Capital Gains Tax Dominates the News

Time for Vietnamese food.

Two days ago, in the post below this one, I blogged on the three-ring circus that the capital gains affair has become. The news is coming thick and fast....

First, the Premier formally accepted Finance Minister Christina Liu's resignation over the stock tax issue this week. Liu was apparently cast as the fall guy in this script; the same role her mother Shirley Guo played when she resigned as Finance Minister two decades ago over a similar issue. The various media reports say that people in the executive branch began to distance themselves from her as this issue went into high gear. People don't get into such positions without highly developed antennae to tell them who is political carrion.....

The capital gains tax proposal is slowing taking shape, pixel by pixel. Yesterday the cabinet revised the legislative proposal which Ma had accepted the other day. That proposal had been slammed by civic groups and by analysts as a set of sops to the wealthy and big business, as I noted in my post two days ago. The cabinet revisions are described in the Taipei Times as....

Three major revisions were made at last night’s meeting to the KMT caucus’ version.

First, the tax payment method based on the index level would be eradicated in 2017.

Second, rich people would not be allowed to use the index-based tax payment method.

Rich people are defined as shareholders who own more than 3 percent of the shares of a company, people whose annual income excluding income earned from shares transactions exceeds NT$5 million, and people who live in the country less than 183 days a year.

And third, starting in 2017, only four categories of individual investors need to pay a securities capital gains tax: people who hold more than 1 percent of the shares of a company, people whose annual income excluding income derived from securities transactions exceeds NT$3 million, people who sell shares annually valued at more than NT$1 billion, and people who live in the country less than 183 days a year.

The "index level" refers to the Taiex stock exchange index exceeding 8,500. Hahaha. In the last 120 months, that has happened for precisely 18 months, according to the civic groups cited in the Taipei Times.

But let's look at this. First, the new law really takes effect in 2017 -- 2016 is a Presidential election year, so obviously the year is a deliberate choice.

Who is taxed? Well, not many people. People with more than a 1% share of a company -- does this category cover only individuals, or does it include institutional investors?

I love the third category -- everyone who makes money from securities income provided their non-securities income EXCEEDS $3 million NT, or roughly $90,000 US. This appears to exclude precisely that category of parasites that I've discussed in the past -- wealthy individuals whose sole income is derived from securities trading and thus, have no paper income. In other words, under this regime, if you can manage to live your life solely by securities, you will pay no taxes. At least, that's the way it looks to me. Under this regime, this category pays no taxes until its transactions reach the NT$1 billion mark, or roughly US $30 million. It will not be difficult for such individuals to set up shell companies or trade through relatives so that they can trade without violating this rule; Taiwanese are past masters at evading tax laws in this manner. Under the "rich people" definition that operates until 2017, the NT$3 million exclusion is an NT$5 million exclusion.....

The final category of 183 day people is loud and clear.

As the staunchly pro-KMT China Post put it in an editorial the other day, Christina Liu's failure dooms any genuine stock gains tax. Not much more to say than that. It is hard to avoid the conclusion that Ma and his party never meant for a real reform to take place....

The Taipei Times editorialized similarly:

First, Liu’s resignation opens a new chapter in the crisis facing the Ma administration as the president struggles to recover from record-low approval ratings. The controversial tax proposal that has sparked strong opposition from the business sector and legislators across party lines since late March, culminating in Liu’s resignation, highlights the Ma administration’s long-standing weaknesses in decisionmaking and crisis management.

Quite true. But let me suggest that the appearance of bumbling was possibly deliberate, part of the smokescreen, with Minister Liu the sacrifice (We're so inept, that capital gains tax just slipped through our fingers. Sorry!). The TT editorial also observed that the widening wealth gap and debt problems will hinder national development and cause social problems. The wealth gap and debt issues are really two sides of the same coin: a large slice of wealth in Taiwan goes untaxed, creating a revenue gap. Nor does it look like it will ever be taxed.

WSJ's China RealTime column ran a piece by Jenny Hsu on Ma's declining popularity....

According to various polls, Mr. Ma’s popularity has fallen to 15-35%, a steep drop from his 51% victory in January’s election.

“With the 2014 local elections and the 2016 combined legislative and presidential elections down the pipeline, KMT lawmakers are trying to disassociate themselves from the power center, making Mr. Ma a lame duck president much sooner than expected,” said Joseph Wu, a political science professor at National Chengchi University.

Jonathon Manthorpe has a comprehensive review with much history of Ma and what all this might mean for Taiwan's democracy. Unfortunately he cites mostly pro-Green voices. Although it's certainly way cool that Peng Ming-min was important for the development of international aviation law.

While it makes great news to watch Ma's popularity plummet, it doesn't mean much of anything. Ma also took a plunge after Morakot and remained low in popularity throughout his tenure. He won re-election however and more importantly, the KMT holds the legislature and won 3 of 5 municipal elections. The 2014 local elections are still two years away and the party remains wealthy and entrenched in the major institutions of society. This all may prove to be as transient as a rain squall on a summer day.

Let's not forget that however botched, the things the Administration has done were things that needed to be done. Fuel and electricity prices have to rise -- Taiwanese have been living in a bubble world thanks to heavy subsidies for fuel and electricity. The national health insurance system must be revised and fees raised. A capital gains tax is a necessity. Regrettably, the Ma Administration has failed to give the nation a meaningful capital gains tax. If the DPP wins the next Presidential election and takes the legislature, let's see if they do any better.
___________
Daily Links:

• Who could have thought it? Court finds pan-Blue politicians innocent of inciting a riot.
• Nurses continue to get screwed by hospitals as increased funding to help nurses merely enriches their bottom line. Who could have predicted that? With all the choices women have today, they will surely vote with their feet and Taiwan, like everywhere else, will suffer a permanent nursing shortage. No doubt Filipino nurses will be much in demand here at some point.
• "China is eating the US' lunch in the South China Sea." The stupidity of our leadership in flinging US leadership into the Middle East abyss will amaze future generations, should any survive our climate policy.
• How Australia helped China manufacture fast attack craft.

_______________________
[Taiwan] Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.