During the first televised debate between the presidential candidates, the Chinese Nationalist Party’s (KMT) Eric Chu (朱立倫) proposed three strategies to turn Taiwan around. The second of these strategies was to introduce tax reform and to continue to insist on increasing taxation on the wealthy and cut taxes for the middle class, so that taxes would be levied on the 1 percent of Taiwanese with the highest incomes and the most assets.
He said that this was not intended to foment division, but rather to promote social harmony and stability.
Looking back at history, a high concentration of land, assets and public wealth in the hands of a minority has indeed caused upheaval and changes in government. If the wealth gap is too big when disaster or crisis strikes, there are inevitable calls for revolution throughout society.
This applies not only to political, but also economic crises. Economists studying US tax records of the past 100 years found that wealth concentration peaked in 1928 and 2007, when the income of the wealthiest 1 percent reached almost one-quarter of total national income.
If too much wealth is concentrated in the hands of a minority, the middle class does not enjoy the fruits of economic growth, instead their purchasing power drops as housing and consumer prices rise. When the purchasing power of society as a whole drops, production surpluses are unavoidable, so it is not surprising to find that far-reaching economic recessions and financial crises struck in 1929 and 2009, the years after wealth concentration peaked.
This is also why political pledges of a wealth tax would help mitigate the wealth gap.
However, when it comes to practical policy implementation, it is important to have a clear understanding of the reasons behind the wealth gap if any remedies are to be effective.
Last year’s amendment to the Income Tax Act (所得稅法) raised taxation on incomes greater than NT$10 million (US$300,571) to 45 percent. The question is if this would really increase tax revenue or would it cause the tax base to shrink as people feel forced to emigrate to Hong Kong, Singapore and elsewhere.
Chu’s proposal might be well-intended, but more detailed policies are required to decrease the wealth gap without hindering economic growth. Appropriate and reasonable taxes could be levied on wages, interest and stock dividends, which, thanks to globalization, are highly mobile, while high and progressive taxes should be levied on incomes from fixed, immobile assets, such as housing and land hoarded for speculative purposes, one area making life hard for the general public.
It must be understood that having a high income is not the same thing as having big assets. High incomes and economic growth are interdependent, while big assets can be unproductive and block growth.
The true meaning of a wealth tax is to implement appropriate and reasonable cuts in labor income taxation and apply ruthless taxation on assets. This is the kind of wealth tax that would be able to increase tax revenue, curb real-estate prices and improve overall national competitiveness.
Jason Yeh is an associate professor of finance at the Chinese University of Hong Kong.
Translated by Perry Svensson
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