"I just can’t hold on any longer. The market has been so horrible these past two years. Our operating revenues dropped from NT$250 million to NT$80 million!" said a teary-eyed Candy Tang, chairwoman of the Alexander Group fitness empire. Among those suffering from this unexpected closure are Alexander’s 200,000 members, as well as its 1,500 employees and their families. A widening wealth gap has created a larger number of "working poor" who have jobs with incomes barely clearing the poverty line.

"Taiwan’s unemployment rate has stayed above 3.9 percent, and in the past, its long-term unemployment rate was around 1.5 percent. A reasonable unemployment rate should be around 2 percent. So that means that nowadays, there are an extra 200,000 unemployed. This is a very, very serious problem," says Professor Duan Wei, who formerly served as Director-General of Budget, Accounting, and Statistics in the central government, and is currently director of the Miaoli County Finance Bureau.In Taiwan, a rising number of companies have, like Alexander Fitness, been shuttering their doors. According to statistics from the Ministry of Economic Affairs’ Department of Commerce, the total number of businesses in Taiwan decreased by 18,000 from October 2006 to October 2007; the number of newly established companies also decreased by 12.9 percent over the same period.

90,000 Sink Below the Poverty Line

In Taiwan, more and more people are poor. Over the past 10 years, 90,000 have sunk below the poverty line, from 125,000 in 1998 to 216,000 today. (Table 1)

Yet a larger number of people have become "working poor," who have jobs with incomes barely clearing the poverty line and cannot receive government aid despite living from paycheck to paycheck.

940,000 New Lower-middle Income Earners

Over the past decade, the ranks of lower-middle income earners has grown by 940,000. According to the "Survey of Family Income and Expenditure in the Taiwan Area" by the Directorate-General of Budget, Accounting, and Statistics (DGBAS), the number of lower-middle income earners - with individual annual incomes between NT$260,000 and NT$500,000 - increased from 4,020,000 in 1996 to 4,960,000 in 2006.

Income dispersion in Taiwan has become progressively more disproportionate since 1980, when the income disparity ratio (a comparison of average income among the highest-earning 20 percent of households vs. the lowest-earning 20 percent) stood at 4.17. This ratio reached its peak in 2001, at 6.39, and remained around 6 in 2005. According to the Gini coefficient - an international measure of inequality in income distribution - Taiwan measured a 0.35 in 2001, dangerously close to the 0.4 divide. (The Gini coefficient is defined as a ratio with values between 0 and 1, in which 0 corresponds to perfect equality - equal incomes among each and every household - and 1 corresponds to perfect inequality). (Table 2) Over the past decade, the income earned by Taiwan’s workers as a percentage of GDP has fallen by 4%. Making money with money has become easier, while making money with one’s hands has grown more difficult.

Cheng Shu-li, director of the Council of Labor Affairs Employment Counseling Office, notes that Taiwan’s labor force participation rate remains stable at 57 percent, and the general unemployment rate is being effectively controlled at around 5 percent; nonetheless, wage levels are decreasing. "This is what worries us," Cheng says.

Cause #1: National Wage Average Shows Negative Growth

According to statistics from the DGBAS, Taiwan’s national wage average increased by 14.5 percent in 1990, but it has increased by less than 3 percent every year for the past eight years. It even showed negative growth in 2002 and 2005, after adjusting for inflation. Between September and November of this year, Taiwan’s Consumer Price Index of 4.4 percent was highest among the four Asian dragons.

For most people on the island, income growth has been stagnating over the past decade. And with the increasing number of poor, national consumer-spending power has also slowed.

Rent Rent Rent, Buy Buy Buy

Real spending power among Taiwanese has greatly decreased. This can be seen from announcements or rumors of imminent closures by the likes of Alexander Fitness and Sunrise Department Store, to the countless "For Rent" signs pasted on the corner storefront windows of defunct shops throughout southern Taiwan - be it bustling Jhongjheng Road in Tainan City or hustling Jhonghua Road in Kaohsiung.

Consumer confidence is also in a downward spiral. Mastercard’s latest analysis shows that at only 29.6 percent, Taiwan has the lowest consumer confidence of 13 markets in the Asia-Pacific Region. In first place, Vietnam has the highest consumer confidence, at 94.3 percent. In November, the consumer confidence index by National Central University’s Research Center for Taiwan Economic Development also fell to 63.3 points, its lowest since December of 2001. (Table 3)

Principally, the purpose of economic growth is to improve public living standards and consumption levels. Yet according to DGBAS statistics, the average public consumption growth rate dropped from the steady 34 percent it enjoyed between 1996 and 2000, down to a mere 14 percent between 2001 and 2006.

Cause #2: Supercapitalism

"The number of poor people grows and grows. The country is divided into rich-man’s land and poor-man’s land. And the government is powerless, having employed only short-term policies from the beginning," says Chinese Culture University professor Chung-Hsin Yang, who has done extensive research into the sale of public land. Over the past 10 years, income growth has been stagnant as workers are still waiting for the economy to improve.

The growing disparity between rich and poor is largely caused by the global prevalence of supercapitalism, whereby the unskilled are made poorer and increasingly more disadvantaged.

Council for Economic Planning and Development minister Ho Mei-yueh contends that in the age of knowledge-based economics, money is used to make money. Thus, at this point in history, a widening wealth gap is something to be expected. "If you look at the income gap in Taiwan, it is actually doing reasonably well compared to other countries," she argues. "In Japan, the household income for the top 20 percent of earners was 6.6 times the comparable figure for the bottom 20 percent, while in Taiwan the ratio is 6.01 times higher."

But Sun Ke-nan, an associate professor in the National Taipei College of Business’s Department of Finance and Tax Administration, declares, "In the 1990s it was five times higher, now it’s six - we’re going downhill."

US magazine Newsweek reports that this disparity has become a global problem, especially in emerging markets that have embraced capitalism, such as Brazil, China, India and Russia.

"The top 10 or 20 percent is pulling away from the rest because of education, job skills, and connections," says Robert Reich, author of the book Supercapitalism. "If you are well educated and well connected, the global economy gives you an ever-greater market for your insight."

Globalization has sped up the flow of wealth, human resources and materials, and it has liberalized economies and markets. But one byproduct of this process is the wealth gap.

60,000 Rich Taiwanese Own Half the GNP

Globalization has given rise to many new wealthy Taiwanese. According to the Merrill Lynch Asia-Pacific Wealth Report, Taiwan had 66,000 wealthy individuals in 2006, an 11.9 percent increase over 2005. With an average personal asset value of US$3.3 million, wealthy Taiwanese are collectively worth nearly US$220 billion. Taiwan had 66,000 wealthy individuals in 2006, an 11.9 percent increase over 2005, collectively worth nearly US$220 billion.

According to Global Insight Inc., Taiwan’s economic growth rate in 2006 was 4.9 percent, higher than the world average of 3.9 percent. But the average Taiwanese did not feel it at all.

"Consumer prices have risen by 5.3 percent over the past six years, while real wages have increased by only 2.9 percent. You tell me how the average person can feel any advantage," muses Dr. Chi Schive, a professor in the Shih Hsin University Department of Economics and former president of the Taiwan Academy of Banking and Finance.

Cause #3: Tax Policy Favors the Rich

As many emerging economies robustly implement supercapitalism, those in power in countries embracing free market competition are unable to make effective policy decisions to minimize the negative impact of globalization on the disadvantaged salaried class.

Newsweek contends that while globalization and the knowledge economy are contributing factors to the wealth gap, its main cause arises from market-led governments with overly right-wing policies.

As supercapitalism goes global, governments around the world have become increasingly right-leaning and market-friendly, Newsweek suggests, as regressive tax regimes and "privatization policies that have funneled public resources into private hands" invariably lead to inequity.

Such is unquestionably the case in Taiwan, where the tax policy puts the salaried class at a disadvantage while favoring the wealthy.

In order to support exports, the government gives large tax incentives to the export-oriented high-tech industry.

High-tech Businesses Enjoy Five-year Tax-exempt Status

High-technology enterprises enjoy tax incentives in the areas of R&D, automation, and human resources. They are also classified as belonging to an important strategic industry, and thus enjoy five years’ tax-exempt status. According to Sun Ke-nan, as much as NT$120 billion in government revenues, about one percent of the GDP, is lost due to this policy. "It is a dangerous situation for Taiwan’s current investments to be concentrated in the high-tech arena," says Chung-Shu Wu, a research fellow at the Academia Sinica’s Institute of Economics.

Electoral culture has always meant close ties between government and business. "Neither major party in this bipartisan system has levied the proper amount of tax from the rich when in power," one analyst reveals. In Taiwan, 75 percent of the income reported in individual income tax returns comes from salaries and wages. Not a single penny of workers’ wages is tax-exempt.

In Taiwan 75 percent of comprehensive income taxes come from taxes on salaries. Conversely, the affluent who are able to buy real estate and financial products, and make money off money, pay little in the way of taxes. Even with a progressive tax scheme, the government fails to tax those who should be taxed.

Salaried Citizens Get No Tax Breaks

Sun points out that while wages result from labor, not a single penny of labor income is tax-exempt.

According to data given by the Executive Yuan’s National Statistics General Report for 2007, Taiwan’s taxation system is giving way to an ever more disproportionately large percentage of income tax (comprehensive income tax and enterprise income tax). This percentage has grown from 12.2 percent to 40.4 percent in the 10 years between 1996 and 2006, while other sources of tax revenues have been in decline. During the same period, business taxes dropped from 18.1 to 14.85 percent, and land taxes fell from 13.2 percent to 8.2 percent.

In addition, while the number of households paying taxes is decreasing year by year, the total number of households with an annual income exceeding NT$5 million who don’t have to pay taxes has grown by 46 times since 1998.

Stock and Land Transactions Hard to Tax

"You’ll find that the rich are getting richer on non-labor capital earnings that are largely non-taxable," says ChiChang Hsu of Ernst & Young.

Professor Chung-Hsin Yang points out that many wealthy people are partial to buying real estate. Real estate taxes in Taiwan are based on the publicly declared land value, which is, on average, less than 50 percent of the market value.

Howard Kuo of PricewaterhouseCoopers tells us that "income from real-estate transactions is a malignant tumor causing unfair tax advantages in Taiwan."

Another major portion of the wealth accumulated by the wealthy comes from capital gains.

The Taiwan government charges only a 0.3 percent tax on securities transactions, levies no taxes on capital gains, and taxes year-end stock bonuses at the par value of NT$10 per share, though many enjoy a much higher share price.

Sun points out that the greatest problems in Taiwan’s tax system is the lack of fairness, adequacy and efficiency: "The government needs to be efficient and incorrupt, so that people will be willing to pay taxes."

In the early years, many attempted to excise these two tumors. Knowing them to be problem areas in the tax system, former finance minister Wang Chien-shien planned on imposing taxes on land transaction income, and Kuo Wan-rong declared a securities transaction tax. Both stepped down shortly after these announcements.

"From this, one can see the immense influence that government-business connections, big business groups, and wealthy people exert on policy," says Chien Hsi-chieh, spokesperson for the Tax Reform Alliance.

The American billionaire investor Warren Buffet once lambasted the Bush administration, stating, "Frankly, an economy where my receptionist pays a lot higher tax rate than I do does not strike me as a just economy." A staunch critic of the US tax system, he points out that because of unfair advantages granted the wealthy, income from the top 5 percent of wealthiest Americans now constitutes 21.2 percent of total GDP - a post-WWII 60-year high that clearly indicates a widening wealth gap.

Tax Dearth Leads to NT$4 Trillion Deficit

Because many wealthy people avoid taxes, and labor income is increasing very little, the government is hard-pressed to cover its annual expenditures by relying on income tax alone. The fiscal deficit stands at NT$500-600 billion, and the cumulative government deficit is now at NT$4 trillion.

As a result, Taiwan’s public taxation income (tax burden), at only 13 percent of GDP, is the lowest among the four Asian dragons. (Table 5)

"Tax revenues constitute 13 percent of GDP, while government spending constitutes 18.8 percent of GDP - it’s just not enough to cover costs," says Sun.

"Because of an over-emphasis on relations with business, the government has led the country down the path toward an extreme form of capitalism. Extreme capitalism allows a small minority of moneyed people to control everyone else, putting an extreme emphasis on efficiency, and ignoring fairness," says Jefferey Bor, an associate professor in the Chinese Culture University Department of Economics.

The Long-term Impact: No Way Out for the Poor

This unfair tax advantage not only negatively impacts future wealth distribution, but also future levels of education.

According to a survey by the Taiwan Fund for Children and Families, out of every five poor families in Taiwan, one family will allow its second generation to sink into the "cycle of poverty," because they are unable to provide them with the necessary economic and educational resources.

Over a decade ago, at the International Chamber of Commerce Annual General Meeting in the Philippines, Professor Yang visited a high-class ethnic-Chinese neighborhood in Manila.

An exclusive road led through the community, which was guarded by a series of gates. Inside, there was a private heliport, and cemeteries shaped like villas. "It was unbelievable - even the dead lived in villas, and every so often families would gather in the living rooms of their villas to play mahjong." The memory of that extravagance made a lasting impression on Yang. "Not far away lay a ghetto, where children went without clothing. Now, that’s an M-shaped society."

No one wants that to be Taiwan’s fate 20 years down the road.

Translated from the Chinese by Ellen Wieman