After a lot of complaints, the Cabinet has finally proposed a plan to revive the economy. The first measure, reducing the securities transaction tax by 50 percent for half a year, did nothing to improve the situation — the stock market reacted by dropping another 206.06 points, or 3.19 percent, yesterday.
The question of whether the economy should be resuscitated through tax cuts or a tax refund has been a matter of heated debate. The opposition wants to follow the international trend and supports a tax refund, while industrial and trade organizations have advocated big cuts in business income, estate and gift taxes. The Ministry of Economic Affairs wanted to restore the five year tax exemption for traditional industry, while some Chinese Nationalist Party (KMT) legislators called for the cut in the securities transaction tax.
The question is whether these tax cuts and refund proposals will produce results in the short run but have long-term negative consequences.
The focus of the Cabinet’s tax reform committee is on low taxes and a streamlined government, and it will begin with reforming income, consumption, property and energy taxes, but this will not have an impact on current economic problems.
If the securities transaction, estate and gift taxes were reduced to resuscitate the economy in the short term but had a detrimental effect on tax reform in general, then the committee would render itself superfluous.
The Cabinet followed the wishes of KMT legislators and lowered the securities transaction tax, hoping it would strengthen confidence and kick start the stock market. If, however, the measure is not supported by international developments and domestic fundamentals, it will not be effective.
Selective measures aimed at quick fixes — which might be difficult to rescind in six months’ time — are certain to have a big impact on tax revenue. It is also unfair to only benefit stock market investors rather than offer rebates to the general public.
The US is dealing with its subprime crisis through tax refunds, and Singapore, Hong Kong, South Korea, Japan and even China are following its example.
The US approach has already produced some results: The economic growth rate increased from 0.9 percent in the first quarter to 3.3 percent in the second. This implies that tax refunds are an effective way to deal with a slowing economy.
However, Taiwan’s government rejected a tax refund because it must first have money to refund. Government finances have been in the red recently, so funds are short and must be found elsewhere. In addition, 27 percent of those filing taxes are exempt from paying individual income tax, while 46 percent of those who pay income tax are in the lowest tax bracket, at 6 percent. These people will either not be entitled to a tax refund, or the refund will be extremely small. It will do nothing to resuscitate the economy.
The government has issued debt to expand domestic demand. If it expands the tax refund to include the general public based on a percentage of overall tax revenue rather than restricting it to individual income tax or selective tax cuts, the tax system would not be distorted.
A progressive tax refund would benefit everyone — the lower the income, the higher the refund — by boosting consumption. In addition, this would help correct uneven income distribution.
If the government feels uncomfortable with a comprehensive tax refund, Vice President Vincent Siew’s (蕭萬長) suggestion of a so-called “468” negative income tax, while not as effective as a refund, would help low income households as well as the economy. But the government must act fast.
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