On the afternoon of May 29, the main lobby of the Ministry of Finance was packed with reporters, including a full row of cameramen, waiting for Finance Minister Christina Liu to appear after having tendered her resignation earlier in the day.

Two hours after Liu made her announcement, CommonWealth Magazine conducted an exclusive interview with the embattled official to learn more about the pressures and difficulties she faced in the two months she lobbied for a capital gains tax on stock transactions and to find out what led her to submit her resignation.

"There was a big difference between the Kuomintang (KMT) legislative caucus's version of the bill and the principles of fairness and ability-to-pay on which the original plan was based, so I resigned," she says. "What I care about is that ‘income earners' should pay taxes. The KMT version allows people who have big gains on the stock market to get away without paying ‘income tax.'"

Taiwan currently does not tax the profits made by individuals on stock trades, though it does tax the gains of institutional investors based on a minimum tax system. The last time Taiwan tried to impose such a capital gains tax system was in late 1988 when then finance minister Shirley Kuo, Liu's mother, proposed the idea. Big investors rebelled and sent the market plunging for 19 consecutive sessions, forcing the government to eventually back down and Kuo to resign.

History may be repeating itself, although the market's performance has not been nearly as bad as it was more than two decades ago.

Still, during the debate over the Finance Ministry's capital gains tax proposal, which was systematically influenced by vested interests and guided by the Legislature, major investors, the Taiwan Securities Association, and business federations all brandished the fear of the unknown to scare retail investors and bring to an abrupt end a policy that had received strong support in public opinion polls.   

"The people strongly backed the tax on stock gains. Now it looks like the policy has been taken over by vested interests, making it impossible for a fair and equitable policy to be promoted," said one middle-class individual angrily.

May is the season when salaried workers, who have long been Taiwan's major tax base, file their personal income tax returns. Because every penny earned by these middle-class workers is automatically reported to tax authorities, they have nowhere to hide. That's why 78 percent of all income tax revenues collected in Taiwan are derived from salaries and wages, while only 12 percent come from capital gains on stock transactions.

On the day Liu tendered her resignation, the Alliance for Fair Tax Reform issued a statement revealing its dismay with the KMT lawmakers' version of the tax bill.

"The capital gains tax on stock gains is about to disappear from Taiwan forever, without any possibility of being restored," the group said.

Liu was not worried by some of the catchphrases that popped up after her resignation announcement to define her legacy, such as "four-month finance minister" and "the mother and daughter duo sunk by the stock gains tax."

"I didn't come to the Ministry of Finance to pursue a historical legacy. I just wanted to promote tax fairness," Liu says.

Once this outspoken finance minister step downs, she will be freer to comment on public policy, and we may expect her continued presence in the public arena. The following is an edited transcript of CommonWealth Magazine's exclusive interview with Christina Liu.

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Q: Why did you resign? What was wrong with the KMT version of the tax bill?

A: My attitude toward the current KMT plan is that I respected it, but that doesn't mean I approved of it.

Q: What didn't you approve of?

A: My philosophy is that if there's income, it should be taxed. But this plan simply increases the stock transaction tax. It is designed so that when the stock market's benchmark index is below 8,500 points, no extra tax is levied. If the market rises above 8,500 points, it assumes that investors are making money and requires them to pay more in transaction taxes.

The transaction tax rate is currently 0.3 percent. (Under the KMT proposal), the rate would increase to 0.32 percent when the stock market moves above the 8,500 threshold. What is the logic of that extra 0.02 percent?

I feel the KMT plan simply increases the stock transaction tax by a minimal amount, and I can't accept that, because that is a tax on everybody. People would pay more in tax whether they lose money or make money (on the stock market).

Q: So you're insisting that people should only be taxed when they've earned income?

A: Exactly. I've always said I don't care how much we collect in tax revenue.

They keep telling me that my version of the plan would generate an extra NT$10 billion in revenues and that their version could also collect NT$10 billion, so there was no reason for me to worry. But what I care about is who pays the NT$10 billion.

Here's an example. Under the minimum tax system in place for the past five years, we collected about NT$600 million last year alone. That money was collected from a total of 1,100 people. Even though I don't know who they are, it really moves me when I look at the number because I know each person is somebody who is willing to pay taxes.

Among them, there is one person whose normal income is NT$1 million. That is, his taxable income is only NT$1 million. But he made NT$300 million on the stock market. Using the minimum tax system where the tax rate is 20 percent, the individual paid NT$60 million in taxes.
 
The person voluntarily paid taxes. I feel that behind every minimum tax taxpayer's file stands somebody like that person. So I hope we can create a system that enables Taiwan to take a step toward fairness and justice. I also believe that there are many people in Taiwan who are willing to honestly pay taxes.

We received a truly moving letter from a person who said he made NT$20 million in the futures market, and he even gave us the number of his futures account. He didn't mind other people knowing about it. He strongly supported the government's push for a capital gains tax on stock gains and believed the tax should also apply to the futures market. He was willing to pay NT$4 million in taxes. I still have his letter.

In debating whether or not to set up a system, we have to go beyond simply saying: "We have proxy accounts and fake foreign investor accounts, so we can't promote such a system."

I think this logic is really strange and essentially paints all Taiwanese as proxies and as people who all love to engage in fake foreign investment, which means we simply can't implement such a tax. I can't accept that way of thinking.

At a KMT Central Standing Committee meeting, I openly made an analogy: Simply because a student cheats and uses a really clever method to cheat, that doesn't mean we should cancel the examination system, because students are going to cheat no matter what.

So I feel very strongly that we must have a system that achieves the goal of taxing income in whatever form it exists. But what I see right now is simply an increase in the stock transaction tax.

Who Crafted the KMT Version of the Plan?

Q: Who participated in the discussions of the legislative version of the tax plan?

A: The secretaries-general of the Presidential Office, the Cabinet and the KMT were involved. Presidential Office secretary-general Tseng Yung-chuan, Cabinet secretary-general Lin Yi-shih and KMT secretary-general Lin Join-sane – the three got together with five KMT legislators who had their own versions of the capital gains tax plan, KMT lawmaker Alex Fai, and me, representing the Cabinet proposal.

But because there was no consensus reached at the meeting, it was left to lawmaker Lin Hung-chih, the director of the KMT Policy Committee, to reconcile the different versions, and this latest version was the result.

On Saturday (May 26), I saw in the newspaper the direction in which the KMT legislators' version was headed. It was finalized at a public hearing on Monday.

The KMT plan also requires that capital gains taxes be paid on profits from the sale of all IPO shares. But because of worries about the usually big price spreads on IPO shares, and also fears that even gains on one lot of 1,000 shares would be taxed and thus create an obstacle for IPOs, the plan decided to raise the threshold to 10 lots of 1,000 shares before any taxes would be levied.

Simply put, no shares listed on the main stock exchange or over-the-counter market will be subject to a capital gains tax.

Q: Why is it so difficult to push through a tax on stock gains?

A: When it comes to real estate, a lot of people talk about who sold what house and how much they made. Compared to stock transactions, the property market is much more transparent. Whether or not to pay taxes is another issue. But everybody knows when somebody has made a lot of money, and this can lead to collective indignation, and a desire for justice can arise.

But because there has never been a tax on the buying and selling of stocks, there of course is no information about it. So nobody knows how much money people have actually made on the stock market.

Every year, there are clearly many people making hundreds of millions of Taiwan dollars on the stock market who don't have to pay tax on their gains, but people can't really tell this is happening. They can't really see any capital gains. All that they can see are capital markets.

That is not to say they are not making a contribution, but can't those who have made money pay a little in taxes? Yet they are fiercely opposed to the idea.

Second, they will object by saying that they don't want their identities to be made public or that calculating their gains and losses is too much trouble. But I think a lot of people would have a hard time accepting people making NT$3 million a year on the market saying that they won't pay taxes because they don't want to account for their trades or hire somebody to do it for them.

Also, many countries around the world assess capital gains taxes on securities trading. How do people in those countries keep their accounts? How do they report their taxes? It's pretty clear that there must be answers to these questions. 

With the house tax and the land tax, the Ministry of Finance simply notifies homeowners how much they owe, and everybody pays the amount. (The tax on stock gains could) use an equally simplified method that could be devised if you really wanted to do so. But when (critics) bring up the accounting problem as a reason for opposing the plan, it scares retail investors to death.

The problem is that because big investors are afraid the Finance Ministry will audit them, they could leave the market, sending prices tumbling and putting heavy pressure on retail investors. Retail investors are not worried about being taxed. They're worried about being trapped with devaluated stocks.

Q: Aside from securities companies being against the plan, six major business associations also oppose it. What is driving their opposition?

A: This is actually a big misunderstanding. The business associations are most concerned about the capital markets shrinking, which would impact their ability to raise funds. But of the OECD's 27 countries, only one does not impose capital gains taxes on stock investments. Other economies, such as Hong Kong, Singapore, and South Korea, also have such a system.

I think the biggest obstacle is that society does not really care about this and does not understand how the world developed.

Not Hearing Global Voices

Q: Why not stick it out and fight for your version? Why do you have to step down? There are many more things you could do if you were to stay on, aren't there?

A: Before we wanted to put in the capital gains tax, the Research, Development and Evaluation Commission conducted a poll and found public opinion to be strongly behind the idea. Why did a policy with such a high public support rating end up with this kind of outcome?

The capital gains tax issue is not entirely why I'm leaving. People are not that interested in understanding the real situations behind many things. Look at the capital gains tax and the ability-to-pay principle. Originally, there was a high degree of consensus about this, but then there developed many misunderstandings. When it became hard to clarify these misunderstandings, the policy went awry.

We announced on March 28 that we would discuss a capital gains tax on buying and selling stocks. During the two months from March 28 to May 28, everybody was saying that volume and share prices on Taiwan's stock market were falling. During this period, how much did the stock market's value actually fall? By about 10 percent, roughly the same as in Hong Kong and South Korea. Japan's fell by even more, by between 13 and 14 percent.

So Taiwan's stock market was actually reflecting a number of factors triggered by European stocks, but we never heard this in Taiwan.

I don't think Taiwan is very good at asking questions related to "international comparisons." The more people talked about it, the more they felt that the stock market had lost NT$2 trillion in value, and it might be a good idea to quickly put an end to debate about the capital gains tax plan.

Q: After you leave, will you assume any other public position?

A: No.

Q: Why was it so difficult to communicate with the KMT's legislative caucus?

A: Actually, I really didn't have an opportunity to communicate with them. When I was at the Council for Economic Planning and Development and was soliciting investment from around the world, I often delivered reports at the Legislature, the party's offices, and the Presidential Office. But did you hear of me ever giving a report anywhere on the capital gains tax issue? I gave one at the Central Standing Committee, and the version presented was the Cabinet's final proposal.

Q: How do you handle the criticism and insults directed at you every day?

A: I'm really not very moody. Most of the time, I don't take anything personally. I think I'm OK. I've never felt that being a minister is anything stupendous, or anything unfortunate either. On the other hand, I very much miss having the right to independently speak my mind.

Q: As it stands now, can your campaign for a tax on stock gains be considered a failure? Are you not worried about your historical legacy?

A: I didn't push for the capital gains tax to create a legacy. After becoming finance minister, I put together a task force to look at the government's finances to promote tax reform. The top priority as chosen by the task force's members was to push forward with capital gains taxes. As somebody in this position, I should have made more progress, but it looks now as though it will be very difficult.

Q: Do you have any other plans for the future?

A: No. I just made up my mind to step down today, and I have no plans at all. I'll probably take a break for a while. Right now, I'm just hoping that when I wake up in the morning, my name won't be in the paper.

Translated from the Chinese by Luke Sabatier

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