EDITORIAL: A more sound tax system needed 1

The Executive Yuan is moving toward abolishing the stamp tax, to the joy of local businesses, but local governments have raised concerns over the move, as the levy is a major source of income for them.

Local Chinese-language media last week reported that Premier Su Tseng-chang (蘇貞昌) approved a bill proposed by the Ministry of Finance to scrap the controversial tax. If the Legislative Yuan approves draft amendments to the Stamp Tax Act (印花稅法) in the coming legislative session, the levy could be lifted as early as next year.

The government promulgated the act on Dec. 8, 1934, making it one of the oldest taxes in the nation. After dozens of amendments, only four types of documents remain subject to the stamp tax: receipts for certain monetary payments; contracts to perform a specific job or task; contracts for the sale of movable properties; and contracts for the sale, transfer and subdivision of real estate.

Even so, local industry representatives have for the past 20 years lobbied against the levy, arguing that it overlaps with the value-added business tax.

On the other hand, increasingly complex transaction types and a wide variety of documents have added to the cost of tax collection for the government, as it must use more administrative orders to identify taxable documents, while taxpayers are more likely to avoid paying it, as they often feel at a loss for what to do. Over the past few decades, several governments considered phasing out the tax, but failed, due to political and economic factors.

In late May, members of the Chinese National Association of Industry and Commerce, one of the major trade organizations in the nation, met with Su and recommended that the government scrap the tax, as collecting it and the business tax results in double taxation.

Apparently, the government heeded the association’s proposal this time around, but few details about the bill are known, while people wonder how the government will cover the cost and help local governments make up for shortfalls in tax revenue.

The revenue generated from stamp tax last year totaled NT$12.1 billion (US$385.8 million), or only 0.5 percent of the nation’s total tax revenue of NT$2.39 trillion, so abolishing it would not negatively affect the state coffers, but could lessen the burden on taxpayers.

However, the move to abolish it has perturbed many local government heads, who last week demanded that the central government first implement supporting measures and designate alternative income sources.

The Chinese Nationalist Party (KMT), meanwhile, has perceived the matter as a campaign tactic by the Democratic Progressive Party to win next year’s presidential and legislative elections.

The key to abolishing the levy is finding a replacement income source for local governments. This could be achieved through amending the Act Governing the Allocation of Government Revenues and Expenditures (財政收支劃分法) to ensure fair allocation of resources to local governments, using part of the central government’s annual budget to make up revenue shortfalls, or raising business taxes.

Before reaching a final decision, the Executive Yuan should gauge the feasibility of the proposals and discuss the matter with lawmakers and local governments.

However, the books cannot be balanced by robbing Peter to pay Paul. The government needs to follow fiscal discipline if it abolishes the stamp duty. More importantly, it must find a way to make the whole pie bigger, which means boosting economic growth and thus increasing overall tax revenue, and developing a more sound tax system, with abolishing the stamp tax being the first step toward a bigger tax reform.