The General Chamber of Commerce last week urged the government to expand relief funds available to companies affected by the COVID-19 pandemic and lower the threshold for qualification. The chamber’s call came just weeks after the annual white paper from the Taipei-based Chinese National Federation of Industries said that the government’s relief and stimulus measures were inadequate and could be better spent.
Although the Executive Yuan on July 23 approved a special relief package amounting to NT$210 billion (US$7.12 billion) in subsidies for firms hurt by the COVID-19 pandemic and funding for vaccines, its delay in two extraordinary legislative sessions this summer affected the ability of some government agencies to deliver promised subsidies.
The groups’ requests reflect worries that the relief funds are not reaching the companies that need it as border controls and quarantine requirements remain in place, as well as fears that the nation’s economy might need to brace for a tough fourth quarter amid softening demand for Taiwan’s exports, in light of escalating US-China trade tensions and a second global wave of COVID-19 infections coinciding with the peak of influenza season.
Consequently, apart from appealing for more funds, the groups called on the government to issue yet another round of stimulus vouchers, offer tax relief for small and medium-sized businesses, enhance access to corporate financing, and provide an exemption for the 5 percent tax on undistributed earnings as a supporting measure for businesses.
However, is there a need for additional relief? The COVID-19 situation in Taiwan is relatively under control and there was a boom in domestic tourism over the summer helped by the government’s Triple Stimulus Voucher program, which has helped domestic consumption return to normal and the economy gradually recover.
Fitch Ratings on Friday upgraded its forecast for the nation’s economy to annual growth of 1 percent for this year, compared with the 0.2 percent contraction it predicted in June and the government’s GDP growth forecast of 1.56 percent.
Asking for tax cuts is like adding fuel to the fire, further harming the nation’s fiscal situation: Relief programs are being launched as a temporary policy, but any tax cuts would mean long-term reductions in tax revenues and could seriously affect the nation’s fiscal profile. What is more, the corporate income tax must be paid only when a company makes money, so why should it be lowered now?
History has taught us that while cutting taxes is a politically popular move, raising taxes is not, which means that once taxes are cut, it would be hard to restore them to their previous levels, which is also a challenge for Taiwan’s fiscal health.
The previous and current governments have launched a spate of tax cuts since 2000, touting them as necessary moves to revive the economy. The truth is that lowering the land value incremental tax rate resulted in more real-estate speculation, the reduction in the inheritance and gift tax rate led businesspeople to repatriate funds into the property market rather than into real economic activity, and the dividend income tax cuts and the tax breaks for repatriated funds have not yielded the expected economic propulsion benefits.
Another tranche of stimulus vouchers would do little to boost the economy at this point, as private consumption has returned to normal. Despite uncertainties in terms of the global pandemic and the situation of major economies, the government should not rush to launch another voucher program or tax cuts.
As the nation’s finances have significantly deteriorated this year due to the economic downturn, lower tax revenues and higher expenditures, the government needs to avoid recklessly spending money in case the economy again encounters headwinds.
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