Abolish Large Investor Provisions, Avoid Lose/Lose/Lose Proposition
China Times Editorial (Taipei, Taiwan, ROC)
December 19, 2014
Executive Summary: It is a wise man who acknowledges past errors. Capital gains tax reform has been tossed around for over two years. The Large Investor Provisions is a lose/lose/lose proposition for large investors, treasury revenue, and capital markets. The legislature must assume responsibility. It must swiftly abolish the Large Investor Provisions. It must retain the provisions for taxation of newly listed shares. That is the right way to proceed.
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Following a heated debate, the Legislative Yuan Finance Committee has decided to postpone implementation of the Large Investor Provisions for three years. This major tax provision was set to take effect on New Year's Day next year. Their content has not been changed. This has temporarily defused a ticking bomb, but has done nothing to solve the problem. Financial markets, the media and the public reacted badly. They consider it a farce, and a case of the old “Father and son ride a donkey” parable.
During the legislative debate, FSC Chairman Tseng Ming-chung said that tax policy should take into account four principles. Revenue, the national economy, social justice, and taxation methods. This is something many textbooks advocate. It is the crystallized wisdom of tax experts, scholars, and the experience of many nations. It deserves careful consideration.
Given these four principles, it should be clear how to reform the taxation of securities income. The capital gains tax on newly listed stocks (IPOs) should be retained. But the so-called Large Investor Provisions should be abolished. Listed companies that sell 10 billion NT in shares within one year should be subject to capital gains taxes.
The reason to why IPO capital gains should be retained is simple. Those able to accumulate a large number of IPO shares are invariably the largest shareholders in newly created or expanded companies. These shareholder stocks come in many denominations. But following an IPO, they are several to a hundred times their original worth. This is typical for capital gains, and of course should be taxed. Such a tax is consistent with the principle of fairness. Levying it poses no technical difficulties. Taxpayers cannot easily evade it. It is unlikely people will refuse to invest in new businesses, expand existing businesses, or list them on the stock market for this reason.
Trading in listed shares meanwhile, is completely different. If taxes must be levied, investors can choose not to transact them on the market. They can resort to foreign corporations, i.e., foreign transactions. Government agencies can establish tax regulations. But they cannot prevent people from changing their behavior to evade taxes. The 2012 tax reform program was passed with several amendments. The market did not fall below 8500 points. But volume failed to recover. In April 2012, former Finance Minister Christina Liu promised securities tax reform. In 2012 Taiwan stock market turnover was 20.78 trillion NT. In 2013 it was 19.60 trillion NT. Compare this to the 28.89 trillion NT Taiwan stock market turnover in 2010, and the 26.99 trillion NT level in 2011. Volume has fallen significantly. Estimates for this year are not optimistic. As of late November, they were 21.02 trillion NT.
Trading volume reduction directly affects treasury income. Between 2010 and 2013 income from capital gains taxeswere 104.57 billion NT, 93.99 billion NT, 71.94 billion NT, and 71.38 billion NT, respectively. Obviously capital gains tax reform reduced Treasury income by about 30 billion NT a year. As a result, from a tax perspective, this tax should be reviewed. This tax failed to increase treasury revenue. Instead, it led to treasury revenue losses. This was contrary to the original purpose of national taxation. It also reduced stock market momentum. It indirectly impacted the ability of listed companies to acquire financing. The imposition of this tax, violated the principle of "revenue income." It violated the principle of a "national economy." The government could have used this 30 billion in revenue, to help the underprivileged. It could have paid for a earned income tax credit, new residential construction for young people, public transit, or other public works. These would have helped reduce the disparity between rich and poor, and implemented social justice. The Large Investor Provisions are a major contributor to revenue loss. It is of course, also a violation of the principle of "social justice."
Some may say that since so many stock transactions took place, paying more in taxes is common sense. In fact, this is the essence of the current stock market securities transaction tax. The Taiwan stock market securities transaction tax is as high as 3 per thousand. It is among the best in Asia and the world. The reason is the stock market securities transaction tax. In 1988 the Ministry of Finance announced that in 1989 the stock market transaction tax would be reinstated. The news caused the Taiwan stock market to plummet 19 straight trading days. In January 1990, the Treasury ceased collecting capital gains taxes. Instead, it increased the stock market transaction tax. Revenue from stock market transaction taxes increased from 1.5 per thousand to 6 per thousand. The economy declined, stimulating stock market turnover. By 1993 it had fallen to 3 per thousand. That is the current tax rate. But its essence has not changed. It combines stock market transaction taxes and estimated stock market transaction taxes.
The stock market exchange tax adopts a "taxation by volume" approach. It ensures that investors with large trading volumes are subject to higher taxes. This is in line with the principle of fairness. Reinstate the old system, abolish the Large Investor Provisions, allow large investors to make large returns. The treasury will once again receive 30 billion NT in revenues, and large investors will pay for it. If these taxes are used for social welfare or infrastructure construction, won’t that be a win/win?
It is a wise man who acknowledges past errors. Capital gains tax reform has been tossed around for over two years. The Large Investor Provisions is a lose/lose/lose proposition for large investors, treasury revenue, and capital markets. The legislature must assume responsibility. It must swiftly abolish the Large Investor Provisions. It must retain the provisions for taxation of newly listed shares. That is the right way to proceed.