Taiwan has long been proud of its decades of high growth and relatively equal income distribution. But in the last few years, many members of society have become extraordinarily rich. The resulting wealth gap is starting to have a major impact on social attitudes, especially among those in the middle class.
From 1964 to 1980, when the island's economy recorded an annual growth of 10 percent, the income ratio between the highest 20 percent of families and the lowest 20 percent dropped from 5.3 times to 4.1—an achievement that defied classic economic theories, which claim that it is almost impossible to maintain equity of income during a time of rapid economic growth.
Theoretically, the major reason behind the erosion of equitable income distribution during the initial stage of an economy's development is that non-farm incomes rise much faster than those in the farming sector. This disparity is usually tolerated because the higher productivity of the non-farm sector is indispensable in driving the economy toward modernization. Taiwan avoided this scenario for two reasons: the Chinese family structure and the island's high concentration of small-and medium-sized businesses for labor-intensive manufacturing, which still account for over 95 percent of all island enterprises.
Conspicuous consumption by the rich, such as this gold-plated Mercedes, is causing growing dissatisfaction. Irritation runs high because so many people are thought to become rich through underground businesses, tax evasion, and other illegal means.
Until the 1980s, it was common for individuals to pool their income for family use. If a few younger members of an agricultural family left the fields for higher-paying non-farm jobs, the chances were strong that they would remit a substantial portion of their incomes back to the extended family. This practice made personal income figures highly suspect because the extended family distributed income more equitably than the statistics on farm and non-farm income show.
The propensity to set up small- and medium-sized businesses also helped make family incomes more equitable. Besides giving rise to many well-to-do bosses, it also created ample job opportunities for unskilled workers, thereby allowing farm families to boost their incomes. Many farmers, or their family members, began moonlighting at factories during the off-season or in the evenings. Others set up their own family business on the side, such as noodle shops or dry-goods stores. Even today, one can find grandparents and younger family members who have long left the fields filling their free time by doing simple labor-intensive work—such as trimming edges of molded plastic parts—to boost the family's income.
Statistics show the success of this diversification of farm and non-farm incomes in extended families. During the early decades of development, farming families earned the major share of their household income from non-agricultural work—51.3 percent in 1970, for instance. Another important factor was the government's Land-to-the-Tiller Program, initiated in 1953, which allowed farmers to purchase the land on which they were working at reasonable prices. After the end of the tenant arrangement, farm productivity shot up, as did family income.
The wealth gap is starting to become a chasm. People living on the margin of poverty aren't the only ones who feel cheated by a society that now has thousands of U.S. dollar millionaires and ten billionaires. Wage earners see their relative financial status stagnating, if not slipping.
Both the entrepreneurial spirit and the extended-family income pooling from farm and non-farm labor go far in explaining why Taiwan was able to minimize the gap in income levels between the richest and poorest members of society. It was an achievement that for decades was rightly considered a matter of great pride.
But that pride is now dissipating. In less than a decade, a huge gap in wealth has opened between the richest and poorest members of society. No less worrisome, the wage-earning middle class is growing increasingly discontented with its loss of financial status vis-a-vis the rich members of society. As political writers from Aristotle to Sun Yat-sen have pointed out, a dissatisfied middle class can bring about an unstable social and political environment.
There are several reasons for this shift in the distribution of wealth. The income ratio between the highest 20 percent of families and the lowest 20 percent began a constant rise after 1980 and hit 5.2 in 1992. The Directorate General of Budget, Accounting and Statistics (DGBAS) attributes the widening of the income gap first to the development of capital- and technology-intensive industries, which have created more higher-paying job positions. From 1980 to 1992, pay for technical professionals rose two times and that of administrative officials 1.9 times, compared with an improvement of just 1.7 times for service workers and 1.5 times for farm workers.
For some, price is no object. Government statistics show that the richest 20 percent of local families possess 54 percent of Taiwan's total wealth.
Second, the island's large extended families are being replaced by small, nuclear families. Many higher-paid young couples are moving out on their own. Unlike the past, they no longer turn over their paychecks to the family elder, weakening the tradition of equitable income redistribution within the family. Although families still help each other out in emergencies and other important occasions, the system has definitely changed. Among the lowest-earning 20 percent of all families in 1992, according to DGBAS, 27.6 percent were headed by people over 65 years of age and 26.6 percent had no income earners; these figures were up from roughly 10 percent for both groups in 1980.
But much more serious than income figures is the dramatic shift in personal and family wealth from non-farm and non-business sources. In recent years, the extraordinary rise in real estate values and easy money through stock market trading have radically redistributed the island's wealth. As a result, statistics on personal and family income levels do not give a complete picture of the growing gap between rich and poor.
According to a survey conducted by DGBAS in 1991—the first such comprehensive study—the richest 20 percent of families had net assets 17 times those of the poorest 20 percent. The main factor contributing to this gap was real estate, which makes up an estimated 60 percent of all net assets of families in Taiwan, followed by financial assets, which account for 26 percent. DGBAS also reports that the richest 20 percent of local families possess 54 percent of the island's total wealth, and the richest 3 percent of families own 27 percent of the total land.
In recent years, stock market speculation has redefined the financial status of island families. From October 1986 to February 1990, the Taiwan stock market index skyrocketed from 1,000 points to an historic high of 12,495. The flood of money from savings into land and stocks created innumerable nouveaux riches—and wiped out or seriously depleted the finances of countless others. Speculation fever radically changed the complexion of society. Among the most prominent shifts: conspicuous consumption became rampant and the work ethic, especially the willingness to perform physical labor, changed radically. Another sign of the times was indicated in the April 5 issue of Excellence magazine, published in Taipei. It reported that Taiwan now has ten U.S. dollar billionaires and countless millionaires. The richest individual, insurance tycoon Tsai Wan-lin (蔡萬霖), has amassed a fortune worth US$6 billion.
Several highly respected institutions and individuals have also focused on studying the growing wealth gap. The Taiwan Institute of Economic Research, a private organization based in Taipei, first raised concerns about this issue in 1992. It pointed out several contributing causes:
· land policy, especially zoning, has not kept up with the island's economic restructuring;
· the taxation system provides substantial loopholes for high-income earners;
· legal restrictions in the past allowed privileged groups to monopolize economic areas by banning new entries into certain business fields, such as securities brokering;
· there is a growing prevalence of money politics, in which some politicians use their influence to obtain undue economic benefits, such as helping secure the extension of soft loans from government banks to privileged applicants;
· the social welfare system is inadequate, and therefore provides insufficient care for the underprivileged and disadvantaged; and
· the substitution of technology- and capital-intensive industries for labor-intensive operations creates more higher-paying positions.
In February of this year, the private 21st Century Foundation published the results of a survey in which the respondents attributed the wealth gap to land speculation (18 percent), collusion between politicians and businesspeople (16 percent), tax evasion by the rich (8 percent), and stock speculation (8 percent). Three-fourths of the 1,020 respondents said that the situation is "serious" or "very serious." The survey indicates that wealth disparity has a psychological dimension: it is stirring up widespread resentment because of the prevalent perception that many of the rich have used unfair or illegal methods to accumulate their fortunes.
China New Party Legislator Jaw Shau-kong (趙少康) in March brought up the same topic at the Legislative Yuan. He identified five main culprits for the widening wealth gap that affect social stability: inflation, land, unbridled expenditure on public projects that is caused partially by the involvement of elected representative in those projects, collusion between politicians and businesspeople, and insider trading by politicians in the stock and land markets.
In 1991, the now defunct Taxation Reform Committee of the Ministry of Finance estimated that, because of tax evasion or special legal exemptions, half of people's income is not subject to taxation. Critics estimate that today more than 70 percent of the government's revenue from income tax actually comes from lower salary earners because of the high percentage of tax evasion, especially among the rich.
But the very rich are not the only violators. Proliferating business activities such as street vending, unlicensed factories, and smuggling have spawned a large-scale underground economy with an output that was estimated in 1990 by DGBAS at more than NT$783.5 billion (US$29 billion), equivalent to 18 percent of the island's GNP that year. This was up from an estimated 16 percent in 1981.
The tax base is suffering for more reasons than simple tax evasion. One major culprit is the granting of extensive tax reductions. In recent years, the Legislature has reduced the tax base by lowering personal income tax rates (especially for the rich) increasing the number of businesses that receive tax breaks, and granting straight tax exemptions to more "strategic" industries. All of these cut back on government income and stimulate the public to raise questions about the overall fairness of the tax structure.
Public concern multiplied earlier this year when several financial officials started calling for an increase in taxes because the government is losing money. Tax revenues currently cover only 56 percent of government expenses, while during the 1970s, they covered 79 percent. Over the past four years, there has been only a 7.5 percent annual growth in total tax revenues; during the 1970s, this figure averaged 22 percent.
The recent islandwide crackdown on vote-buying by local-level elected representatives, which started in March this year, has spotlighted the island's growing problem with money politics. Local politicians allegedly spent tens of millions of NT dollars to win election to local assemblies or to become speakers or deputy speakers of those bodies. Politicians are willing to spend so much to get elected because their expenditures can be recouped through participation in public construction projects or by land speculation. In addition, they can help formulate urban development plans or rezone farmland for industrial or residential use.
Yang Chung-hsin (楊重信), deputy director of the Institute of Economics, Academia Sinica, says that the real factor behind the election bribery is the huge profits that can be made from land speculation, which makes such bribery a reasonable act of investment.
In a seminar on land and politics, sponsored in March by the Chinese Political Science Association, Hsiao Chuan-cheng (蕭全正), a political science professor at National Taiwan University (NTU), pointed out, "The weakening of the central government's authority following the lifting of martial law [in 1987] has led to expanded influence by local political factions and financial groups. These parties not only engage in land speculation, but also participate in the formulation and execution of municipal government land policies." Chu Yun-han (朱雲漢), another NTU political scientist, said: "Land has become an integral part of the interrelated structure of local politics and the economy."
The high visibility recently given to money politics highlights the critical role of real estate speculation in the island's widening wealth gap. The real estate market started on a rampage in the second half of 1987. From 1986 to 1989, average Taipei housing prices skyrocketed 260 percent to roughly US$250 per sq. ft., compared with a 19 percent average rise in the incomes of Taipei residents. As a result, the cost of an average 30-ping apartment in Taipei rose to more than US$250,000 in 1989, twelve times the average income of local households that year. A decade ago, the same apartment would have cost US$65,000, five times the average household income. Today, an average family with two full-time wage earners would have to save 100 percent of all its earnings for twelve years to buy an apartment in Taipei.
Land prices have soared not only in urban areas, but also in farming and industrial areas. Despite the collapse of the Taiwan stock market in 1990, realty prices have stubbornly remained at dizzying heights, although the upward pace has slowed. At present, the average Taipei family spends more than 30 percent of its monthly expenses on rent.
Moreover, land prices have boosted the cost of public infrastructure projects to astronomical levels. Of the total original budget of US$300 billion for the Six-Year National Development Plan (the budget has since been scaled down to US$230 billion), about one-fourth was earmarked for land and compensation for condemned buildings. Landowners are receiving a lion's share of the pie in the island's economic development. The phenomenon has especially disillusioned great numbers of the middle class, the backbone of society. The consequence is a growing sense of alienation from society and an erosion of the traditional work ethic in favor of quick money via speculation.
The government's land policy has recently come under increasing criticism, notably for its strict zoning policy for farmland. Although farmland occupies 28 percent of the island's total land area, farming accounts for only 3.4 percent of the GNP (1993 figures). Forests, many of them on rugged mountain terrain, account for 52 percent of the island's land area. This leaves only 20 percent for other uses. The serious imbalance between supply and demand in the real estate market has provided fertile ground for speculators, whose actions have been facilitated by the excessive money supply, especially when the stock market soars.
In recent years, the government has tried to resolve the growing real estate problem. One major strategy is to increase the supply of land in the realty market. According to the Economic Revitalization Program, announced last year, the government plans to release large tracts of farmland and government-owned land for conversion into industrial use by the private sector.
Moreover, a land reform panel under the Executive Yuan has made several proposals, including restricting private land holdings and levying land value increment taxes based on the actual transaction price. Currently, the assessed value of property and its market value are substantially different. The proposed levying of a land value increment tax based on actual transaction prices ran into immediate opposition inside and outside the Legislature.
Proponents contended that such a tax method could channel a large portion of the windfall profits from land transactions into the public treasury, thereby dampening the interest of speculators and stabilizing land prices. But opponents argued that the method was not feasible because of the difficulty in determining the actual prices for the hundreds of thousands of land transactions annually, as well as the possible consequence of widespread fraud by taxpayers and resulting corruption of tax officials. The proposal was finally nixed in 1992, leading to the resignation of former Finance Minister Wang Chien-shien (王建煊), the leading proponent of the proposal.
In addition to land-related policies, the government is endeavoring to reduce the wealth gap by other measures. One policy is the establishment of a complete social welfare system to help the underprivileged. Also on tap are a national health insurance program, scheduled to be launched by the end of 1994, an unemployment insurance system, and a national pension system. The government is also promoting the development of capital-and technology-intensive industries in the hope that the higher salaries offered by these industries will become the mainstay of the local job market. There is also talk of intensifying the crackdown on tax evasion.
But these efforts have run into strong opposition from those benefiting from the current system. Moreover, in recent years, legislators have created even more tax havens for the rich, such as increased tax exemptions for inheritance and gift taxes. Given these trends, middle class demands for closing of the wealth gap are certain to remain high on the public agenda. - Philip Liu (劉柏登) is editor-in-chief of Business Taiwan, a weekly newspaper published by the United Daily News Group.