2016/11/22
“Death and Taxes”—A Review of Estate and Gift Taxation in Taiwan
Joe CHEN Department of Public Finance
Nov. 15 & 22, 2016
Seminar on Political and Economic Development of Taiwan IMAS, IMES, IDAS at NCCU
Source: textbook and http://www.vincelewis.net/tax.html
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Sources: http://en.wikipedia.org/wiki/File:Window_Tax.jpg; http://en.wikipedia.org/wiki/File:Windows_in_Brighton_St reet,_Edinburgh.jpg; http://londongirl.hubpages.com/hub/Ten-Weird-Taxes-You- Probably-Dont-Have-To-Pay-Now
Source: 冠吟 (100205052)
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Source: http://en.wikipedia.org/wiki/William_III_of_England
Daylight Tax of King William III of England • King William III 1650—1702 (Reigned 1689 —1702) • The “Daylight Tax” was introduced in 1696 by King William III of England. It was officially called Window or Glass Tax in that a property owner or occupier was taxed on the number of windows in their building • In 1851, 155 years after Daylight or Window Tax had been introduced it was abolished and replaced by House Duty or a tax on property which is similar to normal methods of tax today
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Source: by Draken in Google Earth
Source: by Draken in Google Earth
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Source: by Draken in Google Earth
Tax on finished churches in Brazil in the 18th century • Igreja de São Pedro dos Clérigos, Terreiro de Jesus, Salvador, Bahía, Brasil • Visitors can see the transition between the rococo and the neoclassic styles by observing the church’s interior, specially the large panel on the ceiling and the main altar. • This like many others built in the 18th century, was left with one of its towers missing in order to avoid a tax on finished churches.
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Tax based on the width of one’s house in Holland in the 17th century
Source: textbook
Tax based on the width of one’s house and the number of windows in Poland
Kanonia 20/22 (Warsaw, Poland) 17th century house in one corner of Warsaw’s Old Town Square. Four hundred years ago, the people of Poland were subject to a property tax based on the width of the street-facing façade and the number of windows on that side. Slightly wider than the door and with just two stacking windows, this building was a major money-saver. It was partially destroyed in 1944 and Source: rebuilt in 1959 according to its http://www.elledecor.com/decorating/articles/12_na original design. rrowest_homes_world
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Some Quotes about Taxation
• Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. ~ Benjamin Franklin • America is a land of taxation that was founded to avoid taxation. ~ Laurence J. Peter • The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing. ~Jean Baptist Colbert
Some Quotes about Taxation
• What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin. ~Mark Twain • Did you ever notice that when you put the words “The” and “IRS” together, it spells "THEIRS?" ~ Unknown • A fine is a tax for doing something wrong. A tax is a fine for doing something right. ~ Unknown
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Some Quotes about Taxation
• 柳宗元，《柳河東集》，〈捕蛇者說〉： 「永州 之野產異蛇，黑質而白章；觸草木，盡死；以齧 人，無禦之者。」、「嗚呼！孰知賦斂之毒有甚 是蛇者乎！」
Outline I. Taiwan Tax System—An Overview Budget and Deficit The Classification of Taxes II. Estate and Gift Taxation in Taiwan Background Design and Current Status Main Questions of a Reform Proposal III. Some Data Analysis International Experiences The Development in Taiwan Tax Rate Change and Tax Base Effective Tax Rate of the Estate Tax
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Outline IV. Main Conclusions V. Reform Proposals Short-term vs. mid- and long- terms
Remarks Taxation and behavior Tax rate structure Tax capitalization Excess burden Taxation of Gift Trust
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I. TAIWAN TAX SYSTEM—AN OVERVIEW
Budget and the Composition of Tax Revenue According to the 2016 budget approved by the Legislative Yuan: in 2016, yearly expenditure amounts to NT$1,975.8 billion, yearly revenue amounts to NT$1,822.4 billion; at the same time, the tax revenue amounts to NT$1,440 billion.
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Budget and the Composition of Tax Revenue
Expenditures, Revenues, and Tax Revenues 100% billions 2,000 90% 80% 1,500 70% 60% 50% 1,000 40% 30% 500 20% 10% 0 0% 101 102 103 104 105 Tax Revenue/Expenditure Revenue/Expenditure Expenditure Revenue Tax Revenue
Budget Deficits
Budget Deficit (including special budgets and debt payment)
600,000
500,000
400,000 million 300,000
200,000
100,000
0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
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Composition of Tax Revenue
Net tax revenue pie chart in 2014 Net Tax Revenue Pie Chart
3. Land taxes 5. Custom 9.03% duties 5.6% Others 11.8%
2. Business tax 7.5% 1. Income tax 42.4%
4. Commodity tax 9.02%
Security transaction tax 4.6%
The Classification of Taxes
Use y to denote income, C for consumption, and W for end of period wealth. An individual’s activities at period t satisfy:
yt Ct Wt Wt1
Ct Wt RHS: sources of income; LHS: uses of income. In a multiple tax system (pretty much every country in the world), the so-called double taxation is necessary. As a matter of fact, from taxation theory, one can justify double taxation: Efficiency; Redistribution; Administration and compliance. Avoid violating constitutional rights: Principle of Equality; Principle of Proportionality.
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The Classification of Taxes
There are economic bases of taxation: Income; Consumption; Property. Tax incidence: direct vs. indirect taxes Revenue sharing among governments: national vs. local taxes
Tax Classification by Economic Bases By economic tax bases: Income: Consolidated (Individual) Income Tax, Profit-Seeking Enterprise (Business or Corporate) Income Tax, Income Basic Tax, and Land Value Increment Tax; Consumption: Business Tax, Customs, Commodity Tax, Specifically Selected Goods and Services (Luxury) Tax, Entertainment Tax, and Tobacco and Alcohol Tax; Property: Land Value Tax, House Tax, Vehicle License Tax, Estate Tax, and Gift Tax. Taxes may also be imposed on the venues of economic transactions where there are neither income nor consumption involved: Transaction (circulation/opportunity): Security Transactions Tax, Futures Transactions Tax, Stamp Tax, and Deed Tax.
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Tax Classification by Tax Incidence In theory, there are taxes that do not shift—i.e., the statutory incidence of the tax is the same as the economic incidence of the tax, e.g., profit tax and land value tax; but in practice, all taxes shift. By the incidence, taxes can be divided into two categories: direct vs. indirect tax. In the former, the tax is more difficult to shift around.
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Tax Classification by Tax Incidence Consolidated Income Tax, Profit-Seeking Enterprise Income tax Basic Income Tax, Direct Tax Land Value Increment Tax Land Value Tax, House Tax, Estate Tax, Gift Tax, Securities Transactions Tax, Futures Transactions Tax, Deed Tax Customs, Commodity Tax, Luxury Tax, business Tax, Indirect Tax Stamp Tax, Vehicle License Tax, Entertainment Tax, Tobacco and Alcohol Tax
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Revenue Sharing among Governments
The tax revenue of a national tax belongs largely to the central government; the tax revenue of a local tax belongs largely to the local government itself. Except customs and associated business and commodity taxes from imports, all national taxes are collected by the National Tax Administration. Local taxes are administrated by the local governments.
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Revenue Sharing among Governments Consolidated Income Tax, Profit-Seeking Enterprise Income tax, Basic Income Tax, Estate Tax, Gift Tax, National Securities Transactions Tax, Taxes Futures Transactions Tax, Customs, Commodity Tax, Business Tax, Tobacco and Alcohol Tax, Luxury Tax Land Value Increment Tax, Land Value Tax, House Tax, Local Taxes Deed Tax, Stamp Tax, Vehicle License Tax, Entertainment Tax,
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II. ESTATE AND GIFT TAXATION IN TAIWAN
Background (1/2)
The “singularity” of estate and gift tax A property tax? An income tax? A consumption tax? High administration costs A small tax in terms of revenue share (1.3% of total tax revenue in 2014) The most unpopular tax Double taxation Taxing the dead … The most symbolic representation of social wealth redistribution Against human nature: death and taxes
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Background (2/2)
Lots of controversies since the 2009 reform; many calls for another reform Wealth distribution is no longer an interest of socialists and academics (it’s #1 on the NY Times bestselling list) Pressures from the Legislative Yuan Financing for the long term care system
Design and Current Status (1/2)
The tax system differentiates estates (gifts) received from natural persons and gifts received from legal persons (for-profit enterprises) The former is taxed under estate and gift tax; The latter is taxed under income tax. In other words, estate and gift tax is a tax of natural persons. A “total estate tax” approach taxes total estates; a “divided estate tax” approach taxes the part of estates (legacies) as received by each heirs (legatees). A “divided estate tax” is imposed on the recipient of inherited properties or bequests, thus it’s an “inheritance tax”.
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Design and Current Status (2/2)
Due to the substitutability of estate and gifts (an estate is a gift after death; a gift is an “estate” while alive), “total gift tax” (tax on the donors) is used to complement “total estate tax”, and “divided gift tax” (tax on the donees) is used to complement “inheritance tax”. Taiwan has the total estate and gift tax system; the estate tax is imposed at death, and the gift tax is calculated annually. The “Estate and Gift Tax Act” has separate chapters for estate tax and for gift tax.
Revenue Sharing
The estate and gift tax in Taiwan is a national tax with tax revenue shared by the local governments 50% of revenue collected in a special municipality shall be returned to the respective municipality; 80% of revenue collected in a county-level city shall be returned to the respective county-level city; 80% of revenue collected in a rural or urban township or township-level city shall be returned to that township or township-level city. There was a proposal to change all the ratios to 60%.
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Tax Payers of Estate Tax
A citizen resided continuously in Taiwan: All properties are subject to estate tax irrespective of whether the estate is located within or outside Taiwan. A citizen not resided continuously in Taiwan or a non- citizen: Properties are subject to estate tax only to the extent that such properties are located within Taiwan. Fictitious citizen: if the decedent voluntarily relinquished his/her citizenship within 2 years prior to death , all the properties of the decedent shall be subject to estate tax according to the regulations for citizens. The location of death is of no concern.
Tax Payers of Gift Tax
A citizen resided continuously in Taiwan: All properties are subject to gift tax irrespective of whether the property is located within or outside Taiwan A citizen not resided continuously in Taiwan or a non- citizen: Properties are subject to gift tax only to the extent that such properties are located within Taiwan Fictitious citizen: if the donor voluntarily relinquished his/her citizenship within 2 years prior to making of gift, all gifts made by the donor shall be subject to gift tax according to the regulations for citizens The location where gift is made is of no concern
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Continuous Residence The term “estate” or “property” means movables, real estate property, and other rights and interests having values. The term “gift” means an act where the donor offers to transfer his/her property gratuitously to the donee who in turn accepts the transfer. “Continuous residence” mean one of the following: Maintaining a domicile in Taiwan within 2 years prior to the event of death or making of gift Residing in Taiwan without maintaining a domicile, but having stayed in Taiwan more than 365 days within 2 years immediately prior to the event of death or making of gift, except for a foreigner who was employed by the government to render a service and had only stayed in Taiwan for a specific period of time. Not meeting the requirements set forth in the preceding bullet: not continuously resided in Taiwan.
Main Questions to be Addressed (1/2)
1. Theoretical justification of estate and gift tax: Maximizing social welfare as in optimal taxation theory? Social wealth equalization? The pursuit of equal opportunity for all? 2. The choice of total or divided estate (gift) tax? A donor-based tax seems more direct in terms of the goal of equalizing social wealth; on the other hand, a donee-base tax seems to be more direct in terms of promoting equal opportunity for all 3. Tax base: Excluded items and amount? The amount of exemptions? The transfer between spouses? Deduction items and amount? The taxation of land used for public passage free of charge?
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Main Questions to be Addressed (2/2)
4. Tax rate structure: Progressive rate structure? Uniform tax rate? Rate differentiation between estate and gift? Is the current 10% too low? 5. Revenue sharing: Is estate and gift tax an appropriate revenue sharing instrument? The fairness among sub-national government? 6. The estate and gift taxation of trusts 7. Problems associated with the identification of tax payers
III. SOME DATA ANALYSIS
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International Experiences (1/2)
I. Taxpayers Most countries have adopted the divided estate (inheritance) tax system; there are other systems as well, such as: capital acquisition tax, capital transfer tax, capital gains tax, stamp duty, and income tax. II. Exemption The amount of exemption of the current estate tax: medium; The amount of exemption of the current gift tax: too high. III. Rate structure Except a few, most countries have progressive rate structure; It’s typical that inheritance tax rates differ according to the relationship between the deceased and the inheritors; tax rate is the highest in case of the most distant relatives; Most countries have the same rates applied to both estate and gifts.
International Experiences (2/2)
IV. From 2001, there are 11 countries, and two districts—Hong Kong and Macao, repealed their estate taxation ; noteworthily, Norway and Sweden. V. Estate and gift tax are NOT appropriate sources of government revenue due to small bases, and high administrative and compliance costs.
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The Development in Taiwan (1/3)
Year Main Changes Exemption ($NT) Tax Rate Estate: 200,000 3–50% (17 tiers) 1973 Enactment of the estate and gift tax law Gift: 50,000 4–50% (15 tiers)
1.New deductions (grandparents, brothers, and sisters); Estate: 2,000,000 2–60% (18 tiers) 1981 2.Increase the amount of deduction for Gift: 450,000 4–60% (17 tiers) surviving spouse (2,000,000) 3.Increase the amounts of exemptions
1.Exempt gifts between spouses. 2.Increase the amount of deduction for surviving spouse (4,000,000) 3.New deduction for mental and physical- 2–50% (10 tiers) Estate: 7,000,000 1995 disordered surviving spouse/lineal 4–60% (10 tiers) Gift: 1,000,000 descendents/parents. 4.Wedding gifts exemption: given by parents to the extent of 1,000,000. 5. Increase the amounts of exemptions
The Development in Taiwan (2/3)
Year Main Changes Exemption ($NT) Tax Rate Complementary reform made in 2001 accordance to the enactment of the trust law
1.Increase the amounts of exemptions. Estate: 12,000,000 2009 10% 2.The introduction of uniform tax rate. Gift: 2,200,000
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The Development in Taiwan (3/3)
I. Base narrowing: The introduction of new exemptions;
Increase the amount of exemptions;
Increase the amount of deductions;
The scope of coverage been narrowed down. II. Simplification of tax brackets: From 17 tiers to 10 tiers, and then to a uniform tax rate of 10% starting from 2009;
The highest marginal tax rate used to be as high as 60%;
Used to be the case that the tax rate of the lowest bracket of the gift tax is slightly higher than that of the estate tax.
Tax Rate Change and Tax Base (1/2)
I. No significant change to the total estate and gift tax revenue after 2009; II. The tradeoff between estate and gift tax.
Estate and Gift Tax Revenue and Raio—2001–2014 45 90% billions 40 80%
35 70%
30 60%
25 50%
20 40%
15 30%
10 20%
5 10%
0 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Total estate and gift tax revenue Estate tax ratio Gift tax ratio
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Tax Rate Change and Tax Base (2/2) Assessed Estate Tax unit: %; thousands value of gross value of net returns property value year estate per tax estate per tax taxed/total net/gross returns returns 2002–2014 4.4% 48.0% 46,056 22,491 2002–2008 5.2% 48.1% 39,241 19,419 2009–2014 3.6% 47.9% 55,144 26,588 Assessed Gift Tax unit: %; thousands value of gross value of net returns property value year gift per tax gift per tax taxed/total net/gross returns returns 2002–2014 12.3% 57.2% 4,968 3,074 2002–2008 15.8% 48.1% 2,879 1,374 2009–2014 8.2% 67.8% 7,405 5,057
Effective Tax Rate of the Estate Tax (1/2)
Effective Tax Rate Estate Tax Income Tax Decile 2001–2008 2009–2014 2013
1 0.67% 0.82% 0.01% 2 0.86% 1.40% 0.10% 3 1.11% 1.73% 0.49% 4 1.78% 2.36% 0.80% 5 2.72% 2.89% 1.04% 6 3.89% 3.42% 1.24% 7 5.36% 3.97% 1.48% 8 7.60% 4.86% 1.97% 9 10.54% 5.82% 2.92% 10 16.76% 7.96% 11.78% Total 5.13% 3.52% 5.34% Data source: 2014 estate tax assessment data and 2013 individual income tax statistics. Note: Effective tax rate=(tax payable)/(gross value of property or income).
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Effective Tax Rate of the Estate Tax (2/2)
I. The degree of progressiveness of the estate tax is less than that of the individual income tax (9 and 10th deciles). II. The estate tax is still progressive despite the adoption of a uniform tax rate of 10% since 2009. III. Effective rate (taxable returns) drops by 31.4% after the adoption of a uniform tax rate of 10% since 2009. IV. For each decile of the lower 50%, the effective tax rate increases, and for each decile of the higher 50%, the effective tax rate decreases (anti-progressive); the tax rate drop is most obvious with respect to the highest 2 deciles. V. For all periods, income from estate and gifts is taxed less heavily than income from usual sources (e.g., from salary).
IV. MAIN CONCLUSIONS
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Main Conclusions (1/6)
1. Theoretical justification: the estate and gift taxation is justified either from a utilitarian social welfare maximization perspective, or from a non-utilitarian perspective: There are well-founded arguments in terms of efficiency, equity, or other (ethical) aspects (in particular, wealth egalitarianism and equal opportunity for all); Among them, equal opportunity for all is consistent, and also provides clear policy implication; The key in the discussion of economic efficiency is the incentive to transfer properties as gifts and estates; Arguments against gift and estate taxation are refutable.
Main Conclusions (2/6)
2. Estate and gift taxation, gross or divided, promotes wealth egalitarianism and equal opportunity for all.
In terms of administrative costs and tax compliance, the taxation of gross estate (gifts) on donors is more efficient;
In terms of the expenditure side, it’s more direct to tax the donees to promote wealth egalitarianism and equal opportunity for all;
Most countries impose tax on the recipient of inherited properties or bequests (inheritance tax).
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Main Conclusions (3/6)
3. The review of tax base: exclusions, exemptions, and deductions. Compared with other countries, the amount of exemption of the estate tax is intermediate; Compared with other countries, the amount of exemption of the gift tax is too high; Debts and assets are not evaluated consistently; The exemption of gifts between spouses create a loophole for tax evasion; Tax treatments of land used by government for public passage (or other land used for public passage free of charge) should be consistent with the treatments of land reserved for public infrastructure.
Main Conclusions (4/6)
4. Tax rate structure
Most countries have progressive tax rate structure;
With exemptions, uniform rate taxes progressively;
The tax rate is low as compared with other countries;
Adding new higher rate brackets while leaving most unchanged minimizes the adverse effect on redistribution.
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Main Conclusions (5/6)
5. Revenue sharing
Current setting worsens the fiscal inequality among local governments;
In terms of promoting wealth egalitarianism and equal opportunity for all, central government should play the major role;
A much more complicated problem.
6. Trust and estate and gift tax
Certain trusts are venues for tax evasion;
Current rules of law (principle of substantive taxation; substance- over-form principle) cannot close the loophole.
Main Conclusions (6/6)
7. Taxpayers, administration, and compliance
In case that no executor is appointed, and all heirs collectively give up succession, individuals who benefit from the estate may bear no tax liabilities;
In case there is no executor or heirs, the administrator appointed according to the law may bear the entire tax liability, exceeding the amount of the service fee;
The pass along of personal property data of the decedent to taxpayers should be made automatic.
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V. REFORM PROPOSALS
Reform Proposals (1/2)
Based on the conclusions, we propose a short term reform package focusing on:
Base broadening (3);
Rate structure adjustment (4);
Gift tax on trusts (6);
Taxpayers, administration, and compliance (7).
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Reform Proposals (2/2)
A medium-long run reform direction—the integration of estate and gift taxation: Life-time accumulated wealth transfer tax; Life-time accumulated wealth receipt tax. In particular, a Life-time accumulated wealth receipt tax not only has the effect to enhance justification of taxing estate and gifts, but also more direct in terms of promoting wealth egalitarianism and equal opportunity for all.
Estate and Gift Tax (2014; Selected Countries) Exemption (estate) Exemption (gift) Country Type Estae Tax Rate Gift Tax Rate /GDP per capita ) /GDP per capita Belgium inheritance 3%–80% 3%–80% na na Denmark inheritance 15%、36.25% 15%、36.25% 0.8 0.18 Finland inheritance 7%–35% 7%–35% 0.54 0.11 France inheritance 5%–60% 5%–60% na 0.2 Germany inheritance 7%–50% 7%–50% 0.34–1.18 1.43 Italy inheritance 4%、6%、8% 4%、6%、8% 38.14 (life-time) Japan inheritance 10%–55% 10%–55% 13 0.29 Korea inheritance 10%–50% 10%–50% 6.71 2.01 Luxembourg inheritance 0%–15% 1.8%–14.4% na na Holland inheritance 10%–40% 10%–40% na 0.14 Norway inheritance 6%–15% 6%–15% 0.77 0.77 Potland inheritance 3%–20% 0%–20% na 0.22 Spain inheritance 7.65%–34% 7.65%–34% na na Turkey inheritance 1%–10% 10%–30% 6.41 0.15 U. K. inheritance 40% 20% 12.33 0.11 U. S. gross 18%–40% 18%–40% 97.66 (life-time)/0.26 Philippines gross 5%–20% 2%–15% 1.56 0.78 South Africa gross 20% 20% 51.5 1.47 Taiwan gross 10% 10% 18.51 3.39
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Estate and Gift Tax (2014; Selected Countries) Exemption (estate) Exemption (gift) Country Type Estae Tax Rate Gift Tax Rate /GDP per capita ) /GDP per capita Belgium inheritance 3%–80% 3%–80% na na Denmark inheritance 15%、36.25% 15%、36.25% 0.8 0.18 Finland inheritance 7%–35% 7%–35% 0.54 0.11 France inheritance 5%–60% 5%–60% na 0.2 Germany inheritance 7%–50% 7%–50% 0.34–1.18 1.43 Italy inheritance 4%、6%、8% 4%、6%、8% 38.14 (life-time) Japan inheritance 10%–55% 10%–55% 13 0.29 Korea inheritance 10%–50% 10%–50% 6.71 2.01 Luxembourg inheritance 0%–15% 1.8%–14.4% na na Holland inheritance 10%–40% 10%–40% na 0.14 Norway inheritance 6%–15% 6%–15% 0.77 0.77 Potland inheritance 3%–20% 0%–20% na 0.22 Spain inheritance 7.65%–34% 7.65%–34% na na Turkey inheritance 1%–10% 10%–30% 6.41 0.15 U. K. inheritance 40% 20% 12.33 0.11 U. S. gross 18%–40% 18%–40% 97.66 (life-time)/0.26 Philippines gross 5%–20% 2%–15% 1.56 0.78 South Africa gross 20% 20% 51.5 1.47 Taiwan gross 10% 10% 18.51 3.39
Estate and Gift Tax (2014; Selected Countries) Exemption (estate) Exemption (gift) Country Type Estae Tax Rate Gift Tax Rate /GDP per capita ) /GDP per capita Belgium inheritance 3%–80% 3%–80% na na Denmark inheritance 15%、36.25% 15%、36.25% 0.8 0.18 Finland inheritance 7%–35% 7%–35% 0.54 0.11 France inheritance 5%–60% 5%–60% na 0.2 Germany inheritance 7%–50% 7%–50% 0.34–1.18 1.43 Italy inheritance 4%、6%、8% 4%、6%、8% 38.14 (life-time) Japan inheritance 10%–55% 10%–55% 13 0.29 Korea inheritance 10%–50% 10%–50% 6.71 2.01 Luxembourg inheritance 0%–15% 1.8%–14.4% na na Holland inheritance 10%–40% 10%–40% na 0.14 Norway inheritance 6%–15% 6%–15% 0.77 0.77 Potland inheritance 3%–20% 0%–20% na 0.22 Spain inheritance 7.65%–34% 7.65%–34% na na Turkey inheritance 1%–10% 10%–30% 6.41 0.15 U. K. inheritance 40% 20% 12.33 0.11 U. S. gross 18%–40% 18%–40% 97.66 (life-time)/0.26 Philippines gross 5%–20% 2%–15% 1.56 0.78 South Africa gross 20% 20% 51.5 1.47 Taiwan gross 10% 10% 18.51 3.39
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“TV” or “LED Monitor”?
Scope of taxation: the commodity tax is a single-stage excise tax levied on specific commodities manufactured domestically or imported from abroad. Taxpayers: For taxable commodities manufactured domestically, the commodity tax is levied upon departure from a manufacturer’s premises. For taxable commodities imported from abroad, the tax is levied when customs duties are paid. As of now there are 7 categories of commodities subject to the commodity tax levied on an ad valorem or other specific basis:
“TV” or “LED Monitor”? Subcategory Tax rates/amounts Category (for example)
1. Vehicles (cylinder vol. of 2,001 cc or more) 15-30%
2. Rubber tires (rubber tires for buses and trucks) 10-15%
3. Non-alcoholic (diluted natural fruit/vegetable beverages 8-15% juice)
4. Flat-glass 10%
5. Electrical appliances (color television sets) 10-20%
6. Cement (white or colored cement) (NT$600/MT)
7. Oil and gas (gasoline) (NT$6,830/KL)
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“TV” or “LED Monitor”?
Converse Shoes
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Converse Shoes
If you've ever wondered why your Converse All Stars have fuzzy bottoms, you may be disappointed to find out that it has less to do with "increased traction" The special felt bottoms of the All Star cover more than 50% of the shoe's sole and allow it to be classified as a "slipper.“ Tariff rates for importing shoes into the US can be as high as 37.5% and vary widely based on material used. Classifying the shoe as a slipper guarantees the rate at 3%.
Tax Rate Structure
The relationship between tax collected during a given accounting period and the tax base. Average tax rate (ATR) is total dollar amount of taxes collected divided by dollar value of taxable base:
Marginal tax rate (MTR) is additional tax collected on additional dollar value of tax base as tax base increases:
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Tax Rate Structure—Income
Proportional tax system: an individual’s average tax rate is the same at each level of income Progressive (regressive) tax system: an individual’s average tax rate increases (decreases) with income Marginal tax rate (MTR): the proportion of the last dollar of income taxed Example: Tax=(Income-3,000)*20%
Tax Rate Structure—Income
Tax liabilities of the hypothetical tax system in the example Income Tax Average Marginal Liability Tax Rate Tax Rate $2,000 -$200 -0.10 0.2 $3,000 $0 0 0.2 $5,000 $400 0.08 0.2 $10,000 $1,400 0.14 0.2 $30,000 $5,400 0.18 0.2
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Tax Incidence and Capitalization
Statutory Incidence: indicates who is legally responsible for a tax Economic Incidence: indicates whose purchasing power is reduced by the tax. It shows the change in the distribution of real income induced by a tax Tax Shifting: the difference between statutory incidence and economic incidence – Forward shifting – transfer of a tax’s burden from sellers who are liable for its payment to buyers through an increase in the price of the good – Backward shifting – transfer of a tax’s burden from buyers who are liable for its payment to sellers through a decrease in the price of the good
Tax Incidence and Capitalization
– A special kind of backward shifting—Capitalization. It refers to the process by which a stream of taxes becomes incorporated into the price of an asset. A direct tax is one that cannot be shifted by the taxpayer to someone else. An indirect tax is one that can be shifted or passed on.
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Tax Incidence and Capitalization
2 T PR = $R0 + $R1/(1 + r) + $R2/(1 + r) + … + $RT/(1 + r) 2 PR’ = $(R0 –u0) + $(R1 –u1)/(1 + r) + $(R2 –u2)/(1 + r) + … T + $(RT –uT)/(1 + r)
The price of the land (PR) falls by: 2 T u0 + u1/(1 + r) + u2/(1 + r) + … + uT/(1 + r) The price of the land falls by the present value of all future tax payments. This process by which a stream of taxes becomes incorporated into the price of an asset is referred to as capitalization. It is a special kind of backward shifting.
Tax Incidence and Capitalization
Full capitalization – Occurs only if the owners of the taxed asset cannot adjust the quantity supplied in response to the decrease in the annual return to holding it caused by the tax. This most likely happens in the case for land. – The person who bears the full burden of the tax forever is the landlord at the time the tax is levied – Capitalization complicates attempts to access the incidence of a tax on any durable item that is fixed in supply (Knowing the identities of current owners is not sufficient; need to know who the landlords were at the time the tax was imposed)
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Tax Incidence and Capitalization
In general, suppose a capital asset that yields an annual return of Y dollars at the end of each year for n years with a discount rate r, the value of this capital:
n Y V i i1 (1 r) Taking n to infinity, we have: V Y r
Tax Incidence and Capitalization Suppose there is now a t percent annual property tax that is likely to be fully capitalized: Y Y tV Y V t t , or V t r r t r t
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Tax Incidence and Capitalization
Partial capitalization: other taxed assets, such as structures, equipment, and vehicles, are most likely to have elastic supply curve in the long run. A tax-induced increase in market rents would prevent full capitalization of the property tax.
Suppose the current rent per square foot of housing per year is $100, and the market rate of interest is 10%. Then the pre-tax value per square foot of housing is $100/0.1=$1,000.
Tax Incidence and Capitalization
• Suppose now housing is subject to a tax rate of 10%, under full capitalization, the after-tax value $100/(0.1+0.1)=$500 • In the long run, the decrease in net return to housing caused by the tax reduces the quantity supplied and increases the rent from $100 to $120. • The value of each square foot of housing now is:
Y Y $100 $20 V $600 t r t 0.1 0.1
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Tax Incidence and Capitalization
Excess Burden Measurement with Demand Curves The concept of excess burden can be reinterpreted using compensated demand curves.
Suppose the social marginal cost of barley is constant at Pb, and there is a tax at percentage tax rate tb on barley.
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Excess Burden Measurement with Demand Curves
a 2 Excess burden = ½ ηPbq1tb
Tax revenue Excess burden of tax Price per pound of barley (1 + t )P S’ b b gf b
h d i Pb Sb
Db
q2 q1 Pounds of barley per year
Excess Burden Measurement with Demand Curves A = ½ × base × height = ½ × (di) × (fd)
fd = ∆Pb = (1 + tb) × Pb –Pb = tb × Pb di = ∆q
η = (∆q/∆Pb)(Pb/q1)
∆q = η(q1/Pb)∆Pb
since ∆Pb = tb × Pb
∆q = η(q1/Pb) × (tbPb) = η × q1 × tb since di = ∆q A = ½ × (di) × (fd)
= ½ × (ηq1tb) × (tbPb) 2 = ½ × η × Pb × q1 × (tb)
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Excess Burden Measurement with Demand Curves Observe that even if the government returned the tax revenues to barley consumers as a lump sum, they would still be worse off by the triangle fid.
Factors determine the size of excess burden: – Compensated elasticity – Initial expenditure – Tax rate
Excess Burden Measurement with Demand Curves Excess burden is higher for a tax applied to a good with a higher price elasticity. The greater the initial expenditure on the taxed commodity, the greater the excess burden – As the tax rate increases, excess burden goes up with its square: – It is better to tax many commodities at a lower rate than to tax a few commodities at a higher rate (a broader tax is “better” than a narrow tax) Implication: A public project, in order to improve welfare, must produce marginal benefits of more than the real social costs—dollar costs plus the incremental excess burden
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Excess Burden Measurement with Demand Curves: An Example Airline tickets are taxed by the federal government at a rate of 10% Oum et al. (1992) estimated that the price elasticity of demand is about 1.0 Airline ticket revenues is roughly $107 billion per year ½×1×107×(0.1)2 billion = $535 million
Gift Trust Taxation
Consider a pool of selected assets valued at the amount of NT$ 10 million based on the assessment rules as specified in the tax law.
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Gift Trust Taxation
Case I: Direct gift → Tax payable = (gross gift - exemption) × tax rate = (NT$10,000,000-NT$2,200,000) × 10% = NT$780,000
Gift Trust Taxation
Case II: Trust interest consists of money other than accrued interests → Trust period 20 years → Postal one-year term fixed interest rate: 0.74%
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Gift Trust Taxation
Case II: Trust interest consists of money other than accrued interests settlor receives the accrued interests during the trust period beginning: beneficiary NT$10 million receives NT$10 20 years million
Gift tax base is the present value of the trust amount discounted from the time of gift to the expiration of beneficial period
Gift Trust Taxation
Case II: Trust interest consists of money other than accrued interests
→ Gift tax base = 1 NT$10,000,000 NT$8,629,012 1 0.74% 20 → Gift tax payable = (NT$8,629,012-NT$2,200,000) × 10% = NT$642,901
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Gift Trust Taxation
Case III: Trust interest consists of only the accrued interest → Trust period 20 years → Postal one-year term fixed interest rate: 0.74%
Gift Trust Taxation
Case III: Trust interest consists of only the accrued interest beneficiary receives the accrued interests during the trust period beginning: settlor receives NT$10 million NT$10 million 20 years
Gift tax base is the value of the trust property at the time of gift less the discounted present value
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Gift Trust Taxation
Case III: Trust interest consists of only the accrued interest → Gift tax base = NT$10,000,000-NT$8,629,012 = NT$1,370,988 → Gift tax payable = (NT$1,370,988-NT$2,200,000) × 10% = NT$0
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