Christina Liu and Lin Chuan
Straight Talk on Tax Code Reform
In exclusive interviews, two former finance ministers speak out on Taiwan's unbalanced tax policies, the daunting obstacles in the way of reform, and what is needed to cure the island's chronic revenue shortfalls.
Straight Talk on Tax Code ReformBy Hsiang-Yi Chang
From CommonWealth Magazine (vol. 506 )
Dr. Christina Liu and Lin Chuan are two former finance ministers from opposite sides of Taiwan's political spectrum, the former from the "blue camp" (the KMT), the latter from the "green" (the DPP). Liu resigned less than four months into her tenure as minister after refusing to support a draft capital gains tax bill sponsored by the KMT legislative caucus, a bill that was at odds with a ministry-sponsored capital gains tax proposal. While serving as finance minister, Lin pushed through the "alternative minimum tax" scheme, in the process making a name for himself as the first finance minister in nearly two decades to "hike taxes without sacrificing his Cabinet post."
The political careers of the two would appear to be polar opposites, but they both started out as professional finance academics, and both had a prominent public image as reformers during their tenures as finance minister.
How should future tax reform proceed in a Taiwan that has become a "low-tax haven for the wealthy"? Current finance minister Chang Sheng-ford declined CommonWealth Magazine's request for an interview on the grounds that he "must soon appear before the Legislative Yuan for an interpellation session on the Local Government Resources Allocation Act."
The two former finance ministers, perhaps because they've been freed from the political milieu, were willing to speak candidly on their views regarding the direction of Taiwanese tax code reform.
Following are highlights from the interviews.
Dr. Christine Liu: Face the Facts, Reform Requires Resolve
Over the past several years, it's become increasingly difficult to put together a comprehensive national budget, and the problem of finances operating in the red becomes more serious by the day. Yet discussion of Taiwan's deteriorating financial situation seems to remain plagued by "differing opinions" in academia, among the general public and even within government agencies. Yet the objective fact is this: according to international standards, Taiwan's national debt (including hidden liabilities) has long since surpassed 100 percent of gross domestic product. There is no room for subjective interpretation of this issue and even less room for dalliance.
How is the nation's deteriorating financial situation to be improved? As regards controlling spending, within the current national budget, statutorily mandated outlays (various fixed government expenses and legally prescribed spending as passed in the Legislative Yuan) now account for 70 percent, so there is limited room to find savings there. In considering opening up new sources of revenue, increasing tax revenues seems the relatively more feasible course of action.
If taxes are to be increased, just whose taxes should be increased? I think the vast majority of people would say that individuals and businesses with relatively high incomes should pay more rather than evenly dispersing an increase across the general population.
To cite an example, after I resigned as finance minister over the capital gains tax issue, friends laughed that I was "not well-versed in the ways of officialdom." They asked me why I had not simply raised the business tax one percent, as there would have been far less resistance to such a measure, and it would have added NT$50 billion in tax revenues to the national treasury, NT$10 billion to NT$20 billion more than the version of the capital gains tax bill we had proposed at the time. But any increases in the business tax rate will ultimately be passed on to the consumer. That would have been inconsistent with the ability-to-pay principle.
I've always believed that collecting a little more tax revenue from those with the ability and the means to extract high returns from the capital markets and real estate transactions is now an important and necessary policy for the establishment of a fairer system of taxation.
In fact, the so-called "rich people" are not necessarily looking to avoid taxes or dodge taxes. Under the individual income tax alternative minimum tax system, for example, in the five years since implementation of the alternative minimum tax scheme, each year there have been more than 1,000 taxpayers meeting the criteria who voluntarily reported their incomes and paid their taxes in good faith. Among those, the top taxpayers in terms of the amount paid in many cases reaped windfalls in the hundreds of millions from trading in unlisted securities alone, thus making them liable for tens of millions in capital gains taxes.
During my time as finance minister I had occasion to review the tax files on these individuals, and although the total taxes paid by these 1,000 taxpayers were less than NT$600 million, not a huge influence on total national tax revenue, all indications were that they had willingly reported their incomes in good faith and had not sought to establish dummy accounts to dodge taxes. I was quite moved by this, as it was unlike the stereotype of the rich guy who always takes pride in his ability to avoid or evade taxes.
I've always hoped that more and more Taiwanese would happily pay their taxes in good faith. But the inescapable reality is that this ideal will only come to fruition if there is reform to establish a more equitable tax system.
For example, Taiwan took its first steps in the direction of reforming the land tax system with the recent actual assessed land value registration. But the administration must absolutely refuse to be satisfied with just that and should get right to work on formulating a clear timetable for the second step and third step of reform.
If we are to establish a more equitable tax system, I think that as long as there is a consensus in society and majority public opinion support, government agencies need to be more responsible and show a little more determination and not allow intimidation from outside interest groups to tie their hands.
Lin Chuan: Hike Taxes, but You Still Have to Collect
Realistically speaking, Taiwan is a relatively small economic entity dependent on external demand. Open markets, liberalization and a certain tax competitiveness must be maintained in order to have a shot at a place in the global economy.
But this is unequivocally not an excuse for tax cuts or avoiding tax system reform.
The problem is that from the individual up to the corporation, whether in terms of investment or income, it's all long since gone global. In proceeding with tax reform, the common global phenomenon of "taxes flowing to the lowest point" must absolutely not be overlooked. You can raise taxes, but you have to be able to actually collect those taxes, or it's pointless.
I'll say flat out that any reform of the tax system will always be confronted with two opposing voices. Take the alternative minimum tax I pushed through as finance minister for example: One of those two voices came from the corporate world, commercial groups and what are commonly referred to as "rich people." Tax reform was directly damaging to their interests. The other voice came from academia and civic groups who often call for the greatest possible extent of fairness in the tax system.
It's been my experience that overly favoring either side makes successful tax reform quite difficult. Tax reform should be a comprehensive, but gradual, process. You can't just treat the superficial symptoms of the problem, or you'll only end up with fragmentary reform. But you can't be overly idealistic either, looking to create utopia in one fell swoop.
Right now, public support for tax system reforms relevant to capital gains (taxes on income from securities transactions and increases in property values) is quite high, but the interests that this will involve are enormously complex and pervasive. The government cannot rush into rubber stamping anything that will terrify everyone.
I think the first step toward relevant reform can start with consideration of a principle of "increasing the tax base to the extent possible while reducing tax rates to the extent possible." There must be absolutely no backtracking on a fair ability-to-pay principle. But in the early stages of pushing for more taxes, the reality is that low tax rates or broader deadlines must be employed to decrease resistance from the business community.
Furthermore, in the last decade or two, everyone from corporations to individuals has long since become accustomed to spreading out their investment capital around the globe to reduce their tax burden. But in contrast, the abilities of government tax collectors to get a handle on overseas capital flows don't seem up to the task. In pursuing tax reform, there can be no substitute for actively seeking to conclude tax agreements with other nations to establish a mechanism for transparency of overseas financial transactions and other fundamental issues; otherwise, whatever [tax reform] regulations we pass will prove ineffective, and fair taxation will still be difficult to achieve.
Transalted from the Chinese by Brian Kennedy