Legislator Fai Hrong-tai's Public-Interest Lecture at the "Hong Chun-pei Culture and Education Foundation"

(Taiwan Business News) Greece, Spain and other European debt-stricken countries have been plunged into political and economic turmoil by their fiscal crises and must rely on the EU to step in with rescue efforts. Taiwan's fiscal crisis is rapidly emerging, and the severity of the problem is fast approaching that of the European debt-stricken countries, yet there is no international rescue mechanism to fall back on. Therefore, only by acting promptly to save itself can Taiwan avoid an economic disaster.

Finance is the mother of all governance. Every policy and construction project is inseparable from finance. How can financial efficiency be improved so that the best results are achieved with the least money, and every single cent is spent where it counts most? On April 12, the Hong Chun-pei Culture and Education Foundation and Taiwan Business News invited Legislator Fai Hrong-tai to speak on "Sound Public Finance Benefits the Nation and Its People." Drawing on his many years as a legislator and his background in teaching and research, Legislator Fai spoke about sound public finance, and the audience benefited greatly.

The traditional functions of government are to ensure national security and to maintain public order and justice, but a modern, pluralistic government must go further: it must promote a more even distribution of income, provide diverse social welfare, and maintain economic stability and sustainable development. Yet when the goals are prosperity, sustainability and justice, achieving all of them fully would indeed be perfect. But what happens when those goals conflict?

Legislator Fai Hrong-tai's Public-Interest Lecture: A Sound Public Finance Plan to Inject Vitality into the Economy

Take the securities transaction income tax, which has been debated in society for a long time. It is a tax levied on the capital gains earned from trading stocks. Levying such a tax means that those who earn more pay more tax, which helps achieve the principle of fairness and justice; but at the same time it also raises the threshold for investment. As a result, the securities transaction income tax law passed last year was criticized in public opinion for causing a sharp shrinkage in stock market trading volume and affecting economic development, sparking controversy.

In addition, an energy tax may be introduced. It would hit businesses that use large amounts of gasoline, diesel, kerosene, aviation fuel and liquefied petroleum gas (excluding solvent naphtha) relatively hard, and would inevitably have some impact on the economic growth rate; but for ordinary people who use little gasoline, the impact would be small. Instead, they would enjoy the "tax cut" benefit of a higher deduction or exemption under the consolidated income tax.

Finance is the mother of all governance. In responding to fiscal problems, both short-term and long-term administrative needs must be taken into account, and the priorities for reform must be established. Only by tackling both the resolution of the short-term fiscal crisis and the long-term restructuring of public finance can the root problems be effectively solved. In the short term, what we now face is a central government whose finances are stretched to the limit, which must also cope with the fiscal predicament of a rapidly sliding economy, as well as local governments on the verge of a fiscal crisis in which they have "no rice to cook."

These numerous reforms are so interconnected that pulling one strand moves the whole body. How the government can devise policies that satisfy both sides and persuade the public to share the burden will require a great deal of wisdom to resolve.

Legislator Fai Hrong-tai stated that although Taiwan's government debt is "internal debt," different in nature from the "external debt" of the European debt-stricken countries, government debt, whether "internal" or "external," is in essence the debt of all the people and must ultimately be repaid by the people themselves. The more serious the government debt problem becomes, the more the resources available for discretionary spending dwindle, and the people's wealth shrinks accordingly. The longer the problem is dragged out, the more serious poverty becomes, and it is passed down from generation to generation, leaving future generations trapped as a "poor generation" unable to turn their fortunes around.

Even more seriously, the fiscal crisis causes a sharp decline in the quality and quantity of the nation's public services, and shrinks investment in infrastructure, education, science and culture, and other areas. This not only weakens the momentum of economic growth but also severely damages the nation's competitiveness, creating a vicious cycle in the economy. This is exactly a portrait of Taiwan's economy sinking ever deeper over the past few years. The government must find ways to manage the rising fiscal risk, vigorously reform public finance, and turn the crisis into an opportunity.

In February 2014, the Ministry of Finance proposed a sound public finance plan, which called for adjusting the business tax and income tax and raising the special salary deduction. The plan has three key points: controlling the scale of government debt, reviewing unreasonable expenditures, and tax reform. The tax reform is not simply about cutting or raising taxes; it has a certain flavor of taking from the rich to help the poor. The business tax rate for banks and insurance and financial businesses will be raised from 2% to 5%; under the integrated income tax system, the creditable amount of dividend tax will be halved against the consolidated income tax. It is estimated that the national treasury will take in an additional 68.5 billion yuan in tax revenue per year. Adjusting the financial business tax rate: the business tax on banks and insurance companies is to be restored from 2% to the 1999 level of 5%, which is expected to raise an additional 21 billion yuan in tax revenue. The additional tax revenue will go to the national treasury, while the original tax revenue will still be allocated to special reserve funds such as deposit insurance.

The integrated income tax system, which merges the profit-seeking enterprise income tax and the consolidated income tax into one, aims to eliminate the double taxation of business income. To balance the tax burden, the draft provides that for the net amount of dividends (surplus) distributed to shareholders not residing within Taiwan, the portion of the tax already levied at the additional 10% profit-seeking enterprise income tax may only be credited against half of the withholding tax payable on the net amount of such dividends (surplus). To balance the tax burden between sole proprietorships and partnerships and corporate organizations under the partial imputation credit system, the draft provides that when sole proprietorships and partnerships file final, annual and liquidation returns, the tax payable shall be half of the annual tax payable minus the withholding tax not yet credited; small-scale profit-seeking enterprises are not required to file final returns, and their profit-seeking enterprise income is subject to the consolidated income tax as prescribed.

Legislator Fai Hrong-tai: A Brief Profile

Legislator Fai Hrong-tai holds a bachelor's degree in statistics from National Chung Hsing University and a doctorate in statistics from the University of Kentucky in the United States. He has served as a member of the 7th, 8th and 9th Taipei City Councils, Vice Speaker of the 8th Taipei City Council, Executive Director-General of the Lien-Soong Taipei City campaign headquarters, a member of the Economic Development Advisory Council, Associate Professor in the Department of Statistics at National Taipei University, Associate Professor in the Department of Statistics at National Chung Hsing University, Associate Professor in the Department of Business Administration at Ming Chuan University, a member of the 17th Central Committee of the Kuomintang, a member of the Legislative Yuan's Budget Audit Committee, Convener of the Legislative Yuan's Procedure Committee, Chief Secretary of the Kuomintang caucus in the Legislative Yuan, Chairman of the Legislative Yuan's Finance Committee, and Convener of the Legislative Yuan's Finance Committee. He currently serves as a legislator, Convener of the Legislative Yuan's Finance Committee, Convener of the Legislative Yuan's Procedure Committee, a member of the 18th Central Standing Committee of the Kuomintang, and Adjunct Associate Professor at the Graduate Institute of Statistics of National Taipei University.

Hong Chun-pei Culture and Education Foundation 2014 Public-Interest Lecture