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216 Taiwan Development Perspectives 2009 I. Balance among Diversified Goals Taiwan has to take its international competitiveness into consideration when it develops its tax design. There exists a widening poverty gap exists and taxation contributes less to the improvement of income distribution than social welfare. Consequently, consideration should be given the impact on social justice when tax reform is devised. The key points of current tax reform shall be a balance struck between economic development and national competitiveness on the one hand and social justice and sustainable environment on the other. They are the four major goals – social justice, international competitiveness, economic development, sustainable environment – which the newly established Tax Reform Council has to achieve. Indirect taxes are a main source of revenue for social welfare under an indirect tax system in the West. As emphasis is placed on social justice, income tax rates have been set unduly high to create detrimental impact on people’s working willingness and a nation’s international competitiveness. In contrast, low indirect tax rates exert disadvantageous influence on savings and capital formation, which, in turn, hurts long-term economic performance. Most Western countries have followed this Reaganomic tax reform trend, endeavoring to lighten the burden of income taxes and raise the ratio of indirect taxes. Properly designed indirect taxation must aim at raising consumption taxes or sales taxes to stimulate savings and capital formation as well as at promoting long-term economic development and social justice by making tax exemption on necessary consumer goods and decreasing regressivity. On the contrary, lowering income tax rates, coupled with few tax cuts and a broadened taxable base, can increase people’s willingness to work, savings and investment as well as promote equal income distribution. The ratio of direct tax rates has been lowered in developed countries since 1990. Ireland provides the most illustrative example. It lowered the corporate tax rate to 12.5 percent but VAT (value added tax) is maintained at 21 percent. While income tax rates in most European countries have been lowered substantially, VAT is still very high. Singapore rescinded estate and gift tax in 2008 but raised GST(goods and services tax) from 5 percent to 7 percent in 2007. II. Indirect/Direct Tax Ratio in Taiwan’s Tax Reform The highest bracket in Taiwan’s consolidated income tax rate has been lowered from 60 percent in early 1980 to 50 and then to 40, causing serious taxable base erosion through tax reduction and exemption. It is futile to expand the taxable base. VAT, the most important among indirect taxes, has been kept at 5 percent, the world’s lowest. On the other hand, Taiwan’s tax burden (the ratio of taxation to GDP) has been kept at a very low 14 percent. It contributes to the taxable base erosion. Rates of tax on for labor income are higher than those for property income or capital gains. The key points of current tax reform shall be raising the ratio of indirect taxes, lowering the ratio of direct taxes and forgoing selective tax cuts to widen the taxable base of income taxes to allow the public to share the benefits of a broadened taxable base. Lower income tax rates can reduce the tax burden on labor income and improve income distribution as well as raise Taiwan’s international competitiveness. On the other hand, high estate and gift tax which is unfavorable for international competitiveness shall be lowered. Although the current estate and gift tax rate requires high-income earners and wealthy property owners to pay more, raising the amount of tax exemption can reduce the impact on the middle class, cause less taxation loss and lower auditing and levy costs. On the contrary, lowering tax rates will create a bigger negative impact on wealth distribution and more taxation loss. III. Measures to Cope with Economic Recession The U.S. financial meltdown has touched off a
Tax Reform Giving Consideration to Equity and Competitiveness 217 worldwide economic crisis, to which Taiwan is not immune. One most important task facing Taiwan is how to induce an inflow of the capital that has flowed out over the past few years. For one thing, the Tax Reform Council has to try to “win over money” from abroad. Plans are afoot to lower estate and gift tax to 10 percent across the board. A draft Regional Financial Service and Capital Management Center Act, which is now under review, provides tax cuts for the capital which fled abroad before July 2008. Those who will open exclusive accounts with the center yet to be inaugurated shall be entitled to inheritance tax exemption for two to four years and preferential income and gift tax cuts. The proposed measures are not without problems, however. There are many factors contributing to capital flow in and out. Taiwan is an “open” island economy in which “money flees faster than humans.” As Taiwan is facing difficult problems, domestic as well as arising from tensions with China, it is necessary to make a thoughtful analysis of the critical factors to arrive at “right solutions.” Taxation little affects capital movement. As Taiwan’s tax burden is at 13.5 percent, the world’s lowest, there leaves a very much limited possibility for further lowering tax rates and only “structural” adjustment can be made in tax reform. There is no direct relationship between estate and gift tax and capital outflow. The government plans to offer tax exemption by putting a proposed Regional Financial Service and Capital Management Center Act into force. That indicates it is not confident that the lowering of estate and gift tax to 10 percent can induce an inflow of the capital which has already fled. The current “capital flight” doesn’t mean that a crisis exists in Taiwan’s “liquidity.” Lowering estate and gift tax might attract a capital flow back, though it cannot guarantee any improvement in Taiwan’s national competitiveness. If capital flowing back is ploughed into investment a limited supply of real estate or stocks, it is necessary to heed whether “economic bubbles” thus caused in the early 1990s will emerge again. Investment in manufacturing must also be given a similar tax holiday. All the measures to be taken to tide over the current economic crisis are “temporary,” “transitional” and “conditional.” While estate and gift tax is lowered to 10 percent, bylaws have to be enacted to ensure that the limited tax holiday is not abused. For instance, beneficiaries may be required to sign a “voluntary agreement” under which they will be entitled to low tax rates for a specified period of time. Should they break the promise, all the tax savings would have to be returned to the national treasury. A “dynamic adjustment mode” may also be introduced. Under this measure, the U.S. Congress may reduce estate tax for a period of time, at the end of which legislative action will be taken to continue the reduction or make the reduction permanent. It is through these bylaws that the government’s rescue and bailout measures will not contradict the midterm or long-term planning the Tax Reform Council undertakes. Only making these measures conditional can the government win public support for them. Moreover, the government can better maintain financial stability and promote social justice as well as Taiwan’s national competitiveness when the economy is back to normal.
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CONTENTS Preface Overview ix xi Foc
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Agriculture and Fisheries Impact of
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CHUANG, Yih-chyi( 莊奕琦 ) Pro
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TAN, Ching-yu( 譚瑾瑜 ) Associ
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enth effort on the part of the Foun
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ills pertinent to parliamentary ref
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