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.

台灣稅賦公平嗎？一般民眾薪資所得每分錢都得乖乖繳稅，支撐了整個台灣主要綜所稅的來源，但炒房、炒股族卻可享有龐大「租稅優惠」，這部分「遺漏」的資本利得稅，估計每年大概在一千一百到一千五百億之間。

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....

換句話說，不動產炒作者與股巿炒手至少年享逾千億元的「租稅優惠」！台北大學財政系教授蘇建榮就指出，依據國際貨幣基金會（IMF）提供資料顯示，當前台灣財政問題核心在於長期的「結構性財政赤字」，形成的原因除了政府支出結構外，主要是「長期的減稅制度」所造成。

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.

...concluding:

長期的減稅制度不僅造成政府財政虛弱，入不敷出，更重要的是政府許多重要的政務，包括提高社會福利、補助弱勢民眾、加強教育投資等，都沒有能力再作擴充。最後必然造成國家與民眾受害。

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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