Taoyuan Nights

So…

- the government is handing out free money to almost everyone
- the government is planning on handing out free education vouchers
- the government is planning to employ 100000’s of people in huge infrastructure projects
- the government is providing money to bail out local banks
- the government is providing money to bail out the technology sector
- social welfare payments (unemployment, retirement) are increasing

So, outgoing expenditure is ballooning like crazy, and there’s just one small problem:

The government’s tax income has just dropped by an astounding 41%.

I think I’m going to have to say that again.

The government’s tax income has just dropped by an astounding 41%.

Now… how exactly is THAT going to work out OK in the end?

My understanding is that Taiwan’s tax structure is basically geared to take tax mostly from businesses and capital gains, because the tax on individual’s income is incredibly low – around 6-11%, even for professionals. However, since exports dropped 57% year on year, and since most businesses in Taiwan are exporters with lots of operational gearing, that has meant big losses at most companies.

So, what happens next?

Well, the money the government is spending has to come from somewhere. There are at least five obvious places it might come from.

(1) Vastly increase tax on business profits.
(2) Vastly increase tax on capital gains.
(3) Vastly increase tax on individual’s income.
(4) The government could borrow money; i.e. increase the country’s debt.
(5) The government can print money.

Reviewing these options:

(1) won’t work, because you can’t take what ain’t there.

(2) won’t work, because you can’t take what ain’t there.

(3) will kill individual spending and thus hurt internal spending in the local economy, further crushing GDP and tax income. Besides, no-one has any money to be taken through tax, since the previous government allowed one of the largest housing bubbles in world history to develop, and everyone is now too busy paying their home loans. Everyone who still has a job, that is. Again, you can’t take what ain’t there.

(4) is limited by the willingness of people to lend money to the government essentially ‘for free’, in a climate when nobody in the world wants to lend money to anyone. Yet if the government raises interest rates to attract money for them to borrow, then home-loan repayers get murdered by their repayments (higher rates), and exporters get killed by a rise in the value of the New Taiwan Dollar (higher NTD value).

(5) already destroyed the Taiwanese economy completely once before (1945-1952), and is presently destroying the Zimbabwe economy. On the bright side it will solve the home loan problem, because everyone will go bankrupt.

There is no easy way out of this problem.

A separate anecdote: Many civil servants here have a magical bank account backed by the government, that pays out a mind-blowing compound 20% per annum. Do the maths; if you put in $10000 at age 15 into such an account, and never make any further contributions, it magically becomes $10,000,000 by the time you’re 50. Or $320,000,000 by the time you’re 65. Or $320,000,000,000 by the time you’re 100 (how often do you get to say ‘wan wan wan’ in Chinese?). Not a bad return on $10000, and it’s all subsidised through taxation. Welcome to Taiwanomics.