How Can Financial Officials View the Budget Act with Such Contempt?
China Times editorial (Taipei, Taiwan, ROC)
May 8, 2009
First, several provisions of the Budget Act must be mentioned.
Article 34 of the Budget Act states that "Before major policy plans are promoted, alternatives and cost-benefit analyses must be made, and the source of financing and the use of funds explained."
Article 45 of the Budget Act states that "When general budget revenues and expenditures are imbalanced, the (Executive Yuan) must work with central government financial officials to seek solutions."
The Republic of China currently has two problems. One. Leave aside the growing deficit in public infrastructure construction projects. The Ministry of Finance estimates that expenditures this year will exceed revenues by at least 200 billion. This is a clear violation of the Budget Act. Yet no one in the cabinet cares. Two. The Executive Yuan Financial Supervisory Commission and other agencies care only about protecting themselves. They have repeatedly proposed a variety of tax cuts.
A few days ago the FSC proposed tax cuts to attract foreign capital back to Taiwan. It wants future bank income from interest, funds, bonds, and insurance to benefit from cuts in business taxes, stamp duties, and business income taxes. This of course constitutes a "major policy plan" as defined in Article 34 of the Budget Act. Yet the FSC has never mentiond cost-benefit analyses and alternative sources of financing. No one, from finance ministers to the Vice President of the Executive Yuan bothered to look at the Budget Act. It is rumored that the Ministry of Finance supports the Financial Supervisory Commission's policy. The Executive Yuan has suddenly inherited yet another tax cut proposal. financial officials at the FSC apparently view the nation's laws as nothing more than waste paper.
Since the Financial Supervisory Commission is so enthusiastic about tax cuts for financial services, let's analyze the pros and cons. We would like to ask three questions: On what basis? For what reason? For what purpose? First, on what basis must financial services be exempted from taxation? Chairman Chen said that if the aforementioned three financial services are tax exempt, profit margins will increase, making them more attractive to customers. Such an argument seems plausible at first. But when applied universally, one realizes it is nonsense. What industry won't show higher profits once it is exempt from taxes? What industry won't attract more customers if it has larger profit margins? If this is the rationale for tax exemption, then why not make agricultural products tax-free, service sector services tax-free, IC products tax-free? Why should anyone pay taxes on anything? The FSC chairman spoke out on behalf of the financial industry. Other government agencies may well speak out on behalf of other industries. Does the cabinet give a damn about the Republic of China Budget Act?
Next, the Financial Supervisory Commission wants to exempt financial services from taxation in order to attract foreign investment. But for what reason? The foreign investment the FSC wants to attract pertain to funds, structural debt, insurance policies, and other financial assets. Once these financial assets enter Taiwan, most of them will flow into the stock market and real estate. They are different from investment in physical infrastructure construction. In fact, Taiwan's private capital is abundant. So abundant that bank are refusing large deposits. If the FSC is right about five trillion in funds flowing into the Taiwan stock market and housing market, it could lead to asset bubbles akin to those in Iceland and Ireland. If signs of trouble appear and capital flees, what will happen to Taiwan? Chairman Chen was trained in the law. He does not seem to understand that capital flows into Taiwan do not mean increased GDP. His desire to attract investments to Taiwan financial assets is the result of conceptual confusion and erroneous thinking.
We must also ask, for what purpose is the Executive Yuan's economic team constantly calling for tax cuts? Executive Yuan officials cite Paul Krugman. They say they are promoting the same Keynesian policies that Bill Clinton advocated. But what they are doing runs counter to Krugman's policy. Krugman advocated increased government spending and increased public construction. Therefore they were willing to endure a temporary deficit. Clinton opposed tax cuts. He believed in the indirect multiplier effect of taxes. Furthermore, many tax cuts often benefit only select groups among the wealthy. They fail to boost social spending. Yet over the past year our financial officials have repeatedly proposed indiscriminate "Pseudo-Krugman" tax cut policies. They have said one thing, but done another. We really have no idea where they are going.
Finally, let's get back to the Budget Act. The Budget Act has hundreds of provisions. But its essence is balance. On the one hand, the ruling adminstration must live within its means, avoiding unnecessary expenditures, and imposing only essential taxes. On the other hand, the ruling administration should also take into account sustainable management. It must ensure opportunities for our children and grandchildren. Responsible political leaders will be guided by past budget planning lessons. Instead, financial officials are constantly attempting to curry favor with the public, scattering money in every direction, and treating the Budget Act with contempt. Seeing the Financial Supervisory Commission and the Ministry of Finance treat the taxation system and budget process with such contempt forces us to level our harsh criticisms.