OPINION: Taiwan Has an Unhealthy Obsession With Tax Cuts

OPINION: Taiwan Has an Unhealthy Obsession With Tax Cuts
Credit: CNA

What you need to know

Tax cuts are always popular with voters, but do they really help Taiwan's low-income residents?

The anti-automobile Paris Mayor Anna Hidalgo recently introduced public transportation discounts for teenagers, part of her plans to have a completely free metro service. During an interview with the center-left newspaper La Libération, she said that her plans to build a better Paris started with making the Paris Metro free for children between four to 11 years old and will follow that up in 2020 with free metro travel for all people with disabilities under the age of 20.

The free public transport policy has been questioned by opposition politicians as they believe that a free subway service will not only create overcrowding, but would also increase the financial burden of the city – and would therefore not fully fit in with Hidalgo’s dream of "exiling cars out of Paris." Her detractors also think that the best policy would be to instead improve the sorry state of the old and deteriorating Paris Metro with basic infrastructure upgrades and the introduction of new train cars.

At this point in time, Hidalgo has reaffirmed her free subway policy, undoubtedly with an eye on the Paris mayoral elections in 2020, as she hopes to rally support from left wing and younger voters to help her bid of being be re-elected as the mayor of the capital.

Credit: Reuters / TPG
Paris Mayor Anna Hidalgo.

Does this sound like a familiar story? Let’s return our focus to Taiwan. After the Democratic Progressive Party (DPP)’s failure in the November 2018 9-in-1 elections, they immediately announced the latest edition of tax cuts, which mean that in May this year, when taxes have to be filed, certain demographics will be exempt from income tax. They are: single people with monthly salaries of less than NT$30,000 (US$972), families with total annual incomes of less than NT$816,000 (US$26,445) and families with two children under the age of five and earning less than NT$1.232 million (US$39,925).

Whenever an election is fast approaching, the ruling party always launches different types of schemes in order to retain the support of the people. But are those seemingly ideal policies at all effective, or are they just political rhetoric used to gain public backing?

The two reasons why governments collect taxes

Before we analyze the government's future income tax exemption scheme, we should start by discussing why government taxes exist in the first place. Since ancient times, regimes have imposed taxations on their people, which have only ever been for two purposes: To increase financial resources and to control the people.

The earliest tax reform in Chinese history may be the "land quality taxation" system that the spiritual father of Chinese Legalism, Guan Zhong (管仲), suggested to Duke Huan of Qi (齊桓公) during the Spring and Autumn Period. The document can be in found in either Mandarin or the Qi Language, where the main focus of the text explains that the government would collect different tax amounts depending on the quality of land in each village. The reason this policy came to exist was mainly due to the collapse of the Zhou Dynasty’s land distribution system, called the well-field system. In this system, land was distributed to serfs in order to give them more control of the land in the hope that it would enhance their connection to the land, then in turn increase the output from the fields. It was this reform that led the state of Qi to consolidate their kingdom during the Spring and Autumn Period.

By the 16th century, during Ming Dynasty rule, China was experiencing financial difficulties as the treasury was running on empty. In addition, in order to cope with nomads from the north, the defense budget was constantly being increased. Ch'ien Mu (錢穆) mentions in his work “A General History of China” that there were long periods of time where nobility and provincial officials went without receiving payment for their assets and services, and that the ministry of defense had a shortage of food, so military troops all around the country did not receive any pay. It was also at this point in time that the Grand Secretary of the Ming Dynasty, Zhang Juzheng (張居正), instituted the "Single Whip Law," which incidentally became the best method for easing the financial deficit.

The Single Whip Law was implemented across the whole country in the ninth year of Wanli Emperor's (萬曆) reign (1581). It turned out to be one of the most important reforms of the middle to late Ming Dynasty as it combined the traditional tax and labor system and levied land taxes according to the amount of land people owned. The taxes were paid in silver, which helped to greatly reduce complicated administrative procedures. In addition, Single Whip Law made the quantity of land the basis for taxes and defined the limits of taxation of the landless, small landowners and large landowners. This made it easier for farmers to effectively arrange their crop production and thus re-established a strong foundation for the state.

The two examples above support the notion that the two basic purposes for taxes are: Increasing financial resources and controlling the people.

In ancient times, land was the main source of income for the majority of the population, so the size and quality of land became an important foundation for government taxation. The effective classification of taxpayers also helped the government better understand the movements of their people. In today's society, the main reference that determines taxation in most countries is somebody's income rather than the amount of land they own. However, in essence, things have not changed much at all. Taxes are still used with hopes of establishing a set of criteria so the government can distinguish which taxes different demographics need to pay.

With this in mind, we need to analyze if there are any flaws in the 2019 tax-free policy issued by the government of Taiwan President Tsai Ing-wen (蔡英文) and investigate if it is still possible to maintain the basic principles of taxation: Increasing financial resources and controlling the people.

The government has identified 1.77 million ‘poverty-stricken’ citizens, but is tax exemption really what they need?

The government's tax reduction and exemption policies seem like an attempt to imitate social welfare systems in Europe and, to a certain extent, the United States. Indeed, giving relevant discounts to the people is a good move. After all, who doesn’t like free stuff?

However, as the government prepares to implement these benefits, has it thoroughly considered the resulting effects? According to estimates by the Ministry of Finance, there will be 1.77 million recipients of this benefit in the future. There is no telling how much tax revenue will be lost.

Let’s look at whether or not the tax exemption benefit is the salvation that the poverty-stricken demographics truly need.

First, in terms of practicality, there seems to be little opposition for single people with monthly incomes of less than NT$30,000 to receive a tax exemption, as similar practices are also adopted for low-income citizens in some European and North American countries. For first-time workers such as fresh-graduates, it is indeed a beneficial policy. Unfortunately, from a logical point of view it is less clear-cut. Does this demographic really lack economic power as the media often reports?

If we were to imagine two single workers with monthly salaries of NT$30,000, one in Taipei and the other in Taitung, their quality of life would be completely different. The person in Taitung could perhaps live at home with their parents, saving a great deal on rent that equates to a higher amount of income to play with every month, which could even be more than someone from the higher monthly income bracket of NT$40,000 (US$1,300) living in Taipei. In contrast, for the person working in Taipei, their rent alone would account for a large part of their outlay, as without a budget of around NT$10,000 (US$325), it has become increasingly difficult to find a good place to call home.

From these two hypothetical situations, perhaps we should think about whether we actually need to achieve this type of "one size fits all" tax system. If we determine the policies depending on the consumption behavior of each county and city, we can avoid having "real poverty-stricken" citizens that actually profit from this welfare policy.

Credit: CNA
Taiwan Finance Minister Su Jain-rong (蘇建榮).

Second, although it is nice to believe that there is true kindness in humanity and fairytale love stories, we are here to talk about immediate social problems. A dual-income family with an annual income of less than NT$816,000, as the name suggests, means couples who both have average monthly incomes of less than NT$34,000 (US$1,100). Unless they have no financial concerns, for a couple to both be earning such low wages is, without a doubt, a vicious circle.

In Taiwan's modern society, what kind of people would enter into a marriage without either party having a solid economic foundation?

To put it bluntly, only people from families with economic situations that were already bad; groups with low socio-economic status.

Many people from this demographic background tend to have children when they are very young, and as a result it means they will get moved into a different bracket that does not need to pay income taxes, which is, families of four with combined monthly incomes of less than NT$1.23 million (US$39,860). For some low-income families in the future, this will mean that when they include the time before their child becomes five years old, there is a high possibility that they will have a period of over five years where they won't need to pay income tax.

Now that we have come this far, have you realized how significant this problem actually is? If the tax exemption policy is passed for this group of people, besides creating a small paradise bubble, it really doesn't practically address the actual problem. According to the government's population and housing census, the total number of two-person and four-person households was about 3 million, and among them there is a total of 1.77 million whom the government defines as "tax-exempt poverty-stricken citizens." With this many people not paying taxes, could it possibly have a positive effect on the development of the country?

Just from the above point, it is crystal clear that this policy completely contradicts the two principles of taxation, increasing financial resources and controlling the people.

The government must think carefully about whether to increase taxes on the rich or exempt the poor from them

Many people may ask why the government needs to collect taxes from the poor. Is it not better to just increase taxes on the rich as they already earn so much?

In order to answer this question, we first need to understand the role the rich play at the top of Taiwan's taxation pyramids. Taking last year as an example, 12 percent of the total population were taxpayers with annual incomes of more than NT$10 million (US$324,065). This small percentage of people contributed close to one-third, around 32 percent, of Taiwan’s total tax revenue.

From this simple statistic, we can see that the richest people are already the government's most important source of income tax and can be viewed as Taiwan's "key minority."

The young people of today, driven by their passion for justice and equality, probably want to see the government play the role of Robin Hood by "robbing the rich and giving to the poor" as they believe that increasing the tax on the rich will lower the tax rate for the lower social classes and achieve something closer to a "fair and just society." From a numbers perspective this may be true, but from a social one it is not justifiable. The main reason is that blindly demanding an increase to the taxes on the rich may not necessarily increase the revenue received from the rich.

One of the most famous bad examples of tax reform was when former French president François Hollande had to abolish his 75 percent 'supertax' policy in 2015. The French newspaper Le Figaro said that the release of the policy in 2012 le d to an exodus out of the country by high profile names and continued protests from major corporations in the country. In addition, after taxes were later calculated, they discovered that revenues had not reached the expected levels, so the policy received strong criticism the opposition party at that time. The most famous names to leave were France's richest man and founder of LV, Bernard Arnault, who took Belgian nationality. There were also high-earning footballers, like Swedish football legend Zlatan Ibrahimovic, who was playing at Paris Saint-Germain (PSG) at the time. Many French business leaders warned that raising the tax on the rich would lead to big-name sports stars and wealthy people leaving the country, which would have an adverse and opposite effect on the government's tax revenue.

Credit: Reuters / Eric Bolte / USA TODAY Sports
Zlatan Ibrahimovic now plies his trade in the United States, leaving behind what he once called a 'shit country.'

This example shows us that these so-called rich people's taxes must be agreed upon after consultations between the government, business and financial consortiums. If the government tries to arbitrarily implement them, the consequences could be unimaginable.

In short, let's suppose that the government raises the tax rate on the rich and gives middle- and low-income citizens tax-free concessions. In the end, they will likely not only lose the tax revenue from the majority of the middle and lower social classes, but it is highly likely that they won't even receive tax from the rich, creating an even greater financial deficit in the government's pocket.

Credit: Reuters / TPG
Former French President Francois Hollande.

Taiwan wants to become a welfare state like the North European countries, but the people of Taiwan would rather the government cuts taxes

Just like the title suggests, if you want to become a welfare state then the people must pay, even if they only have low incomes. The Constitution used to say that the people have an obligation to perform military service and pay taxes, and these obligations are what one can contribute to their country.

If the government truly wants to help these citizens who have real difficulties in life, they should not exempt them from paying taxes. Think about it like this: The money the government would have received before the tax cuts could easily be used to help pay for healthy lunches or to subsidize tuition fees for children from extremely disadvantaged families. It could possibly even be used to promote cooperation between industries and schools or be put towards helping graduates find better job opportunities. By investing in education and career development, the government has a better chance of improving the lives of these low-income and disadvantaged families.

The saddest thing is that today's government only wants to use meaningless tax-free concessions to please the masses and divert their attention. In reality, these concessions will have no practical effect on the development of the country.

The views expressed in this article are those of the author and do not necessarily reflect the editorial policy of The News Lens.

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This article first appeared on the Chinese-language Taiwan edition of The News Lens and can be found here.

Translator: Zeke Li

Editor: Nick Aspinwall (@Nick1Aspinwall)

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