The National Economics and Trade Conference Should Address Tax Reform
China Times editorial (Taipei, Taiwan, ROC)
June 18, 2014
Summary: The Academia Sinica recently published its "Tax Reform Policy
Proposals." It addressed the problem of fiscal red ink and urged tax
reform. Academia Sinica member Wang Ping, convenor of the team, spent
nearly a year discussing, analyzing, and researching the problem. He
concluded that the government has three major problems. He made six
major recommendations. The government and the public should give his
report the attention it deserves.
Full Text Below:
The Academia Sinica recently published its "Tax Reform Policy Proposals." It addressed the problem of fiscal red ink and urged tax reform. Academia Sinica member Wang Ping, convenor of the team, spent nearly a year discussing, analyzing, and researching the problem. He concluded that the government has three major problems. He made six major recommendations. The government and the public should give his report the attention it deserves.
We are pleased to see members of the Academia Sinica, the nation's foremost research institute, emerge from their ivory tower, develop a civic spirit, and attempt to help the public. The report offered six recommendations. It did not prioritize them or draw up a timetable. Nevertheless they can serve as a blueprint for future government policy.
The report mentioned three major issues. The 2012 tax rate of 12.8% was among the lowest in the world. Payroll tax proceeds accounted for the lion's share. Corporate and capital income taxes were on the low side. Too much income was non-taxable. There was no sign of improvement in the deficit, which has worsened. These are the most important reasons for our government's fiscal problems. These problems have been around for ages. They are community-wide structural problems. A seven year long illness cannot be cured by three years of treatment.
The government's tax rate is too low. The proportion of corporate taxation is too low. Wage earners bear the heaviest tax burden. Surveys of family income and expenditures clearly reveal the nature of the problem.
In 2005, there were 7.1 million households on Taiwan. That year about 5.5 million households filed consolidated tax returns. Therefore nearly 1.6 million households, legal and illegal, filed no returns. Approximately 5.5 million households reported inadequate family incomes under 50,000 NT per month. Nearly 4 million households reported annual household gross income under 595,000 NT. The remaining 1.5 million, or 20 percent of all households, were largely newly married couples with two incomes. They bear most of the government's tax burden. Taxes on Taiwan are levied in a highly inequitable manner.
Corporate and capital income is undertaxed. The report said "Our national tax base is basically an income tax on wages." A large proportion of non-wage related taxes are evaded, Most Taiwan businesses are SMEs. Even tax authorities in advanced countries have a hard time getting a handle on small business income." No country advanced as the ROC can become a tax paradise. SMEs almost never pay taxes. Their financial records are not subject to audits. Their records are kept by accountants. Tax returns are filed based on invoices. The expenses of business owners, family members, as well as others, are all covered by the company.
We cannot expect ivory tower academics to implement these reforms. We must depend on taxing agencies to redesign the system and remedy the problem.
Discussions and recommendations about the consumption tax are a top priority. The government's consumption tax, a 5% value-added tax, is among the lowest in the world. The government has long been afraid to raise it. Most scholars assumed it was a regressive tax. But the report states that "From a dynamic perspective, it should be considered a proportional tax, rather than a regressive tax." It concluded that "Savings will be different due to different types of consumption in the future. Raising the consumption tax rate, especially the luxury product consumption tax rate, is a fait accompli, given the imminent tax hike on wealth. It can improve tax efficiency. It can also reduce wealth inequality." Therefore the report recommended an appropriate increase in the consumption tax rate. Normal consumer goods can remain at the current rate of 5%. Taxes on luxury goods can be increased to 10%.
But part of the argument was flawed. As we all know, most income is used to consume. Most of the wealth of the rich is saved. They can even go abroad to shop. Raising the consumption tax merely takes more from the common folk. Therefore it is a regressive tax. That said, increasing the luxury tax is feasible, and will improve the government's fiscal situation.
We have a blueprint. Therefore we should act on it. We should don sword and sandal and solve the problem.
The national debt is a serious problem. Central government debt as a proportion of GDP is not high compared to other countries. But the hidden debt exceeds 24 trillion. The ROC government's debt level is as high as the PIIGS just before the European debt crisis struck, including the worst basket case -- Greece. The central bank contribues about 200 billion a year to the treasury. Without the central bank's contribution, the government's fiscal deficit would be serious. But allowing the central bank to contribute to the treasury is far from satisfactory. Central banks the world over do not bear such burdens. The Academia Sinica should propose a solution to this in the future.
The National Economics and Trade Conference will convene this weekend. We expect in depth discussions on these issues. The Ministry of Finance should consult these recommendations. It should offer specific responses and develop policy plans to implement the necessary reforms.