Mon, Dec 31, 2001 page18

• Yophy Huang discusses reform of public finance

  Yophy Huang, an associate research fellow at the Chunghwa institution for Economic Research who specializes in public finance and taxation, sat down with staff reporter stanley chou last week to discuss a range of fiscal issues including the new NT$3,000 monthly subsidy for seniors and the reform of the public sector

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  Taipei Times: The DPP administration recently proposed again the NT$3,000 monthly subsidy for senior citizens aged 65 and over. Do you have any comments on the proposal?

  Huang (黃耀輝): The DPP administration's public finance [policy] is leading the country in the wrong direction, as recent events in Argentina and Japan have shown. Argentina went bankrupt because of its generous social security system and [high] salaries for public servants, which caused government expenditures in recent years to skyrocket.

  

  Yophy Huang gestures during an interview last week.

  PHOTO: CHEN CHENG-CHANG, TAIPEI TIMES

  The Japanese government also borrowed heavily over the last few years and has allowed its budget deficit to exceed 7 percent of GDP [compared with the 3 percent benchmark set by the European Union]. Its fiscal and monetary policies have failed to improve the sluggish economy over the last decade -- and that despite 13 [different] economic recovery plans over the period.

  Currently, the Taiwanese government is carrying over NT$2.3 trillion of debt, but the DPP administration still wants to spend NT$16 billion on a subsidy for senior citizens in order to keep a campaign promise.

  The subsidy itself is unjustified because it excludes the poorest class from qualifying to receive the subsidy. (Anyone who is currently receiving a government subsidy for poverty is not qualified to receive the proposed NT$3,000 subsidy.) In order to bypass opposition from the KMT and PFP, the DPP administration will not try to enact a law for the new subsidy. Instead, it has included the subsidy in the annual government budget and is attempting to issue an executive order to work around the problem.

  The DPP gimmick is actually destroying fiscal discipline, which could affect the country for decades to come.

  In addition, the subsidy for senior citizens is actually crowding out social benefits for women and children. It's obvious that the DPP is trying to please its constituents [mainly senior citizens] in order to win future elections, since the voting rate of senior citizens is one the highest among all age groups. In another word, it's vote-buying.

  TT: Will recent government reforms proposed by the DPP administration reduce government expenditures?

  Huang: The DPP administration did say recently that it is planning to reform the government structure in order to reduce government expenditures.

  However, based on past experience, it's unlikely that such reform will be successful. For example, several years ago former President Lee Teng-huei (李登輝) abolished the Taiwan Provincial Government. Nonetheless, expenditures have not been reduced. The Japanese government also spent years working on such reform without success.

  The worst case scenario is that the general public will not trust the government anymore, [seeing] that the DPP administration has broken its promise again and again.

  Before the DPP took over the administration last year, it said that by simply unifying government procurement procedures, it could cut government expenditures by NT$300 billion a year. But it failed to keep the promise. And now, the DPP administration claims that it is going to amend the Constitution again (the seventh time in the last decade). The general public will lose confidence if the pattern continues.

  What the government should do is fire public servants when necessary. However, during the recent elections, President Chen Shui-bian (陳水扁) immediately did the opposite, assuring public servants that no salaries would be cut.

  It's impossible to balance the government budget without reducing salaries to public servants and in state-run companies. Recently state-run companies like China Petroleum Co (中油) and several others gave raises to their employees.

  In order to reduce the burden of state-run companies, the administration has to close inefficient state-run companies and privatize efficient ones.

  TT: What kind of tax reform should the government currently be looking at?

  Huang: Currently there are two areas of tax reform the administration should consider.

  The first one is property taxes, such as the Land Value Tax (地價稅) and the Land Value Increment Tax (土地增值稅). The current tax rate for land value tax, or the holding cost of land, is too low. (About 0.04 percent on an annual basis.) Meanwhile, the tax rate for land value increment tax, or the cost of land transactions, is too high. The current tax rate could be as high as 60 percent and the DPP administration is planning to reduce its in half in the next two years.

  In order to make efficient use of land all over the country, the government should increase the tax rate on holding land and reduce the tax rate for land transactions. The adjustment in the property could significantly increase tax revenues for the government and raise the efficiency of land use.

  The second one is the green tax, or a tax on polluters, including water pollution, air pollution and other forms of pollution.

  The idea of green tax is to emphasize the quality of life. While levying the pollution tax [on companies], the tax revenue generated could be used to reduce tax rates for low-income earners and corporations. It's a better way to subsidize low-income earners than the NT$3,000 subsidy for senior citizens. Meanwhile, lower tax rates for corporations [for commercial entities that minimize pollution] could reduce business costs and raise competitiveness.

  TT: What are your thoughts on the Ministry of Finance-proposed tax reform plan?

  Huang: The Ministry of Finance is not taking a forward-looking perspective on the issue of tax reform. Tax reform planners should not be inviting industrial groups to participate to avoid creating the appearance of conflicts of interest -- but the ministry is currently doing so.

  It's very difficult to propose adding [new] taxes, and it would also be difficult to propose tax-cuts for the current debt-ridden situation. However, the Ministry of Finance has to take responsibility for the issue and has to have the guts to conduct such reforms.

  We should take the example of other countries like the US. Former President Ronald Reagan proposed a tax-reform act in the early 1980s. What he did is to lower the tax rate and enlarge the tax-base at the same time.

  For example, the Taiwanese government could reduce the current securities transaction tax (證交稅) rate to zero in exchange for levying the securities income tax (證所稅), which is tax-free now. In the first year, the government could lose NT$50 billion in tax revenue. But from the second year on, the larger tax-base could generate more than NT$100 billion in tax revenues on a permanent basis.

  TT: What are the prospects for public finance reform by the DPP administration?

  Huang: I am quite pessimistic on the prospects. The DPP actually won the latest election -- even with its poor performance over the last 18-months. What we saw is a DPP administration using lots of gimmicks to rule the country instead of actually solving economic problems. The subsidy for senior citizens is a good example of such a gimmick. The more gimmicks used by the DPP administration, the more trouble for future generations.
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