European and U.S. Debt a Warning:
Taipei Must Not Underestimate Its Fiscal Crisis
China Times editorial (Taipei, Taiwan, ROC)
August 4, 2011
Summary: President Ma worries about the European and American debt crisis. He must not ignore the domestic fiscal crisis. We remind him once again. We look mainly to the executive branch to cope with the fiscal crisis, as soon as possible, Do not wallow in feel good sentiment. If we refuse to face our fiscal problems, we will soon follow in the footsteps of Europe and the US.
Full Text below:
Russian Prime Minister Vladimir Putin has criticized the U.S. debt crisis, saying it left the global financial sector in chaos. He said the debt-ridden United States is the world's economic parasite. While speaking to foreign journalists, President Ma Ying-jeou said he was worried that the United States and European debt crisis would drag down Taiwan. But there is probably little we can do in response to the U.S. and European debt crisis. What President Ma really needs to worry about is Taiwan's fiscal crisis. The government has reached its borrowing limit. The tax rate has reached new lows. The government's fiscal situation has never been more strained. Next year a number of major public construction projects will have no funding. This has already had a serious impact on the government's effectiveness. The fiscal situation is alarming.
The Ministry of Finance recently announced the results of the Executive Yuan's tax reforms. It said that tax cuts led to a 10.8% economic growth rate last year. Some cabinet members said that framing the issue this might mislead the public. How to interpret the data may be a matter of opinion. But the tax burden (the ratio of tax revenues to GDP) is now at a 11.9%, a new low. This is a fact we cannot overlook. If this is not adjusted as soon as possible, the budget situation will be truly worrisome.
Just how serious is the fiscal crisis? The Bureau of Audit recently released its 2010 annual central government accounting report. According to the Office of Economic Cooperation and Development (OECD), the average income tax rate was about 28%. The rate for the Republic of China was significantly lower, less than half. Tax dependence (tax revenues over annual expenditures) fell from 73% in 2008 to 57.4% this year. This shows that tax cuts have serious undermined financial stability. Now consider the central government's outstanding debt. By the end of this year, it will reach four trillion nine hundred billion NT. It will account for 37.1% of the GNP over the last three years. It is now near the legal limit of 40%. The government's fiscal situation is grim. The Bureau of Audit has appealed to the Ministry of Finance, saying the debt crisis in Europe and America should offer us a lesson. It has urged a comprehensive review of the effectiveness of tax cuts. It seeks an effective solution to the balance of payments issue.
Over the past three years, central and local government debt has skyrocketed. Some counties and municipalities have difficulty meeting their annual payrolls. Last year the Control Yuan began to address the issue of increasing government debt. Hidden debt and huge fiscal deficits continue to worsen. They pose a threat to economic growth and national security. The Control Yuan asked the Ministry of Finance to correct the problem. The Control Yuan report said that our laws regulating public debt are inconsistent with international standards. This has led to serious distortions in our government debt statistics.
Alas, economic growth last year looked good. But tax revenues for the first half of this year have not regained their old level, prior to the financial tsunami. This is the result of tax cuts. In addition, the Ministry of Finance lowered the income tax rates by three tax brackets. It wanted to help low income persons. But the progressive tax rates actually benefitted those in high tax brackets more than they did those in low tax brackets. The tax cuts perversely increased the gap between rich and poor.
Over the past decade, DGBAS and the Tax Data Center have gone from using five income brackets, to ten income brackets, to twenty income brackets. But the gap between rich and poor has continued to increase. The problem is the unfair tax system. The primary source of income for the wealthy is real estate and capital gains on stocks, on which they pay little tax. Wage earners meanwhile, receive no relief whatsoever. As a result, wages account for as much as 75% of the income tax base. Under the circumstances, it is hard to argue that the income tax burden has become fairer,
Addressing the impact of tax cuts, Nobel economics prize winner Paul Krugman wrote that a supply side tax cut has almost never helped the economy. He cites actual figures to expose the lies of the Bush administration. He shows how the largest tax cuts benefit the top 1% the financial pyramid, who are the beneficiaries of a 37% tax cut. Yet the Bush administration claimed that the biggest beneficiaries were the middle class. It deliberately misled the public. Krugman denounced the Bush administration tax cuts, as tax cuts for the rich. They had a limited effect on boosting the economy, They led to the deterioration of the state's fiscal situation. Krugman's criticisms have enormous relevance for the Ma administration.
Compare our fiscal situation with the international fiscal situation. We cannot avoid the fact that the Public Debt Act does not define debt according to international standards. This leads to serious distortions in the debt statistics. Everything else on Taiwan conforms to international standards. Why not the definition of debt? One may wish to argue that tax cuts have brought about many benefits. But one must also confront the revenue shortfalls. These have seriously affected funding for government programs. After all, tax cuts are not a panacea. To revive our economy, we cannot rely exclusively on tax cuts. President Ma worries about the European and American debt crisis. He must not ignore the domestic fiscal crisis. We remind him once again. We look mainly to the executive branch to cope with the financial crisis, as soon as possible, Do not wallow in feel good sentiment. If we refuse to face our fiscal problems, we will soon follow in the footsteps of Europe and the US.