INCOME INEQUALITY IN TAIWAN

Transcription

1 INCOME INEQUALITY IN TAIWAN Tina Huang, Louis Ciou, Neal Hu, Kitty Chen, Albert Hung

2 ABSTRACT Income inequality had always been a controversial topic where the balance between the free market and the redistribution of wealth in a society must reach a balance in order for the country to continue growing. This thesis selects several sources including Taiwan's statistics bureau and the Asian economic papers to investigate the relationships between income inequality and different income sources. We use Gini index as our dependent variable and income sources as our independent variable. We look to find how the change in income sources will affect the Gini coefficient which we indicate as a measure of income inequality, then we will demonstrate how we would suggest Taiwanese government on their imposition of income taxes in Taiwan.

3 1. INTRODUCTION 1.1 Background Income inequality is becoming a much bigger issue nowadays than what we might have imagined ten years ago. The effects of free economy and the competitiveness effects of the markets are shifting the wealth of the economy from the pockets of the many into the hands of the few. Among all the aspects of wealth inequality, personal income is the aspect that best describes that reasons why wealth inequality are increasing. One of the most important factors as to why income inequality are increasing is because the globalization of industries are making countries try to keep companies in their country, therefore giving companies more and more leverage so the incentive to stay would increase. Taiwan s current economic situation is becoming worse and worse. Due to reasons unknown, Taiwanese government does not include real-estate trading as a form of trading, and they also excluded taxing the stock market. Real estate transactions are not properly taxed because only partial of the income is been or recorded. Thus there are no keeping correctly methods of how much money is been moved around the country via real-estate. This means that there are no way to know if the current policy is redistributing income properly and effectively. This paper is going to be talking about income inequality, it ll be using Gini coefficient and income difference multiple to help us. Gini coefficient is the instrument scholars use when they are trying to find out the level of income inequality that exist in a country, then talk about what a government can do, especially on taxation. The thesis will finish the thesis with suggestions to Taiwanese government as to how they can resolve this problem. 1.2 Motivation & Objectives Income structure is an important part of social status. After understand the current income inequality problems and how it might affect the redistribution of social welfare, the paper will identify Taiwan s current economy status thus try to give suggestions to governments on how to resolve it. 1.3 Taiwan s Current Income Status By straight up dividing Taiwan s income structure into four parts, this paper will examine the current social status of Taiwan s income structure. The first quintile will represent the bottom 20% of the population, and the fifth quintile will represent the top 20% of the population. Looking at income s chart, it s almost linear as to how the income between different quintiles are growing. However, the interesting part is that if you look at the 2nd, 3rd and 4th quintile, the difference between are linear. However, when it comes to the 1st and 5th quintile, you can see that they possess a huge gap with the other quintiles, let it be 1st to 2nd or 5th to 4th. The amount of income coming from business owners also follows the trend, where people at the 1st quintile possesses the least among all quintiles and the people from the 5th quintiles have the most income. Return on assets include investments on the financial market. However, as reasons explained in background, some items are not included and the reasons behind it might be due to incomplete taxation structure. There is also another possible reason is that the government is ignoring that aspect on purpose, benefiting those who are directly linked with those unaccounted for incomes.

4 Current transfer talks about income that is not earned. Heritage, gifts, government subsidies are all included. Since current transfer includes government intervention, usually it as a way the government use to redistribute the wealth of the society. However, as you can see in the above bar graph, even though the 1st quintile obviously receives equally as much as the 2nd, 3rd and 4th, but the 5th quintile still receives the most in this category. It makes an interesting case that current transfer is not actually the re-distributional tool that people understand it. However, government subsidies do help on redistributing the economy wealth. From the graphs above, Taiwan is not nearly as equal as it is advertised. Gini Coefficient and income difference multiple is going to be used in the following parts of this thesis as an analysis tool to find out whether Taiwan is really facing a greater threat of income inequality, and what we can do in terms of government policy to help it. 2. LITERATURE REVIEW 2.1 Comparison between Asian countries and the rest of the world Since Asian countries have similar social characteristics, this part will compare the findings in Taiwan with other Asian countries. Iris Claus, JorgeMartinez-Vazquez and Violeta Vulovic published Coping with Rising Inequality in Asia: How Effective Are Fiscal Polices? Asian Economic Papers in This paper has found the situation of tax system in Asian country and then it want to know how to form an efficient tax system in next part. First, below is a table from the Asian economic paper. Table 1. Estimated marginal impact of taxation on income inequality (in percentage points) Asia Rest of the world Personal income tax Personal income tax*progressivity Corporate income tax Corporate income tax*globalization Social security and payroll taxes General taxes on goods and services Excises Customs duties Source: Claus, Martinez-Vazquez, and Vulovic (2012). As you can see on this table, personal income taxes are generally thought to reduce income inequality.

5 However, when evaluating their impact on income inequality, it is important to take into account the progressivity of income tax scales. With progressivity, that means people with higher income will need to pay higher taxes. Personal income taxes have the expected negative marginal effect on income inequality and that the effect is significantly higher in Asia than in the rest of the world. A one-percentage-point increase in PIT revenue as a percent of GDP reduces income inequality by percentage points. The finding of a greater redistributive effect of personal income taxation may be due to a larger number of people not paying income tax in Asia because their income is below a tax-free threshold. A larger share of informal employment may also be a contributing factor. While evaluating the impact of corporate income taxes on inequality, we should also take into account that it may be affected by the country s openness. In a closed economy, the owners of capital tend to bear the full burden of corporate income taxes. On the other hand, in a globalized economy, where capital can flow freely across different countries, the burden of corporate income taxes are more likely to be shifted to workers. In Taiwan s situation, huge multinational companies shift their profit overseas to Asia in order to avoid huge tax payments in the developed western countries. Corporate income taxation also reduces income inequality in the rest of the world, but it is regressive in Asia. A one-percentage-point increase in CIT raises income inequality by around percentage points. This regressivity of CIT in Asia may be due to larger tax concessions and subsidies for firms. However, after interacting with globalization, it reverses the sign and it lowers inequality in Asia. The finding may be due to profit shifting by multinational corporations to Asian countries. Thus, we can also assume that the corporations in Asian countries are hard to shift the burden of CIT to other countries in the world. 2.2 Tax Incidences and Efficient Tax System The Asian economic paper has found some difference of tax system between Asian countries and other countries, then it want to know how to make Asian s tax system better. Below it will show some basic features of efficient tax system Tax Incidences and Deadweight Losses Before forming an efficient tax system, this paper is going to find out what will happen to taxpayers. The tax incidence analysis who ultimately bear the burden of government tax in the economy. There are two kinds of taxpayers in the economy which are statutory incidence and economic incidence. Statutory incidence are situations where the taxpayers who, by law, are required to pay the taxes and they can shift the burden to economic incidence who ultimately bear the tax burden. The shifting of taxes happens because the agents can alter their economic behavior and transfer the burden to other agents via changes in prices, wages, or the return paid to the investments and the degree of shifting depends on the elasticity of demand, supply, and substitution in the use of inputs of production among the economic agents interacting in the activity or market being taxed. Economic agents with lower elasticity are more likely to ultimately bear the burden of taxes. The deadweight losses are the difference between the burden imposed by tax and the amount collected by government. The deadweight losses arise because taxes distort the choices of economic agents and lead to less efficient uses of economic resources and lower output and income in the economy. For example, income taxes affect labor leisure choices and saving and investment decisions The Feature of Efficient tax system. Although taxes don t have great effect on redistributing income, it is crucial to raise financing for government expenditure to achieve distributional objectives.

6 An efficient tax system is one that reduces the disincentive effects of taxation to work, save, and invest by using broad bases and low, fairly uniform rates. If the tax rate keep the same, the broader the base the more taxes we received. A broad-base, low-rate tax system is fairer than a narrow-base system because of horizontal equity and vertical equity considerations and taxpayers are more willing to pay the taxes, so it can lowers administration and compliance costs, leaving more resources for productive activities. Higherincome taxpayers have greater scope and resources to shift income to avoid higher tax rates and unfair tax systems will reduce individuals and businesses willingness to pay taxes. Although governments can use tax administration to reduce the effect of unfair narrow base tax system s disadvantage, they have to pay more administration and compliance costs. 3. METHODOLOGY 3.1 Multiple Regression Analysis To find out which income sources affect Taiwan s income inequality the most, this paper looks on the correlation between income inequality (Gini coefficient) and income sources, which are worker s wage, business owner, imputed rent income, return on assets, and current transfer. The definitions of each income sources are as followed: Worker s Wage: Income earned as an employee, including full time payroll, part time payroll, and other receipts or subsidies Business Owner: Income earned as an employer or self-employment Return on Assets: Interests from savings, dividends Current Transfer: Pure transfer of assets without anything in exchange (ex. Government Subsidiary, Social Security, Health Insurance, Heritage, etc.) Imputed rent income: Housing depreciation To investigate in a micro-view, this paper decomposes the income sources into elements instead of running the multiple regression directly with five income sources. The composition of each income sources are as followed: In the multiple regression, the X-axis represents (5 th quintile- 1 st quintile)/ 1 st quintile, which means that the income of top 20% richest people divided by the income of top 20% poorest people minuses 1. The Y-axis is Gini coefficient. Regression 1 In the 1 st regression, this paper decomposes all of the income sources to consider all possibilities, which lead to the result that is most similar to reality. From looking at Table 1, the multiple regression result shows that part time payroll and business owner have significant P-value, and both of them have high correlation with income inequality respectively. In other words, both part time payroll and business owner have huge

7 impact on income inequality, while the only difference is that they influence the result of income inequality in a different direction. Table 2. Results of Regression 1 Coefficient P-Value Worker s Wage Full Time Payroll Part Time Payroll * Other receipts or subsidies Business Owner ** Return on Assets Imputed rent income From individuals Current Transfer From Government Benefit of social insurance From enterprises ** From aboard Regression 2 After considering all the possibilities, this paper decides to investigate on the effect of specific income source by decomposing the specific income source and then running the multiple regression with others. In Regression 2, worker s wage is taken as the specific income source and is decomposed into full time payroll, part time payroll, and other receipts or subsidies. The finding of this multiple regression is demonstrated in Table 2. In Table 2, both business owner and full time payroll have significant p-values and positive correlations with income inequality. This means that the more business owners earn, the more serious income inequality is; the more full time payroll 5 th quintile earn, the more serious income inequality is. In other words, when rich people earn more, the Gini coefficient increases. However, there is a negative correlation between part time payroll and income inequality. It may seem conflicting at first, but the result actually explains income inequality well. In a year of serious income inequality problem, poor people tend to have more part time jobs to support their basic livings, which leads to the decrease of X-axis and shows a negative correlation between part time payroll and income inequality. Table 3. Results of Regression 2 Coefficient P-Value

8 Full Time Payroll *** Worker s Wage Part Time Payroll *** Other receipts or subsidies Business Owner *** Return on Assets Imputed rent income Current transfer Regression 3 From the previous multiple regressions, the results show that worker s wage and business owner have high correlation with income inequality. To confirm that, Regression 3 combines business owner and worker s wage into an item and runs the multiple regression with other income resources. The result is shown in Table 3. The p-value of the item is significant and the coefficient is high. Thus, the finding can assure that business owner and worker s wage are important factors affecting income inequality. Table 4. Results of Regression 3 Coefficient P-Value Worker s Wage ** Business Owner Property income Imputed rent income -1.2E Current transfer Multiple Regression Results From the multiple regression analysis, the result has shown that worker s wage and business owner are key factors influencing income inequality. Thus, this paper would recommend government to impose more tax on worker s wage and business owner to balance the situation. 4. IMPLICATIONS Overall, it is the personal income tax and corporate income tax that can reduce income inequality the most, so this paper will compare different tax rates among some Asian countries.

9 Table 5. Corporate Tax in Asia Countries The relationship is neither directly proportional nor inversely proportional. If the tax rates for corporate income increases, there is no predicting the effects it will have on the revenue it will contribute to GDP. There are no obvious relations when it comes to corporate income taxes, so if the government decides to tax on corporate income tax, they will not be able to tell what it affects until the tax system is put into practice, but there are no indication that it is going to affect negatively if we increase as well. Table 6. Personal Income Tax in Asia Countries From table 3 the tax rate goes up, percentage tax revenue goes up, too. Thus, if we raise the personal income tax, we can assume there will be an increase in percentage of tax revenue in GDP.

10 5. CONCLUSION 5.1 Conclusion For conclusion, to examine back at the topic do income sources affect income inequality? As mentioned in the regression analysis of our thesis, taxes on business owner and worker s wage affects Gini coefficient negatively and significantly. Therefore the recommendation would be to increase the comprehensive income tax to decrease Gini coefficient. 5.2 Research Restriction The thesis is conducted mainly from Taiwanese Statistic Bureau. The information from capital gain, real estate selling or stock revenue is not available. Therefore, incomes from these categories are not included in our research. The paper can only reflect on part of the society s condition. 5.3 Suggestion for Government Policy An efficient tax system should be broad-base, low-rate. Broad-base means that more people are obligated to pay for taxes. Low-rate represents that the incentive to bail out from taxes are low, therefore people would be less likely to not pay taxes.. However, according to Asian Economic Paper and the charts in the comparison part, it is obvious that PIT and CIT have a negative marginal effect on Gini index in most Asian countries. The increase on PIT rate is directly proportional to percent occupied in GDP. Besides, the tax rate in Taiwan is already relatively low compared to other countries. The policy suggestions to increase tax rates for personal income and corporate income should pay off. 5.4 Future Plans From the results of this thesis, the income from capital gain, real estate selling or stock revenue also occupy a large part in income inequality. Therefore, these categories should be the main focus if anyone wants to develop further research.

11 REFERENCE LIST 1. 張文春 (2005) 個人所得稅與收入再分配, 稅務研究,246, 陳隆華 (2004) 政府在所得重分配所扮演的角色 主計月刊,577, 林金源 朱雲鵬 (2003) 移轉所得對台灣所得分配的影響 人文及社會科學集刊,3, Iris, C., & Jorge, M.V., & Violeta, V Coping with Rising Inequality in Asia: How Effective Are Fiscal Policies? Asian Economic Papers, 12(3): Santya, Paul Income Sources Effect on Inequality. Journal of Development Economics, 73: