make it eligible for tax deductions ranging from 4 to 80 percent, while holding properties for less than two years is subject to a 30 percent tax rate.
Is holding an asset for longer than two years enough to qualify for long-term ownership and eligibility for tax deductions? The answer is quite obvious.
Research shows that on average, Taiwanese move after living in one property for 10 years. Therefore, it would be more reasonable to allow property owners deductions for holding non-primary residential assets for at least 10 years and to at least penalize short-term owners by imposing higher taxes. If ownership of more than two years is enough to qualify for long-term ownership, this could be seen as an attempt to lighten the luxury tax.
Is it reasonable to allow property owners a bigger tax deduction for non-private residential properties and to mete out a smaller penalty for short-term ownership?
What does the public think of the ministry’s tax reform?
According to the ministry, less than 1 percent of taxpayers will be slightly affected, and some will benefit more from it than from the current luxury tax. What is the purpose and meaning of ratifying such a tax reform?
We can also look at this matter from a different perspective: That as long as basic housing needs are completely unaffected, most people who live in only one house — which accounts for 60 percent of the population — and people who do not own their own homes — who make up 20 percent of the population — are likely to support a fairer and more reasonable tax policy plan.
The Cabinet and the legislature should think very carefully about how to proceed. The Chinese Nationalist Party (KMT), the opposition parties and the public should all be actively engaged in the debate.
Chang Chin-oh is a professor of land economics at National Chengchi University.
Translated by Ethan Zhan
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