As ROC President Ma Ying-jeou began his second term May 20, his administration started setting the stage for a series of ambitious initiatives seeking to transform Taiwan into an equitable and just society.
But as recent controversy surrounding a bill to reinstate a securities gains tax shows, the country’s problematic tax system is a severe test of the government’s determination to realize the president’s vision for a better Taiwan.
“Fair taxation and sound public finance are both essential parts of President Ma’s golden decade blueprint, as they hold the keys to Taiwan’s sustainable development,” said Minister of Finance Christina Y. Liu, who took the post in a February Cabinet reshuffle. Under her direction, a task force was organized in March to address the flaws in the country’s public finances.
After extensive consultation and discussions with representatives from academia, business, government agencies and civic groups, the MOF unveiled amendments to the Income Tax Act April 12, with the aim of reintroducing a securities gains tax in 2014. The possibility of levying a capital gains tax on real estate transactions is also being studied.
According to the ministry, “the change will bring Taiwan more in line with ability-based taxation and increase the country’s tax revenues.” The proposed measures are designed to minimize impact on the local bourse and the competitiveness of the country’s capital market, the ministry added. The bill has been approved by the Cabinet, and is expected to be reviewed by the Legislature in June.
Under the plan, individual investors will be taxed 15 percent to 20 percent on annual securities gains over NT$4 million (US$135,135). The rate is to be set after taking economic and market circumstances into consideration. The amendments also allow for 50 percent of annual transaction taxes paid to be claimed as a post-assessment deduction, with losses over the past three years offset against gains.
In addition, tax rates for corporate investors will be raised from between 10 percent and 12 percent to a maximum 15 percent, with the exemption threshold slashed from NT$2 million to NT$500,000. To retain the local bourse’s attractiveness, qualified foreign institutional investors will be exempt from the tax.
One measure designed to encourage positive investment behavior is a clause enabling individual and corporate investors to report taxes on only half of their gains from securities held for three-plus years. The MOF estimates that only 1 percent of investors, or between 10,000 and 20,000 individuals, will be affected.
Just a few days after the MOF announcement, Tseng Chu-wei, an emeritus professor in public finance at Taipei-based National Chengchi University and legislator for the ruling Kuomintang, submitted his own bill, designed with a fundamentally different philosophy. In a nutshell, Tseng proposes to treat securities gains as ordinary income, to be taxed when an individual’s annual income—excluding capital gains—is subject to tax rates of 30 percent and above. The remaining provisions of his bill are similar to those in the MOF proposal.
While a number of other KMT legislators have proposed different tax schemes, theirs are basically variations on the MOF proposal. The leading opposition Democratic Progressive Party is also working on its own bill.
The last time Taiwan levied the tax was in 1989. But after then Finance Minister Kuo Wan-jung—Liu’s mother, in an interesting twist of history—announced the decision in September 1988, the local bourse tumbled with zero turnover for 19 consecutive trading days.
The measure lasted for only one year amid strong political pressure, and as an alternative Kuo implemented a 0.3 percent securities transaction tax, which has been generating about NT$100 billion in revenues every year for the nation’s coffers. The ruling KMT administration tried to reinstate the securities gains tax again in 1995, but the bill ended up stillborn.
Scholars, civic groups and the general public see the MOF’s latest decision as long overdue. “While there are a lot of loopholes in the bill’s design, this is an important first step in upholding equality and bridging the country’s wealth gap,” said Chien Hsi-chieh, founder of Taipei-based Anti-Poverty Alliance. “Taxes on capital gains will be an important gauge of Ma’s commitment to his campaign promises,” said Wang Jung-chang, spokesman for advocacy group Fair Tax Reform Alliance.
As expected, the amendments drew vehement protest from a mighty army of interested parties, with some of the most vocal opponents coming from the public sector. Leading off the charge, Taipei-based Taiwan Securities Association launched an immediate assault on the bill with a series of well-orchestrated news conferences, hearings and newspaper ads, claiming the policy to tax individuals “will doom the local capital market to perdition.”
Minister of Finance Christina Y. Liu expects the reintroduction of the securities gains tax to bring Taiwan closer to ability-based taxation. (CNA)“Taiwan’s securities markets have been an important contributor to the country’s exponential economic growth, providing the much-needed capital for startups that later formed the backbone of the local high-tech sector,” said TSA Chairman Hwang Min-juh. Over the course of two decades, the number of Taiwan’s listed companies has increased sixfold from 230 to nearly 1,400, while their market capitalization has grown from NT$3.2 trillion to NT$20.6 trillion, he pointed out.
Nearly 9 million ROC nationals hold registered securities accounts, generating 300 million transactions a year, or 65.5 percent of Taiwan’s securities trading, according to TSA statistics. “This vigorous stock market generates steady tax revenues and provides numerous quality jobs,” Hwang said. “The bill will discourage market activity, and we expect daily turnover to shrink 35 percent to NT$50 billion next year.”
Such weak trading would seriously affect the securities sector, and Hwang estimates local brokerage firms would cut between 15,000 and 20,000 jobs, or 30 percent of the sector’s labor force. “Some smaller agencies may even be forced out of business.” The tax will not achieve its purpose, and will backfire by significantly reducing revenue from transaction taxes, he warned.
Echoing the TSA’s assessment, the Financial Supervisory Commission, the regulatory body for Taiwan’s financial sector, was also quick to voice its concern. “We need to take into consideration other countries’ practices when weighing the pros and cons of the matter,” said FSC Minister Chen Yuh-chang.
According to Chen, Taiwan’s securities transaction taxes are already higher than those levied by many countries. “The reinstatement of a securities gains tax will increase overall transaction costs in the local capital market, reduce its liquidity and hamstring the sector’s future development,” Chen said. “We need to put this complicated issue in perspective, as taxation equality is only one of the many considerations involved.” The agency urged the MOF to consider cutting the transaction tax when the securities gains tax takes effect.
Siding with the commission, the Taiwan Stock Exchange Corp. also argues that the tax runs counter to the government’s policy of building Taiwan into a financing center for global high-tech firms, and will reduce the local bourse’s ability to attract foreign funds.
While these arguments seem to hold water, Tseng, who has spent more than three decades advocating tax reform in Taiwan, highlighted the first concern of the MOF bill, which is to put Taiwan’s taxation system back on the equality track. But in addressing any taxation issue, Tseng said, the first prerequisite is to uphold the integrity of the system.
“As long as we need the government to provide services for us, we will have to pay taxes to finance most of public spending,” said Tseng. “This is the fundamental issue in any taxation reform.”
According to Tseng, equality, efficiency and competitiveness are three major benchmarks in assessing whether a taxation system is reasonable. “While equality is an elusive concept, the universal gut feeling is that those who make more money should pay more taxes, and that everyone and every kind of income should be taxed without any preferential treatment. This is the basic idea of ability-based taxation.”
Individuals and businesses make all kinds of decisions in their everyday lives and operations, and their collective behaviors create market efficiency, Tseng said. But taxes may change or distort their behaviors, resulting in market inefficiency and triggering a chain reaction, including diminished competitiveness of the capital market. “This explains the strong objections from the FSC, TSA and TWSE, as recent lackluster market performance seemed to show that the trio’s fears are not unfounded.”
KMT Legislator Tseng Chu-wei, a public finance professor and veteran tax reform advocate, argues for levying a capital gains tax in Taiwan. (Photo: Jimmy Lin)The tug-of-war between equality and efficiency makes tax reform an uphill battle, because one cannot advocate one core value without sacrificing the other, Tseng said. “The soaring discontent among the majority of taxpayers seems to indicate that Taiwan’s tax system has overly emphasized efficiency and competitiveness at the expense of equality.”
This is evidenced by a recent poll that shows over 70 percent of respondents see Taiwan’s taxation system as unfair. At this juncture, Tseng argued, it is evident that the top priority is to bring the skewed system back to a more balanced and healthier state.
But reform comes with a price, because people are bound to be affected one way or another, Tseng pointed out. And while over 60 percent of the respondents in the same poll are in favor of the securities gains tax, the reform’s success will not hinge upon the high support rate, but will be decided through the delicate political maneuvering by the Ma administration, he said. “This is where the real challenge lies.”
No policy can cover all the bases, and the desire to please everyone often leaves politicians in a dilemma. “In the end, it is Ma who has to make the call, as it is unrealistic to expect a consensus from the whole society on the matter.” It is his administration’s responsibility to convey the president’s vision to the public and explain the possible sacrifices society has to pay to right the wrong, Tseng noted. “This is a critical test of Ma’s leadership and political competence.”
While Tseng endorsed the decision to levy the tax, he said the MOF has made too many compromises in a move to appease investors. “The bill’s design, including a generous exemption and a flat rate, contradicts the spirit of ability-based taxation,” he said.
And while the ministry expects only a limited number of individuals to be affected, the fact is that investors all need to calculate their gains to determine if they are subject to the tax, he pointed out. He maintains that securities gains should be taxed under a progressive income tax system, as “this is the best approach to achieving equality.”
As to the tradeoff Taiwan has to make in terms of reduced market efficiency and competitiveness in the short term, Tseng believes it is a calculated risk society can afford to take. Besides, Taiwan’s financial market is much more developed now and investors are more sophisticated than before, he added. “The capital gains tax is not a new idea to Taiwan, and based on what happened more than 20 years ago, I think we already know what to expect.”
In the long run, Tseng believes the overhauled system will help strengthen Taiwan’s competitiveness by forcing both the public and private sectors to shake off their reliance on the cost advantage that comes with low taxes and subsidized electricity rates, an ingrained myth that has been holding firms back from engaging in value-creation activity.
“The whole country needs to break free of this outdated thinking and start rebuilding Taiwan’s core competence on innovation. And the Ma administration needs to communicate this paradigm shift in such a way that people can relate to it in their everyday lives.”
Despite strong protests from formidable interest groups, Tseng believes the MOF bill, which leaves a lot to be desired from a professional perspective, will still receive support from KMT legislators. “The MOF and FSC should bury the hatchet and start working as a team on complimentary measures to restore market confidence.”
More importantly, Tseng said, Ma should stick to his guns if he truly believes in what he is trying to accomplish. “The people of Taiwan will decide whether the policy is in the best interests of the country, and give Ma the credit or blame he deserves.” (THN)
Write to Meg Chang at sfchang@mail.mofa.gov.tw