Income gap/income stagnation

Ta-ken, Taichung.

On one of the lists I frequent we were discussing the reasons for Taiwan's stagnating income and slowing economic performance, stimulated by a recent short piece in WSJ which touches on some of the issues. A friend point me to this MUST READ article in Commonwealth on the tax situation here in Taiwan.... as I've noted before, the wealthy simply don't pay taxes:

Jim Huang is 35 years old, a member of the third generation of a powerful political family in Taiwan. He does not have a job, but he's doing just fine.

In Taiwan, he lives in a 660 square-meter luxury apartment on ritzy Renai Rd. that he inherited from his father, and he also owns property in Los Angeles, Shanghai and Germany.

Through overseas trusts, Huang also holds stocks in the United States, Hong Kong and Taiwan worth more than NT$1 billion. With the help of two private banking advisers and their use of hedging techniques in the equity and futures markets, he earns a 6 percent return, or roughly NT$50 million a year, on his investments regardless of whether markets are bullish or bearish.

But Huang now faces a major decision. The United States Internal Revenue Service has aggressively pursued overseas assets of Americans in recent years to boost tax revenues, and Huang, who has American citizenship, is thinking about giving it up.

"The United States is cracking down hard. I've been thinking that it might be better to come back and be Taiwanese," says Huang, which is not his real name. "In any case, when you add it all up, the tax burden here is really low."

Because Huang's investments are channeled through a complicated array of overseas trusts and multilayer reinvestment structures, Taiwan's National Tax Administration has him classified as a "low-income household." In 2011, he paid less in taxes than his driver, just one example of how Taiwan has become a low-tax paradise for the wealthy.

Some stats from the article:

• "...Taiwan's ratio of tax revenues to GDP, known as the national tax burden ratio, fell from 20 percent in 1990 to 11.9 percent in 2010, the world's sixth lowest and even below those of Singapore (13.5 percent) and Hong Kong (13.9 percent), which are known as low-tax havens." 
• "Taiwan's effective personal income tax rate is only 5.96 percent, the 10th lowest in the world."
• "In 2010, the central government budget was 18.9 percent of GDP, the sixth lowest of any country around the globe."
• "...[estimates] there are 96,000 high net-worth individuals in Taiwan. Their assets have grown by 30 percent over the past four years to NT$10 trillion, or roughly 10 percent of all the wealth in Taiwan. Banking executive: "According to our internal numbers, private banking customers pay about 8 to 10 percent of their income in taxes every year."(highest marginal personal income tax rate is 40 percent and alternative minimum tax is 20%).
• In the five years from 2006 to 2010, household wealth in Taiwan grew by NT$24.6 trillion, according to DGBAS figures. Of that, NT$16.6 trillion, or nearly 70 percent, resulted from capital gains on stock transactions, which are not taxed in Taiwan, and profits from property transactions, which are taxed at very low rates.

Yes, that's right. I blogged on this before (Chen Shui-bian died for your sins). As the Commonwealth article notes, many rich investors have never paid taxes on their capital gains. The recent capital gains tax is a mere fig leaf and changes little. The assessed value on land, the real prize in the game, has not been changed since 1987. The result of the low assessed land value is described in the article as it talks about a luxury apartment sale:

On a profit that was in fact NT$82 million but assessed by the government at NT$15.25 million, the investor paid a land value increment tax of NT$3.05 million, an effective tax rate of 3.71 percent. Even when deed taxes and other fees are added, the investor's tax liability was still under NT$4 million, or lower than 5 percent, the lowest marginal rate on personal income taxes.

The effects of this non-taxation of wealth are totally pernicious. In the go-go days of the 70s and 80s Taiwan's thriving small and medium-sized businesses (SMEs) were funded by informal methods, since the banks were government-owned and generally didn't lend money to SMEs. In other words, local savings were sourced through a variety of methods as local start-up capital for manufacturing businesses which in turn generated growth and new savings, leading to a virtuous cycle of savings and investment. Today Taiwan's wealthy park their wealth overseas -- instead of capital staying local and driving new business growth, it enters vast international pools of global capital and is invested in securities which are backed by other securities or by global stocks, producing no new business growth at home. Taiwan's incorporation into the global financial system has meant that it is essentially being strip mined of its growth capital, siphoned off to global financial networks. Untaxed, too.

The wealthy also invest in land and real estate at home. The assessed value the government uses to calculate the tax on the land has not changed since 1987. This means that real estate is effectively a tax shelter. That's why the $82 million in profits on that house above were only taxed at $15 million. Observe, dear reader, that the government's pious moves to keep government property on or off the market or to play with the interest rates or to assure the public that those big Chinese buyers are just around the corner are just diversions meant to keep the public's eye off the ball, which is the assessed value. That has to be raised. Note also that the luxury building boom is not a construction boom of future apartments for buyers with money returning from China or from Chinese investing in Taiwan. The construction companies are building tax shelters for the rich.

Of course there are a number of other issues. The economy has transitioned from manufacturing to low paying service McJobs. A big chunk of capital has gone off to China, where many businesses struggle to survive and few really make it rich. This is one reason that Korea has done better than Taiwan, it has less exposure to China (and a much bigger domestic economy with global-scale manufacturers). One of the rich ironies of the Ma Administration's China Cargo Cult is that as Taiwan ties itself closer to China Taiwan's trade with that nation is actually in decline. Even worse, the article notes:

Tung Chen-yuan, a professor with the Graduate Institute of Development Studies at National Chengchi University and a former deputy chairman of the Mainland Affairs Council, says that over the past 10 years, Taiwanese businesses in China have paid nearly NT$3 trillion to the Chinese government, roughly twice Taiwan's total annual tax haul.

The article ends with a former finance minister noting how completely stupid it is to believe that tax cuts for the wealthy stimulate the economy -- actually, they simply transfer wealth to holders of wealth while killing economic growth. As we have seen in the US, and are experiencing now in Taiwan.

The China Times offered an editorial last week after the Labor Minister resigned in the wake of the failure to raise the minimum wage, and offered some dramatic stats on the stagnant income....

Official statistics show that income recipients in Taiwan earned NT$611,134 on average in 2011, down NT$3,882 from the previous year and declining to the level of 1998. The level is now 52 percent lower than South Korea, which had lower salary levels than Taiwan in the past, and barely half of Singapore's.

Now you can see one reason why we have a constant flow of foreign-directed controversies -- the Diaoyutai insanity, the Ractobeef mess with the US  -- keeping the media and public looking outward rather than inward towards the true source of the nation's problems -- because a lot more people are going to die from lack of an adequate income than from eating ractobeef.
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