Monday, March 12, 2012

Taiwan: Greece to Come?

Having fun in a pause between rainfalls. This is a crop; the original is here. I love capturing reflections in water bubbles...

After the election I argued in the Taipei Times that one of the hidden factors in the election of President Ma was the growing wealth divide in Taiwan....
During the 1990s, when then-president Lee Teng-hui (李登輝) was midwifing the birth of Taiwan’s democracy, he essentially made a grand bargain. In return for their silence in his struggle to fend off the Chinese Nationalist Party’s (KMT) regressive right wing and its last-ditch defense of the party-state, it was decided that those who had grown wealthy by suckling off the party-state teat would not have their wealth taxed away through a progressive tax system, particularly a tax on Taiwan’s most important investment, land. Subsequent administrations have also found it politic to keep this bargain.


Such individuals might have concluded that, if Tsai had won Saturday’s election, there would have been a significant reduction in their wealth if a fairer tax system were implemented, especially the paper wealth generated by the Taipei property bubble. Since Ma can be trusted to make noise about fairness, but to do little concrete, he was their obvious choice.

The property bubble is doing more than distorting the economy; it is distorting the nation’s politics as well. Observers have often remarked on Taiwan’s unfinished transition to democracy, yet they have seldom overtly argued that a critical factor in this is the regressive tax system.

As social inequality continues to grow, expect this wealthy class and its class interests to be a silent, but powerful driver of KMT success.
A similar political deal helped impoverish Greece, Spain, and Portugal, while in the US, the transfer of the nation's wealth out of the hands of its producers and into the pockets of a tiny coterie of fantastically rich individuals is having the same negative effect on the public purse, the ability of the nation to invest in its future, and on its democracy.

Surprisingly, the pro-KMT China Times came out with an interesting piece this week on the untaxed wealthy in Taiwan and their distorting effect on the nation's finances.

Is Taiwan's tax system fair? Every penny of the general public's wages are obediently taxed to support the whole of Taiwan's main resource of comprehensive income tax, while families with real estate and stocks enjoy huge tax incentives. The capital gains tax on this part of the "missing" taxes has an estimated value of NT$1.1 trillion to $1.5 trillion.
After the article details some of the taxes that have gone missing and their effects, it notes....

In other words, real estate and stock market speculators enjoy tax breaks worth at least NT$1 trillion! Su Jianrong of the National Taipei University Department of Finance pointed out that International Money Fund (IMF) data show that the core of Taiwan's financial problems is the long-term structural deficit. In addition to the expenditure structure of the government, the main reason for the formation of the long-term structural deficit is long-term tax reduction.

This long-term tax system not only causes weak government finances, meaning that the nation is living beyond its means, but many important agendas of the government, including improving social welfare, subsidies to vulnerable populations, and increasing investment in education, cannot be expanded. In the end, it will inevitably lead to the victimization of both the nation and its people.
As long as the the government remains KMT, it is highly unlikely this will be fixed. This is a far more ominous issue with far greater ramifications for the future than the level of ractopamine in US beef -- which points to one of the important functions of the constant churning of minor issues like beef: it keeps the public nicely distracted...

UPDATED: Summary of interview this week of Control Yuan President Wang Chien-hsien, who said the government should impose taxes on stocks and real estate. Wang was forced to step down in 1992 when he attempted to levy a tax on real estate transaction based on the market price.
During an interview with the Taipei-based China Times, Control Yuan President Wang Chien-hsien (王建煊) indicted that in order to seek tax fairness and justice, the government should levy a capital gains tax on stock and real estate sales. In particular, he noted, the land value increment tax should be levied “based on market prices” on high-value real estate transactions as well as transactions of non-self-use residences. He went on to say that this would not require any Constitutional amendment, and the government would face less difficulty compared with imposing a new tax on securities exchange gains, so a capital gains tax on real-estate sales should be taken into consideration first. The increase in revenues from this tax could be used to subsidize first-time housing buyers, he noted.
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Feiren said...

The China Times is running a whole series of articles about the need for a capital gains tax.

Isn't Taiwan very unlike Greece in that it has no debt? And is the budget deficit really that high, or is it cleverly concealed?

Michael Turton said...

Taiwan's external debt:

$101.7 billion (31 December 2010 est.)
$81.96 billion (31 December 2009 est.)

There's a cap on the deficit as I recall, but i'd have to look that up.

Yes, i was noticing the China Times' series. Pretty cool of them to run that.


Michael Turton said...

Budget deficit with charts, through 2010

Michael Turton said...

Also, i think a lot of Taiwan's indebtedness is handed down to local governments...

Anonymous said...
hahahahahaha... This title is the biggest joke of the year! Yes, Taiwan still has internal debt to ourselves, but we have actually paid off our foreign debt as of September 2011. @ 37% of GNP, Taiwan's debt situation is still below the level of US, Japan, German, France and Singapore. It's more likely that these countries would implode with debt first before Taiwan would even get close to the level of the Greek debt tragedy. "The deficit of the central government’s general budget and special budget will reach 1.6% of GDP next year, compared with the peak level of 3.5% during the global financial tsunami in 2009."

You need to do more homework before you make such a ridiculous title. lol...

Michael Turton said...


"""Taiwan has become a country free of external debt after it repaid the last installment of US$238,238 in debt to the International Development Association (IDA), one of the World Bank's lending arms""

Ummm... right.

Debt - external:
$116 billion (31 December 2011 est.)
country comparison to the world: 38


Yes, I'm sure that Taiwan ranks below many other countries. This doesnt mean we are not threatened by revenue and debt problems. But why would I expect logic from a drive-by troll?

Anonymous said...

Michael, the sources you quoted were wrong and mixing foreign debt with Taiwan internal debt. 1) Taiwan is currently not a member of World Bank, therefore we can't borrow from the World Bank or IMF (I supposed the only advantage of not being a "country". 2) In addition, Taiwan has too much free cash internally and doesn't issue bonds to sell to foreigner bond holders. We also have too much free cash with that obscenely high foreign reserves. Since you pride yourself on researching and presenting facts, don't quote wrong/outdated publications from 2010, instead you should find something more updated, like after Sept 2011 after Taiwan paid the last bit of its foreign debt borrowed from the 1970 when it was still a "country".

Taiwan doesn't have an impending debt problem like you are stating here. I do like the fact that Taiwan doesn't place a heavy tax burden on its citizens comparing to US, Canada or the European countries. However, I do agree with you on the part that Taiwan should start taxing some of those capital gains on real estate and stocks.

Anonymous said...

You don't have to publish this, but I am actually willing to spend time to educate you. Instead of quoting from news, secondary or territoriality sources, why don't you spend some time going through Taiwan's most recent annual national treasury report. NO foreign debt means no foreign debt.

However, for a conspiracy-monger like yourself, I wouldn't surprised that you would claim the treasury report to be faked by

Here are more about Taiwan's financial report FROM Taiwan's Treasury Department:

Michael Turton said...

Anon, stop wasting my time. The first document contains nothing about external debt, except a footnote on page 16.

The second only mentions external debts once.

In any case my post didn't mention foreign debt. The issue is the lost revenues and unfair taxation.

But thanks for the education.

Michael Turton said...

In addition, Taiwan has too much free cash internally and doesn't issue bonds to sell to foreigner bond holders.

These restrictions ended in 1995. Foreign bond purchases were re-imposed but foreign funds can still purchase up to 30% of their portfolios in government bonds. I don't know exactly what percent of that debt is foreign-owned.


Michael Turton said...

The rules for foreign purchases of Taiwan bonds are here:

B.Y. said...

"Taiwan's external debt:

$101.7 billion (31 December 2010 est.)
$81.96 billion (31 December 2009 est.)"

These numbers include total public and private debt.