Entering its 100th year, the ROC enjoys the world’s fourth largest foreign exchange reserves—plus a national debt nearly off the charts. Double-digit economic growth is accompanied by a historically large wealth gap. Steps to achieve stable financial administration and a more equitable distribution of income have to start now.
To meet its objectives for economic development, the government has for a long time sacrificed the fairness of the tax system. Under normal conditions, economic progress brings increased tax revenues, which then support social welfare programs and education, reduce government debt and stimulate private investment, thereby resulting in further economic progress.
When the tax system is out of kilter, however, the result is a vicious cycle with a stagnant economy, an ever-increasing public debt and a gaping divide between rich and poor.
Over the past 10 years, Taiwan has averaged 4-percent economic growth, while tax revenues have increased by less than 2 percent and the average tax burden has fallen from 20 percent to 12.2 percent.
The income elasticity of tax revenue, used to measure how well economic development is reflected in tax yields, dropped from 1.16 in the 1980s to 0.7 in the 1990s, and has since dipped below 0.5. When this figure is below 1.0, it means economic growth and the nation’s finances have become less and less related.
To get finances back on track and bring about social justice, the government must now sweep away all vested interests obstructing tax reform. Income taxes, affecting 700,000 businesses and 5.4 million households, are the place to start. The key to success will be whether the government can bring the salaries of military personnel and teachers, overseas income and capital gains into the tax system.
In 2010 income taxes accounted for 42.6 percent of the government’s budget, well below the average 46.6 percent over the past 10 years. Given average annual income tax revenues of NT$1.7 trillion (US$58.31 billion), with each drop of 1 percent the national treasury loses around NT$10 billion.
If income tax gets on the right track, the rest of the tax system will follow. Then the benefits of low tax rates with a broad tax base will extend to the entire population. (THN)
(This commentary originally appeared in the Economic Daily News Jan. 2.)
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