Saturday, July 03, 2010

Chen Shui-bian Died for Your Sins: Land, Taxes, and Inequality in Taiwan

And Aaron shall lay both his hands upon the head of the live goat, and confess over him all the iniquities of the children of Israel, and all their transgressions in all their sins, putting them upon the head of the goat, and shall send him away by the hand of a fit man into the wilderness.

Outsiders know Taiwan primarily through its computer industry, but few understand that the local political economy runs on land speculation and development. Commonwealth magazine recently had a great issue that explored some of the links between inequality, land development, taxation, and income in Taiwan. In an article discussing land speculation, it described why government land is auctioned and then developers sit on vacant lots for long periods, observing:
Taiwan's convoluted property tax system also keeps the cost of holding vacant lots quite cheap.

Land in Taiwan has four different values. Aside from the actual market price, there is the "publicly announced land value," which is adjusted once every three years, the "reported current land value," which is the value reported by landowners used to calculate the land tax and can be up to 20 percent higher or lower than the publicly announced land value, and finally the "assessed present land value" on which land value increment taxes (similar to capital gains taxes) are based.

Taiwan's houses also have two prices -- the actual market price and a "standard unit price for housing construction" set by the tax revenue offices of each local government for residential units under their jurisdiction. This publicly assessed price has not been adjusted for 27 years. Legislator Lai Shyh-bao estimates that the current "standard unit price" is roughly only one-fifth of the actual market value.

The lack of transparency in real estate transactions has also contributed to strange practices. Jwo explains that many property transactions in Taiwan involve three contracts. There is a "public contract," drawn up to show government tax offices, a "private contract," which lists the actual terms of the deal, and a "fake contract," to use to apply for a mortgage.

Why are local governments so impoverished in Taiwan? One reason is the 18% interest on government employee retirement accounts, as I have noted before. But another is the low assessed values of property in Taiwan. These cannot be changed because political campaigns in Taiwan are, pound for pound, some of the world's most expensive. The article observes:

An employee of a prominent company, who is active in government-private sector associations, says that in today's political environment, only the profits on land speculation are sufficient to support an elected official. "Any election campaign now requires at least NT$100 million. Politicians won't have enough if they only rely on cuts from public works projects," the source asserts.

Because of these complex symbiotic ties between politicians and the business community, local governments never adjust the standards for the "publicly assessed land value," "assessed present value," or the "housing assessment value," all of which they have the authority to change without amending any laws at all. NTU's Hua vividly recalls the reaction he got when he suggested to a county chief that he increase the publicly assessed values of land and houses to ease the county government's financial woes.

"He shook his head vigorously and said to me, ‘You're an academic who doesn't have to deal with reality. I still have an election ahead. No way. No way.'"

Because local politicians are deeply involved factions that are up to their ears in The System of land speculation and development that underpins Taiwan's local political economy, it cannot be changed. Perhaps when Chinese developers start to muscle in on local land development, Taiwan's local faction politicians will fight for raised taxes as a defensive measure. Yet the effort that the KMT has spent over years in preventing factions from operating at the national level and keeping them confined to their local areas may mean that Taiwan's localities lack the institutional frameworks and skills necessary to carry out national-level politics of this nature.

The article notes that among the regions of Taiwan, in Taipei the tax on land is relatively closer to the actual value...
Chang-I Hua, an adjunct professor at National Taiwan University's Institute of Building and Planning, argues that the problem with Taiwan's land tax system is not low tax rates but rather the tax base. Of all local governments, Taipei City's present assessed values most closely approximate actual market prices but are still about 30 percent below market. The publicly announced land value is 60 percent below market value. Consequently, while land and housing tax rates may seem high, homeowners' tax burdens are only about one-tenth that found in the United States, according to Professor Hua.
One reason Taipei lives high on the hog is that the local government can actually extract something resembling meaningful taxes, in addition to its greater share of the national budget. Out in the less developed areas, not even that is possible. This disparity in institutional and financial power and resources between north and south is an inequality that seldom makes the news, but is one of the most important drivers of the island's political life.

Perhaps the new municipalities of Taichung, Kaohsiung, Tainan, and The City Formerly Known As Taipei County, with the greater power of their mayors -- recall that in the ROC system a municipality is the equalivalent of a province -- may find the wherewithal to bring land taxes up to more rational levels.That would be progress.

Progress, Frank Herbert once wrote, is a concept by which the terrors of the future can be kept at bay.

There is a National Land Planning Act, evolving from laws proposed and drafted in the 1990s, but it has never been made into law due to opposition from developers via the politicians in their pocket. A bill must pass three readings to become law; the Act had its first reading in 2004, nearly a decade later. Several laws have been passed then that have aided land developers, including the 1999 Agricultural Development Act, which allowed developers to annex and build residences on previously off-limits agricultural land. That act is chiefly responsible for the mushrooming of hideous cookie-cutter housing developments all over the island. Now in draft is another law that essentially allows anyone to open their own industrial district and do whatever they like in it, as one Taipei Times commentary interpreted the legislation a couple of months ago.

The absurdly low taxes on land are just half of the problem; the other half is that wealth in Taiwan is not taxed. The underlying tax inequities are a key driver of the island's rising income inequality. Says Commonwealth:

The salaries and wages earned by Taiwan's 9 million workers account for 72 percent of the reported income on which individual income taxes are paid in Taiwan (Table 1), a far higher ratio than the 56 percent in the United States and the 49 percent average across wealthy OECD (Organization of Economic Cooperation and Development) countries.

In Taiwan, there are 7.54 million households, but only 5.38 million, or 71.3 percent, pay taxes. "Many of those that don't pay taxes are actually high-income earners. These people only pay NT$600 a month in health insurance premiums, and in the future, when premiums are calculated based on household income, this one-third that don't pay taxes may not have to pay health insurance premiums," a former financial official in the central government says.


"Taiwan's truly wealthy people are not the ones you see in public. Rather, they are the quietly anonymous individuals who live in exclusive properties like The Palace," says a former financial official. In an unprecedented move a few years ago, the Ministry of Finance released figures on how much tax Taiwan's richest people paid in 2005, providing a glimpse into the severity of the imbalance. Out of Taiwan's 40 wealthiest people, eight paid no taxes five years ago and 17 paid only 1 percent of their income.

"The taxes that many people pay are totally disproportionate to their incomes," says economist Ma Kai. Many households' accumulation of wealth relies on gains from property and stock transactions, the vast majority of which go untaxed. Even if the wealthy have taxable income, there are many legal or "gray area" tax shelters at their disposal to help them reduce their tax liability, Ma explains.

According to the 2009 IMD World Competitiveness Yearbook, corporate income taxes paid by Taiwan's enterprises are only 3 percent of GDP, lower than the ratio in the other Asian Dragons (South Korea, Sinpapore and Hong Kong), China, Japan and the United States. Reported corporate pre-tax earnings, which account for only 18 percent of all taxable income reported in Taiwan, amount to barely 20 percent of the business income listed in Taiwan's national income statistics. In other words, at least 70 percent of Taiwan's taxable corporate income has fallen through the tax system's cracks.

Of course, it hasn't "fallen through the cracks." Rather, the system is designed so that it has many cracks for wealth to fall through. In fact, as the article notes, the more money a company makes, the less tax it pays...

Commonwealth also notes that the Ma Administration has taken the lead in George Bush style tax cuts.....

Over the past two years, the administration of President Ma Ying-jeou has rolled out a number of tax breaks for companies and the wealthy. Only recently, to compensate big businesses for the loss of R&D and other tax breaks when the "Statute for Upgrading Industries" expired at the end of 2009, the government decided to lower the corporate income tax rate from 25 percent to 20 percent. But not wanting to be underbid when the opposition Democratic Progressive Party pushed a 17.5 percent tax rate, the government slashed the proposed rate even further to 17 percent as part of the new Statute for Industrial Innovation passed April 16. The bill also retained tax credits for R&D expenditures by large corporations and subsidies for small- and medium-sized enterprises to hire workers, even though the latter had nothing to do with innovation.

This so-called "17 plus 1 plus 1" package became the biggest tax cut measure in the history of the Republic of China. It was passed at a time when the country's finances are in their worst shape in the past eight years with the budget surplus of NT$40 billion in 2007 being transformed into a deficit of NT$500 billion.
The Commonwealth piece on the incredibly unequal tax systems describes a representative investor who makes over a million NT a year on investments but pays no taxes because it is all capital gains income. His daughter even applied for financial aid at school, the article says. It then links land taxes, income taxes, and inequality:
Taiwan's government has been unable to institute a capital gains tax on stock or real estate income because of a lack of transparent information and fears of rattling the markets. In the property market, those fears have left the government unwilling to replace publicly assessed present values (on which "land value increment" taxes are currently calculated) with actual market prices, which would boost capital gains tax revenues dramatically.

"Other countries have all done it. Can the government tell us why only Taiwan can't get it done?" Chien asks.

"If you say it's hard to get accurate information on real estate, I would agree. But all stock transactions are completely computerized. To say it's hard to get information is simply ludicrous. The real reason is the fear that the stock market will collapse," says stock brokerage worker Ruan Cheng-yuan.

"Taiwan is the only country in the world that uses an assessed present value to calculate housing and land taxes," says the economist Ma Kai. The publicly assessed land and house value usually seriously understates actual market values. "The Palace's apartments are publicly valued at only NT$3 million to NT$4 million," Ma says of the luxury property that reportedly has sold its units for up to NT$ 70 million.

Far from spurring innovation and upgrading by companies, low taxes mean that the government lacks the resources to stimulate upgrades of the educational and research systems, as well as supply the amenities that attract hi-tech businesses. It also means that much of the island's wealth is tied up in speculation in land and stocks rather than chasing investment in innovative new industries. Finally, the lack of a capital gains tax explains why so many locals so obsessively play the stock market and so obsessively buy land -- because if they win, they can live tax-free. In Taiwan, basically only individuals with salaries from registered companies pay taxes.

Why the title of this post? Rene Girard, the brilliant French thinker, argued in Violence and the Sacred that when social chaos threatens, societies resolve the problem of looming disorder by arbitrarily selecting an individual for sacrifice who is portrayed as both the cause of the problem and the actor through which it can be relieved: a scapegoat. Consider the large, and largely invisible, class of non-taxpayers described above, and consider Chen Shui-bian. It should be obvious by now that one of the most important social functions of the whole Chen Shui-bian affair with its lurid and loudly indignant emphasis on the vast sums passing through his family's accounts, was to provide a scapegoat onto which the sins of the island's quietly untaxed wealthy could be noisily unloaded and then sent into the political wilderness to die, silenced and alone.
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Nevets said...

perfect title.

David said...

Fantastic post.

D said...

Fascinating. And depressing. Looks like a classic race to the bottom.

les said...

Interesting stuff. It's also interesting to know that the anti-speculation tax on vacant land that was introduced after the 'snails without shells' movement is based on a completely false value. Another move designed to give the appearance that the government is doing something for the ordinary citizen, when in fact it does more to protect the developers which support the government than the people.

Anonymous said...

how do you find time to raise two kids, care for a wife, bike and do your daily activities, and then write all these extremely long-winded posts???? you must not sleep at all, dude.