Judgment Day for Treasury Officials

Judgment Day for Treasury Officials
China Times editorial (Taipei, Taiwan, ROC)
A Translation
July 17, 2007

A Summary

During the past two months, Taiwan's stock market has gone crazy. From 8,066 points on May 4, it rocketed to 9,471 points on July 13. Trading volume increased from NT$ 113.9 billion to NT$ 239.6 billion. Normally speaking, the stock market is a window on the economy. Stock market trading volume and indices reflect economic fundamentals. What is unsettling about this latest round of stock market movements, is that no changes in the economic fundamentals can be detected behind these momentous changes. No dramatic changes in domestic consumer investment, in imports and exports, in cross-Strait trade, in free trade area negotiations, or international market competitiveness. Most analysts believe that the stock market's current rise has to do with aggressive intervention by the ruling Democratic Progressive Party (DPP). Whether such aggressive interventions will yield long-term results remains to be seen. The DPP buys votes by means of pork barrel patronage. We have learned to accept it. But when it provides political patronage by means of short-term tax cuts, using the pretext of systemic reform, that we can never accept. We must remind Minister of Finance Ho Chih-chin that these actions are being recorded. By this time next year, everyone on Taiwan will be able to see the amount of business taxes and individual income taxes collected in 2007. Whether inheritance taxes are reduced, whether procedures for investigating tax evasion are changed, whether Minister Ho has relinquished his foreign nationality are all trivial matters. The future reputation of Minister Ho will depend solely on whether he can protect the nation's assets and manage the nation's finances. Nothing else.
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Please See Full Text of the Editorial Below

During the past two months, Taiwan's stock market has gone crazy. From 8,066 points on May 4, it rocketed to 9,471 points on July 13. Trading volume increased from NT$ 113.9 billion to NT$ 239.6 billion. Normally speaking, the stock market is a window on the economy. Stock market trading volume and indices reflect economic fundamentals. What is unsettling about this latest round of stock market movements, is that no changes in the economic fundamentals can be detected behind these momentous changes. No dramatic changes in domestic consumer investment, in imports and exports, in cross-Strait trade, in free trade area negotiations, or international market competitiveness. Most analysts believe that the stock market's current rise has to do with aggressive intervention by the DPP (Democratic Progressive Party) government. Whether such aggressive interventions will yield long-term results remains to be seen.

Financial and economic analysts look at the current round of government interventions in two different ways. The first is the Central Bank's dual rate policy: Control of exchange rates and interest rates and strict controls over overseas funds, effectively imprison capital within the island. Taiwan is an island economy, highly dependent upon imports and exports. The price of trade goods has always reflected fluctuations in international pricing. When domestic capital is abundant, the price of trade goods tends not to rise because it is linked to international pricing. Capital naturally flows to regional, non-trade oriented investments such as stocks and real estate, resulting in a simultaneous rise in stock prices and real estate prices. The current rise in stock prices and real estate prices is essentially a reenactment of the 1986 to 1987 bull market drama, but with a different cast of characters. As analysts have pointed out, those entering the stock market this around and making a profit are mostly corporations subject to the Central Bank's rate policies, not individual investors late to the game. If due to poor fundamentals the bottom falls out of the market, the impact on individual investors will be serious. Caveat Emptor!

The Central Bank's dual rate policy has incurred a great deal of outside criticism. But it is after all, only a tactical, short-term measure. The Central Bank can raise interest rates or exchange rates at will. It enjoys considerable latitude in this, and side effects are limited. By contrast, many of the Executive Yuan's "benefit of the week" vote-buying schemes involve tax cuts and land planning. Any excesses will probably have irreversible and catastrophic consequences. Caution is advised.

Take tax cuts over the past two months for example. First, the Executive Yuan demanded that the 10% preferential tax rate in the Land Value Incremental Tax for personal residences be made applicable from "once in a lifetime" to "one residence in a lifetime." The Ministry of Finance dared not dissent, and timidly agreed. Next, the Executive Yuan approved an amendment to its Foreign Workers Levy, decreeing that expenses incurred by workers' spouses while returning to their native countries were tax exempt. This constituted yet another bizarre and irrational tax cut measure. After which, the Executive Yuan approved a five-year tax exemption for the distribution industry, on the basis that it was an emerging industry of strategic importance, resulting in billions of NT dollars of loss in tax revenues. The Executive Yuan's policies regarding high-value tracts of land in Taipei and Kaohsiung were reactive, hasty, and ill-considered. These tracts were nominally under the purview of the Ministry of Finance’s Bureau of State Properties. In fact, the bureau colluded with the Executive Yuan to bestow political patronage.

As we can see, the government's monetary policies and fiscal policies are short-term stimulus measures. Undue political influence on short-term economic trends forced the US government to respond to demands for central bank and monetary policy autonomy. The public regards even such short-term economic measures unacceptable. How can it accept the subordination of long-term economic development, tax policy, and agricultural policy to whatever party happens to be in power? Take rural development for example. Every plot of farm land developed is one more plot of farm land gone forever, never to be restored to its original condition. Shouldn't such matters be subjected to meticulous debate before reaching hasty decisions? Take the use of tax incentives to encourage speculation on rural land for example. What kind of half-baked financial policy is that? Take the distribution industry's five-year tax exemption for example. How does this industry merit listing as an "emerging industry" deserving of tax exempt status by the Ministry of Finance? Don't such matters need to be debated with outside parties? If the Ministry of Finance is going to agree to any and all demands for tax cuts, what do we need a Minister of Finance for?

The DPP buys votes by means of pork barrel patronage. We have learned to accept it. But when it provides political patronage by means of short- term tax cuts, using the pretext of systemic reform, that we can never accept. Do the Ministry of Finance and the Council for Economic Planning and Development have no opinion about such matters? Under pressure from tax cuts in other areas, Taiwan's business taxes have always been difficult to collect, and established a new low in 2002. Total revenues were only NT$ 150 billion. Combined efforts by the public and former Ministry of Finance officials eventually increased revenue to nearly NT$ 330 billion by the end of 2005. We must remind Minister of Finance Ho Chih-chin that these actions are being recorded. By this time next year, everyone on Taiwan will be able to see the amount of business taxes and individual income taxes collected in 2007. Whether inheritance taxes are reduced, whether procedures for investigating tax evasion are changed, whether Minister Ho has relinquished his foreign nationality are all trivial matters. The future reputation of Minister Ho will depend solely on whether he can protect the nation's assets and manage the nation's finances. Nothing else.

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