Taiwan Needs Radical Tax Reform
In this exclusive interview, tax reform expert Ping Wang makes the case for a long overdue overhaul.
Taiwan Needs Radical Tax ReformBy Sara Wu, Monique Hou, Hsiang-Yi Chang
From CommonWealth Magazine (vol. 549 )
Following more than a year of deliberations, a high-level task force of finance experts and business leaders unveiled a proposal for a radical overhaul of Taiwan's taxation system on June 6. The group under the auspices of the Academia Sinica brought together five former finance ministers and renowned entrepreneurs such as TSMC Chairman Morris Chang and Acer Chairman Stan Shih.
Their proposed tax reform package sent a clear and firm message: Taiwan's taxation system has been unfair for a long time and has failed to keep up with international trends. The task force came to its conclusion after comparing comprehensive domestic economic figures with international taxation data and practices. It calls on Taiwan to completely overhaul its tax regime and implement the resulting changes as soon as possible. The package calls for an abolishment of the dividend imputation scheme in favor of separate individual and corporate income taxes, as well as for a hike of the capital gains tax on land and property transactions and the consumption tax.
Key figures behind the task force's tax reform package were its convener Ping Wang, Washington University economics professor and currently visiting scholar at the Academia Sinica, and its secretary general Peng Shin-kun, distinguished research fellow with the Institute of Economics at the Academia Sinica. Under the duo's leadership and coordination, the task force members from industry, government and academia gradually forged a consensus and set a new general direction for Taiwanese tax reforms.
Though he hails from Taiwan, Ping Wang has worked with the U.S. Federal Reserve Board and the National Bureau of Economic Research during his career as an economist. He also played a key role in hammering out tax reforms in the U.S. state of Missouri. Wang returned to his native Taiwan this time driven by a strong sense of mission to "give my all and do my best for Taiwan." Wang believes the shortcomings of Taiwan's taxation system are its deviation from international taxation practices and its neglect of tax fairness principles, both longtime ills that need to be thoroughly addressed.
Following are excerpts from Ping Wang's exclusive interview with CommonWealth Magazine:
My teacher, Academia Sinica research fellow Liu Ta-chung, once established a perfect income tax system for Taiwan. It was not only leading in Asia at the time, but also provided the state with sufficient resources to promote a nine-year compulsory education program. However, in the end, Taiwan was unable to reform and adapt its taxation system in line with the domestic and international economic situation and changes in industrial structure. Instead, Taiwan tried to stimulate the economy through continued tax cuts or piecemeal reforms that treated the symptoms rather than the underlying causes. As a result, we have a taxation system today that not only fails to boost economic development and industrial investment, but also severely lacks fairness and undermines government finances. It is high time for restructuring and complete reform.
In returning to Taiwan this time to propose an entire package of reforms for Taiwan's tax code, I hope to emulate my teacher Academia Sinica member Liu Ta-chung. I have to give my all and do my best for Taiwan.
The Three Ills of Taiwan's Taxation System
If we look at Taiwan's current tax system against the backdrop of international taxation trends, we can identify the following three major problems: First is the integrated income tax (corporate income tax and individual income tax), which has been discordant with international trends for a long time. Right now, only a handful of countries around the globe such as New Zealand and Mexico still use a system that allows deducting corporate income taxes from individual income tax.
Actually, the mainstream in current global taxation holds that corporations and individuals should be taxed separately, because they enjoy different resources, for industry and for the nation as a whole (i.e., industrial policy and basic civil infrastructure, respectively).
The lion's share of dividend income is concentrated in the hands of rich people, the top 5 percent, if not 1 percent, of high-income earners. In Taiwan's case, for instance, 90 percent of taxpayers would remain completely unaffected if the integrated income tax system were completely abolished immediately. Therefore, the argument that the integrated income tax prevents taxpayers from being 'fleeced twice' does not make sense at all. In fact, large shareholders and capitalists are the only beneficiaries of the integrated income tax.
Second, internationally Taiwan is a rare exception in that its capital gains tax, which is mainly levied on land, is not calculated based on market value. Moreover, the tax rate is far below the international level. Even in the United States, which has comparatively low taxes for an advanced country, the property tax plus the property transaction tax add up to an average of nearly 15 percent. In comparison, we performed a preliminary calculation of Taiwan's property tax, and it actually does not even reach 0.001 percent per year, while the capital gains tax on property transactions stands at just 1.65 percent.
Given that the tax burden from capital gains is so low, the income tax burden has been shifted, of course, onto the shoulders of the broad class of salary earners, whereas the rich, who are truly able to make money from capital transactions, enjoy the privilege of low taxes. In that regard, Taiwan has long turned its back on tax fairness and the "ability to pay" principle.
On top of that, the income tax on profit-seeking enterprises in Taiwan has been constantly adjusted downward and combined with various tax breaks and tax cuts. As a result, the corporate tax burden today counts among one of the lowest in the world. Nevertheless, corporate investment in Taiwan has not increased over the past years, nor have the expenses saved from corporate tax breaks been fed back into employee salaries. Unfortunately, "cutting taxes to save the economy" is only an empty slogan that undermines state finances and social justice.
Since the early 1990s, the advanced nations have gradually begun to adjust and reform their taxation systems in response to changes in the way wealth is generated under the influence of globalization, from being primarily generated by salaries and wages to mainly returns on capital investments. They have countered cross-border tax evasion by the super-rich with tax treaties as well as cross-border tax collection and tax investigation. In contrast, Taiwan in recent years still seems to believe in the old thinking that tax cuts can boost investment and stimulate the economy. At the same time, capitalists have dominated public debate, so that many people have been made to believe that heavier taxation would deal a severe blow to the economy.
International experience shows, in fact, that as long as there is sufficient communication and with comprehensive complementary programs in place, tax reform will not affect the national economy at all. On the contrary, once state coffers have been replenished, it helps the nation's long-term development, provided the government is able to utilize its finances more efficiently.
The Academia Sinica's tax reform proposal outlines comprehensive, principled suggestions regarding the many problems mentioned above that have plagued Taiwan's taxation system for a long time. I hope Taiwan moves in this direction and that the government and private sector can forge greater consensus, so that taxation can become fair again and state finances are sustainable too.
Translated from the Chinese by Susanne Ganz
Academia Sinica Proposals on Taxation Policy Reform:
1. Reinstate separate personal income and corporate income tax systems: tax corporate and personal incomes separately.
2. Bring cost of property ownership to levels that are more realistic: raise the tax rate on non-owner-occupied homes, impose a combined tax on land and houses, and use market value as the basis for capital gains and property taxes, levy higher taxes on foreign nationals.
3. Raise the corporate income tax, raise the value-added tax on luxury goods.
4. Reform the commodity tax system and structure, establish a green taxation system, and integrate it.
5. Reassess the rationality and fairness of revenue sharing between the central and local governments.
6. Strengthen tax compliance and penalty mechanisms, prevent the further aggravation of tax avoidance and tax evasion, protect tax base stability.