TAIWAN: by Jeffry Babb News Weekly
Taiwan's tax system keeps money in the family
, September 24, 2005
One secret of Taiwan's economic success, writes Jeffry Babb, is a tax system which encourages savings and offers large tax deductions to families with dependants, thereby reducing the need for public welfare.The family is the bedrock of Chinese society and this is reflected in the way Taiwan organises public spending and the way people plan their lives.
Taiwan is a traditional Chinese society, and traditionally, the Chinese family has looked after its own. The government encourages this with a family-friendly tax system with large tax deductions for dependents.
This means, instead of the government taxing the individual and then returning the money as a family allowance, the money never leaves the hands of the taxpayer. Tax allowances are generous and many average income earners don't pay tax at all - but they have to look after their families.
Average earnings per household in Taiwan amounted in 2004 to NT$1,112,000 - or in Australian dollars, $44,480. This was a rise of 1 per cent from the 2003 level. Income tax must be paid on earnings. However, for each dependent child, a deduction of $2,960 (NT$74,000) is allowed. For a dependent student over 20, the same deduction is allowed. This amount is claimable for all children. Similarly, a dependent spouse is allowed $2,960 (NT$74,000) as a deduction.
Until recently, Taiwan has not had old-age pensions. However, now each elderly person receives a stipend of $120 (NT$3,000) per month. In addition, for parents over the age of 70, a tax deduction of $4,440 (NT$111,000) is allowed per parent.
This system worked well when Taiwan was booming, but recently, things have been less rosy. The figures still look enviable - with an unemployment rate of 4.15 per cent in March, and the growth rate estimated by the government to be 3.63 per cent for 2005.
Taiwan society has been working on a bargain - the government will provide full employment, and the family will look after its own.
This has been reflected in the savings rate. Again, the figures are enviable. But a downward shift has been observed. Taiwan's average household savings dropped to a new low of $7,920 (NT$198,600), the government statistical agency, the Directorate General of Budget, Accounting and Statistics (DGBAS) reported.
Looking at the broader trends, the composition of Taiwan households is changing, with young members moving out of their parents' homes to form nuclear families. As a result, the number of Taiwan households increased from 5.57 million in 1994 to 7.08 million in 2004, while the average number of members of each household dropped from 4.02 to 3.5. Against this backdrop, per capita savings still registered a marginal 0.2 percentage increase over the decade.Household income
According to the DGBAS survey, average household disposable household income was about $25,640 (NT$891,000), up 1.1 per cent from 2003, and the growth rate for the past decade averaged 1.5 per cent. The DGBAS also reported that average household expenditure was $27,720 (NT$693,000) in 2004, up 3.9 per cent from the year earlier. The annual growth rate averaged 2.4 per cent for the past decade. Of household expenditure, dwelling-related spending, including rent, utilities, furniture and household management, accounted for 26.8 per cent, while spending on food and non-alcoholic beverages made up 23.7 per cent.
Household consumption has risen, and average household savings have declined steadily over the decade. Nevertheless, the savings have remained positive, indicating that Taiwan households have continued to accumulate wealth.
Recently, the government has been saying that increased outlays on social welfare and other domestic spending have left it short of cash for other spending, such as defence.
The current spending on defence is 2.7 per cent of GDP - compared with 5.5 per cent in Singapore. The military has said it must have 3 per cent of GDP to maintain a credible deterrent force, but the government says the money can't be found.
Increasing income tax is not feasible when times, if not tough, are less rosy than in the past.
Many "sunrise" industries such as computers and other high technology get tax breaks, and the government has been talking of increasing corporate taxes.
Again, this has left the government between a rock and a hard place, because increasing taxes on corporations would accelerate the shift of vital industries to other parts of Asia - particularly mainland China.
Taiwan's government expenditure as a proportion of GDP remains low for a country that is now an industrialised nation. However, given that government spending in Australia is dominated by transfer payments - in other words, social welfare and family support payments - the figure for Taiwan does not take account of the fact that much of the social welfare spending remains where it always has been - in the family.
Also, Taiwan has a national heath care system, similar to Australia's Medicare. This means crippling health care costs are for most people a thing of the past. Membership is based on income earned, and some people fall through the cracks, but the government is steadily expanding coverage.
In all, Taiwan is a society in transition, but still retains its Chinese character. The relatively high level of domestic savings means that money is available for investors in industry and the family-based system of care remains strong, with the money staying in the family.