Identifier
Created
Classification
Origin
05TAIPEI3221
2005-08-02 09:22:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
American Institute Taiwan, Taipei
Cable title:  

Taiwan Tax Reform II - The Numbers

Tags:  EFIN ECON TW 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.

020922Z Aug 05
UNCLAS SECTION 01 OF 04 TAIPEI 003221 

SIPDIS

SENSITIVE

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR TWINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EFIN ECON TW
SUBJECT: Taiwan Tax Reform II - The Numbers
REF: Taipei 03150

Summary
-------

UNCLAS SECTION 01 OF 04 TAIPEI 003221

SIPDIS

SENSITIVE

STATE PLEASE PASS AIT/W AND USTR

STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA

USTR FOR TWINELAND

USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT
TREASURY FOR OASIA/ZELIKOW AND WISNER
TREASURY PLEASE PASS TO OCC/AMCMAHON
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF GOVERNORS,
AND SAN FRANCISCO FRB/TERESA CURRAN

E.O. 12958: N/A
TAGS: EFIN ECON TW
SUBJECT: Taiwan Tax Reform II - The Numbers
REF: Taipei 03150

Summary
--------------


1. (SBU) This cable examines Taiwan government expenditures
and revenues. According to the Directorate-General of
Budget, Accounting and Statistics (DGBAS),the 2005
projected total government expenditures equal NT$1.635
trillion; total revenues equal NT$1.402 trillion. The
estimated annual budget deficit equals NT$233 billion, a
slight (six percent) improvement from the previous fiscal
year. End Summary.

Intro
--------------


2. (SBU) This cable is the second in a series on Taiwan tax
reform. The first cable (reftel 03150),released July 25,
discussed Taiwan tax reform policy proposals. The third and
fourth cables in this series will discuss the two proposals
under consideration to alleviate Taiwan's fiscal problems -
the Alternative Minimum Tax and Value Added Tax,
respectively.

Historical Burden
--------------


3. (SBU) In 1989, Taiwan experienced its first significant
budget deficit - NT$285.8 billion, equivalent to 7.3% of
GDP. The budget balance has remained negative through the
present, with the exception of 1998, when Taiwan implemented
a fiscal reform package with the National Development
Council's (NDC) goal of having a balanced budget by 2001.
These reforms caused a jump in government revenue growth,
from 6.3% in 1997 to 20.5% in 1998, producing a budget
surplus of NT$60.9 billion. Despite this, the following
year saw another deficit due to a 2.9% increase in
government spending and a 2.4% decrease in government
revenues (mainly due to repercussions of the Asian financial
crisis).


4. (SBU) According to the DGBAS, from 1990 to 2003,
Taiwan's annual GDP growth rate averaged 8%; Taiwan's annual
GNP growth rate averaged 7%. In contrast, tax revenues on
average grew only 2.8% annually, failing to keep pace with
economic growth.


5. (SBU) Several major infrastructure projects launched
during the Kuomintang (KMT) era resulted in a substantive

fiscal burden for the Democratic Progressive Party (DPP)
after it took office in 2000. From 1987 to 1997, annual
expenditure on social welfare increased nearly 800%, from
NT$37.1 billion to NT$295 billion. Since taking office in
2000, the social welfare budget has continued to grow,
deepening the debt. In 2005, the central government will
spend NT$419.2 billion on social welfare.

Revenues
--------------


6. (SBU) The projected 2005 total revenue is NT$1.402
trillion, a NT$53.265 billion increase from total revenue in

2004. Taiwan's revenue structure for 2005 consists of taxes
(68.3% - NT$958 billion),profits of public enterprises
(19.4% - NT$271.6 billion),public properties (5.8% - NT$82
billion),fees, fines and indemnities (5.3% - NT$73.7
billion),and miscellaneous sources, such as tuition and
donation (1.2% - NT$17.425 billion).


7. (SBU) The tax system is composed of income tax (NT$437.6
billion),commodity tax (NT$145 billion),business tax
(NT$132.7 billion),security transactions tax (NT$98.23
billion),customs duties (NT$83.5 billion),tobacco and
alcohol tax ($42.36 billion),estate and gift tax (NT$10.1
billion),and futures trading tax (NT$8.5 billion).

Income Tax
--------------


8. (SBU) A progressive individual income tax from 6% to 40%
exists. Personal exemptions of NT$72,000 are allowed for
the taxpayer, spouse and each dependent. Taxpayers with
parents over 70 years of age can take an additional
NT$108,000 exemption.

Value Added Tax (VAT)
--------------


9. (SBU) The current VAT is set at 5%. The Ministry of
Finance plans to increase this tax by one to two percentage
points, from 5% to 6-7%, in 2006. An increase of one
percentage point would bring added revenue of NT$30 billion
a year. Unlike the minimum tax, an increase in the VAT does
not require new legislative measures. Current law gives the
executive branch power to set the value added tax level
between five and ten percent.

Expenditures
--------------


10. (SBU) According to the DGBAS, Taiwan's government
expenditure structure for 2005 consists of social welfare
including retirement (25.7% - NT$419.2 billion),education,
science and culture (19.4% - NT$317.7 billion),economic
development (15.7% - NT$257.37 billion),national defense
(15.4% - NT$251.94 billion),general administration (10.6% -
NT$173.05 billion),obligations (8.2% - NT$134.65 billion),
and general subsidies and other expenditures (5% - NT$81.67
billion). General Subsidies and other expenditures include
subsidies for special projects, community development, and
environmental protection.


Challenge 2008 - National Development Plan
--------------


11. (SBU) The Challenge 2008 National Development Plan
implements fiscal reform to reduce the central deficit. By
strengthening the allocation system of government revenues
and expenditures, central government hopes to eliminate the
central deficit in five to ten years. In 2002, the
government allocated NT$2.65 trillion to jumpstart the
national development plan. The Challenge 2008 Plan projects
to produce an estimated NT$19.3 trillion additional economic
output over six years.


12. (SBU) The Challenge 2008 tax revenue reform objectives
include adjusting the tax structure, pursuing steady and
adequate tax revenues, and achieving fairness and
efficiency. To control expenditure growth, the government
will review structure, efficiency and scale of fiscal
expenditures. Officials believe the Challenge 2008 Plan
will promote continuous economic growth, more job
opportunities, and better life quality.

Government Administration
--------------


13. (SBU) One of President Chen Shui-bian's campaign
promises was to streamline the government to make it more
efficient and cost-effective. In 2005, government
employment rolls have been reduced by 1,000 employees, but
payroll expenditures will still total over NT$400 billion
(NT$14.3 billion more than 2004).


14. (SBU) Local governments rely heavily on subsidies from
the central government, which undermines fiscal discipline.
Passage of a statute in November 2002 giving local
governments more taxation power has resulted in little
progress. "Local governments don't have much incentive to
impose taxes because that may lead to public complaints,"
said Finance Minister Lin Chuan. "For them it's much less
troublesome to continue asking for funding from the central
government." This state of dependency further exacerbates
the central government's fiscal condition.

Issuing Bonds
--------------


15. (SBU) Central government revenues from sales of
government bonds have escalated from 10.5% of annual
revenues in 1994 to 19.54% of annual revenues in 2004.
Since 2000, the DPP has issued an average of NT$245.2
billion in annual public bonds, compared with the KMT's
annual average of NT$191.6 billion from 1989-1999.

2006
--------------


16. (SBU) According to Commercial Times, Premier Frank
Hsieh chaired a 2006 budget preparatory meeting on July 25.
According to the report, central government expenditure will
decline .8% from 2005 to NT$1.596 trillion. The science and
technology (S&T) budget will substantially increase by 19.7%
to NT$84.3 billion, previously NT$70.9 billion in 2005. The
growth is designed to meet President Chen Shui-bian's policy
target of (national) R&D expenditure reaching 3% of GDP.
Economic Minister Ho Mei-yueh believes that for every NT$3.6
billion in government R&D expenditure, private investment
will increase by NT$10 billion.
Comment
--------------


17. (SBU) For 2005, the estimated budget deficit will reach
NT$233 billion. The central government continues to resort
to issuing bonds to control the deficit. In FY2005, central
government will issue NT$255 billion in bonds. According to
Chen Chien-Hsun, a Research Fellow at the Chung-Hua
Institution for Economic Research, reliance on bonds to
finance the increased expenditures may drive up domestic
money market interest rates and bring about foreign capital
flows, in turn leading to higher borrowing costs, which will
crowd out investment. Furthermore, this will cause the NT
dollar to appreciate and exports to decline, inevitably
weakening Taiwan's long-term economic prospects.

PAAL

(This cable drafted by Economic Section intern David Craig)