Luxury Tax Pros Outweigh Cons
China Times editorial (Taipei, Taiwan, ROC)
March 2, 2011
The luxury tax, as it is commonly called, is a special sales tax on certain goods and services. Last Thursday, after the Ministry of Finance reported to President Ma, the draft law for the luxury tax was officially finalized. President Ma is determined to promote the bill, in order to discourage speculation in the housing market. We heartily approve of his move. But the bill needs to be promoted within the legislature. We feel the need to issue a warning. In the short-term the housing market and the economy may be negatively impacted. The government must be psychologically prepared, and ready with a response. It must persist in its efforts at systemic reform.
The luxury tax draft law imposes a 10% luxury tax on automobiles costing over three million NT, on private planes, yachts, and on country club and golf club memberships costing over 500,000 NT. But it is another problem that most concerns the public. That problem is speculation in housing units, building sites, and commercial buildings not intended for personal use, which are sold less than two years after purchase. These will be subject to a 10 to 15% transaction tax. The purpose of this tax is to discourage speculators from creating bubbles in the housing market.
Domestic housing prices began soaring in 2008. They retreated slightly due to the financial tsunami, but then shot straight up again. By the end of last year, housing prices in Taipei had increased 11.1 times. Housing prices in Xinbei City had increased between eight and nine times. The average price of housing units in Taipei City has soared to 700,000 NT. The numbers are at record highs. Three point six million salaried workers earn less than 30,000 NT a month. Finding a house within the metropolitan area to settle down in has become a far off dream. High housing prices have long been the number one source of pubic discontent.
Residential units should resume their normal function, as places to live. Housing prices should increase at roughly the same rate as income. But that is not what we have today. Incomes have remained static, while housing prices have skyrocketed. Between 2008 and the end of last year, average housing prices in Taipei increased 20 percent. Prices in some of the most desirable areas increased over 50 percent. Based on the low point of the current real estate business cycle, prices have more than doubled. Prices in some areas in Xinbei City, in satellite cities such as Xinzhuang, have doubled in one or two short years. The reason is low interest rates and easy money. These enable the growth of asset bubbles. The "investor friendly" domestic housing market system fuels speculation. This is an important contributor to rising prices.
They system does not impose a capital gains tax. Hundreds of speculators have pocketed tens of millions speculating in the housing market. The tax system favors such speculation. Anyone with a little money will see the housing market as an ideal channel for the pursuit of windfall profits. The result is that amidst rising housing prices, speculators spring up like mushrooms. They invest, and contribute to further housing price rises. Such cycles often end in crashes. Industry insiders estimate that over half of all metropolitan area housing sales involve speculation. This gives us some idea of the "contribution" of speculators to the housing market.
The government has introduced a luxury tax targeting housing market speculators. Housing market speculators are the main force pushing up housing prices. They are the real reason ordinary people cannot afford housing. We feel that addressing this problem is helpful. The ideal remains taxation based on a comprehensive assessment of the market price. Ultimately, income from the sale of housing should be integrated into capital gains taxes. But this is a good first step.
The Ministry of Finance's current draft applies only to residential property and construction sites not for personal use, sold less than two years after purchase. Only these will be subject to the luxury tax. Sales made within one year will be subject to a 15% tax. Sales made within two years will be subject to a 10% tax. We think that is reasonable. The impact is limited to housing speculators alone. and will have no impact on most people. But the Ministry of the Treasury should consider lengthening the time frame to three years. Sales made within three years should be subject to a luxury tax of 7%. Most speculators divest themselves of their investments within three years. They tend not to hold on to them for more than five years. For example, the infamous Lien Ching Xinyi building site changed hands in just over two years. In little over two years, it earned nearly 1.5 billion NT in profits. A five year limit may be too harsh. But three years is more reasonable, and should be consistent with the workings of the marketplace.
If the luxury tax bill is approved without opposition and becomes law, it will discourage speculation in the housing market. The number of speculators in the housing market will diminish. Demand will decline, and prices will decline. As a result, the number of people in real estate related industries, including construction companies, real estate brokers, interior decorators, and even others on the margins will decline. The financial sector may need to bear some bad debts. But the financial sector, under central bank direction, imposed risk management controls long ago. Therefore the repercussions will be minimal. But regardless, the overall economy may be affected. The government should be psychologically prepared for the economic and industrial impact of the luxury tax. It must not suddenly announce the suspension of tax in the event the housing market declines, and the economy slows.
Frankly, the current wave of soaring real estate prices is a departure from economic fundamentals. Many above board construction companies are disgusted by it. They fear it will lead to a major crash. The government must curb speculation. In the short term that may affect the housing boom. But in the long term, it will ensure sustainable development in the housing industry. It will avoid the recurrence of a housing market bubble. We hope the government has both the will and the way to discourage speculation in the housing market. We hope members of the legislature will support the bill. Housing speculators boast that "Legislators are mouthpieces for construction firms. The luxury tax will not make it through the legislature." We hope that legislators will prove them wrong.