Taiwan Considers Tax Increase on High-Income Earners

Taiwan Considers Tax Increase on High-Income Earners

Government Also Looking at Boosting Taxes on Financial Institutions

ARIES POON And FANNY LIU

Feb. 24, 2014 6:11 a.m. ET

TAIPEI—Taiwan’s government, running a deficit budget for the sixth straight year, is considering increasing taxes on high-income earners and financial institutions, as the export-dependent economy is showing more signs of picking up.

Finance Minister Chang Sheng-ford said Monday the government is looking at raising the top rate of income tax to 45% from 40% on individuals whose annual taxable income exceeds 10 million New Taiwan dollars (US$329,161).

Additionally, the administration is considering an increase in the business-tax rate on banks and insurers to 5%, a level it was at before the 2008 financial crisis, from the current 2%. The government is also looking at reducing tax credits individuals can claim if they are subject to both income and dividend taxes.

“This is only fair,” Mr. Chang said at a news conference. “The government is trying to establish a concept of ‘feedback tax’, and let a small number of high-earning individuals and sectors give back to the community and propel the economy forward.”

Taiwan is joining other economies in raising taxes on the wealthy. France’s constitutional court in December approved President François Hollande’s “millionaire tax,” a 75% tax rate on individuals who earn more than one million euros. U.S. President Barack Obama is also expected to unveil a proposal to increase taxes on high-income earners in his 2015 budget, The Wall Street Journal reported Thursday.

Taipei has been spending more than it collected since 2009, pumping dollars into infrastructure projects and social-welfare programs while the economy was weighed down by weak exports.

Mr. Chang said tax revenue, if all proposed increases kick in, should be boosted by up to 90 billion New Taiwan dollars a year, around 5% of the government’s tax income last year.

The plans come after the government last Tuesday projected a 2.82% economic growth for this year, the fastest in three years but still below the average 3.3% annual growth over the past five years. Improving exports to developed economies has led companies in Taiwan to increase investments and raise wages in recent months, although a slowing Chinese economy remains a continuing concern.

Taiwan has no external debt, but the central government owes its own citizens 5.192 trillion New Taiwan dollars (US$171 billion) as at the end of January. Rolling government notes and bonds are about 36.8% of the average gross domestic product over the previous three years, according to government data.

The island’s public debt level, already close to its statutory ceiling of 40.6%, is sanguine relative to many Asian countries such as Japan and Singapore. Mr. Chang said Monday the government has no plans to raise the debt limit.

Ratings firms in general are comfortable with Taiwan’s fiscal position, in part because of the island’s ample foreign-exchange reserves. As of the end of last month, Taiwan central bank’s reserve assets totaled US$416.94 billion, among the 10 highest in the world.

A high domestic savings rate, strong outbound investments, the lack of external debt and improving relations with Beijing have also led to favorable credit ratings for Taiwan. Moody’s Investors Service in October raised the island’s local-currency country risk ceiling—the highest rating a foreign-currency-denominated security from Taiwan can be assigned—to Aa2 from Aa3. Standard & Poor’s has Taiwan’s foreign-currency rating at AA-minus and Fitch Ratings’ long-term foreign-currency issuer default rating is at A-plus.

Taiwan’s government has in the past year rolled out new measures and proposals to boost income or reduce spending, but met with limited success.

In June, the lawmakers passed a long-stalled amendment to water down a new tax on capital gains from stock trading, as the original version met with vehement opposition from the investment community. The government last year also decided to cut its subsidies on fuel and electricity in phases, after its plan for a one-off withdrawal drew criticism from the public.

The government is also considering reducing pensions for civil servants, which has attracted fierce opposition.