Why Implement Tax Reform?
United Daily News editorial (Taipei, Taiwan, ROC)
February 14, 2012
Summary: The new cabinet has been in office one week. Tax reform will undoubtedly become its most closely followed policy issue. The government's endless flip-flopping reflects the pressure it is under. Last Saturday, President Ma finally announced his tax reform policy, which will be based on "fairness and justice, geared to one's ability to pay." This raises the question, "Why implement tax reform?"
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The new cabinet has been in office one week. Tax reform will undoubtedly become its most closely followed policy issue. Control Yuan President Wang Chien-hsiuan strongly recommends a tax increase. Kuomintang legislator without portfolio Tseng Chu-wei walked out without addressing the capital gains tax issue. The securities transaction tax, profits tax, and "new tax every day" on the rich, remain unresolved. The government's endless flip-flopping reflects the pressure it is under. Last Saturday, President Ma finally announced his tax reform policy, which will be based on "fairness and justice, geared to one's ability to pay." This raises the question, "Why implement tax reform?"
The government has offered countless reasons for tax reform. For example: The tax system must be reformed because government revenue is inadequate. The tax system must be reformed because economic development demands it. The tax system must be reformed because it is too messy. The tax system must be reformed because the election is over. The tax system must be reformed because public resentment must be appeased. Regardless what justifications are offered for tax reform, one must never reform merely for the sake of reform. One must never reform on a selective, piecemeal basis. One must never pander to populist sentiment. One must never abandon one's principles and ideals. Especially since current tax reform program was begun only after President Ma had already won a second term. President Ma is not under any reelection pressure. He has an excellent opportunity to ensure that the reforms are sound. The financial tsunami has highlighted the increasing wealth gap and social opposition between rich and poor due to excessive capitalism. Tax reform is the social consensus. There is no excuse to postpone it or shrink from it. It represents the hopes of a majority of the community. Tax reform will be a critical part of President Ma and the KMT's legacy.
Compare the current tax reform program to previous tax reform programs. Current tax reform has two causes. The first is excessively low tax rates. The tax burden rate is the ratio of taxes to gross domestic product (GDP). Last year it was 12.8%. It has risen from the global low of 11.9% two years ago. But it remains low nonetheless. The tax burden rate is merely an indicator. It represents the effect, not the cause. Problems with the tax burden rate cannot be resolved by uttering the magic word, "tax increase." Otherwise raising the business tax rate by one percentage point would increase income by about $50 billion dollars. The tax burden rate would also immediately increase. One need not even amend the law. Wouldn't that be so much simpler? The sales tax does not distinguish between rich and poor. It is a consumption tax. The bulk of the tax burden is born by the proletariat. Such tax increases are inconsistent with President Ma's "fairness and justice, geared to one's ability to pay."
The tax burden rate measures the national tax burden. It also measures the soundness of the financial base. It reflects the impact of taxation on economic activity. In recent years the national tax rate has decreased. This means the national tax burden is lower. But the fiscal base has also become weaker. This is harmful to long-term development. More importantly, the gross domestic product and taxes cannot interact. They may even have become delinked. The tax system has a major problem. The economy has grown, but the tax rate has not grown with it. This affects more than fiscal income. It undermines the tax system's ability to stabilize the economy. It is even a source of unfair income distribution. The lower tax burden rate causes serious problems. This is why the tax system requires study and reform. Fiscal income is only one reason for the problems we face. It is not the sole reason. It is not the primary reason.
Another reason for tax reform is to achieve "fairness and justice." The pursuit of fairness and justice may seem like a given. But it only became an international issue after the financial tsunami struck. The World Economic Forum in Davos, Switzerland last month called the unequal and unjust gap between rich and poor a significant risk to economic development, It called on nations to give it their full attention. In order to encourage investment and promote development on Taiwan, the government once provided tax relief. That has gradually been phased out. But exceptions remain. To attract foreign capital following the financial tsunami, the government implemented massive cuts for inheritance taxes, gift taxes. and income taxes for profit-making enterprises. The deeper problems remain. The tax system increasingly benefits the rich. President Ma likes to cite statistics. But he should keep one number in mind. According to income statistics, over the past five years the average tax rate for the highest income group, was 4.18%, the lowest in three years. The rate for the lowest income group was 2.4%, higher than when the Ma administration first took office. The income gap between rich and poor is widening. The tax gap between rich and poor is narrowing. This is a crowning irony for a tax system ostensibly geared on one's ability to pay.
Therefore the unequal and unjust provisions of the current tax system must be corrected, This is the key to achieving equality and justice. This is the direction we must take. Tax reform has four principles. One. A review of the tax system must not be confined to any specific tax. The income tax system is the best showcase for a tax system geared to one's ability to pay. Naturally it is going to be the focus of any review conducted, But capital gains taxes include the income tax and land taxes. New economic behavior and taxes must be harmonized. This too requires review, to avoid robbing Peter to pay Paul. Two. The administration must look forward. Some scholars say tax reform studies can never be anything but incomprehensible. They must nevertheless make them comprehensible. One need not waste time re-convening a fiscal reform conference. But past research is outdated. It may serve as a starting point. But discussion and communication are essential for any conclusion. Three. Reform must not be limited to amending the law. One can also promote reform through administrative means. One need not wait for tax reforms before acting. For example, real estate and land taxes should be determined on the basis of actual market prices. Four. Less talk. More action. Once the decisions have been made, one should "just do it." The "new tax every day" approach forces the administration to waste time explaining everything to everybody. This is pointless, and is unhelpful to tax reform.