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The International Journal of Accounting Studies 47 2008 7 1 28 91 15% 43.5% 7% 220,000 ( 74,000 ) 35% 36% 1% 240 98 2007 96-2416-H-002-031 1 2007 8 2008 3

2 47 2008 7 A Flat Tax for Taiwan: Simulations and Proposal Su-Ming Lin Department of Accounting National Taiwan University Kuo-Tay Chen Department of Accounting National Taiwan University Chuan-San Wang Department of Accounting National Taiwan University Nien-Chyi Chao International Business Service PricewaterhouseCoopers Abstract The flat tax system taxes all types of income with the same tax rate to achieve simplicity, efficiency, and fairness. Although the traditional progressive tax system is based on the ability-to-pay principle, the ever-expanding tax preferences, however, have eroded the tax base, compromised tax equity, and complicated the tax system. Under the assumption of preserving 2002 tax revenue, this study develops a tax simulation model to determine the impact of adopting a flat tax system in Taiwan. We find when a 15% flat rate is applied to both business and individual income, 43.5% of business income taxpayers will pay less tax, while only 7% will have more tax burden. As to individual income taxpayers, 35% are better off with less tax payments provided that personal exemption was increased to NT$220,000 and an additional special deduction of NT$74,000 for those who are disabled or handicapped. On the other hand, 36% of the individual income taxpayers are worse off with more tax exposure due to the elimination of deductions. Moreover, every 1% increase of the flat tax rate will increase total income tax revenue by NT$24 billion. This facilitates simulations of a long-term optimal flat rate. Our results suggest the government should evaluate the adoption of a flat tax system to simplify the tax system and to promote tax equity, before the tax incentives provided in the Statute for Upgrading Industries expire at the end of 2009. Keywords: Flat tax, Iincome tax system, Tax simulation, Tax reform. Submitted August 2007 Accepted March 2008 After 1 round of review

- 3 1985 (Hoover Institution) Robert Hall Alvin Rabushka 1 The Flat Tax(Hall and Rabushka 1985) 2 Grecu 2004; Edwards 2005; Mitchell 2005; Teather 2005 (simplicity, efficiency and fairness) 30 50 400 2006, 11-12 95 98 99 2006 2006 10 (controlled foreign corporation) (Estonia) (Lithuania) (Latvia) (Russia) (Serbia) (Ukraine) (Slovakia) (Estonia) 1994 26 2007 20 5.7 2001 30 13 2002 35 24 (Edwards 2005) 1 2 1995 2007 4

4 47 2008 7 Hall and Rabushka (1985, 1995) 91 15% 奬 10 (2005) 1989 (2003) 86

- 5 (2002) 83 85 ( 2002) 82 89 (2003, 127) (2005, 67) Hall and Rabushka (1985, 1995) (postcard tax return) (The Individual Wage Tax) Hall and Rabushka (1995) 3 25,500 82 19% Hall and Rabushka (1995) 3 Hall and Rabushka (1995, Figure 3.1)

6 47 2008 7 80% (Internal Revenue Service) (The Business Tax) 4 Hall and Rabushka (1995) 4 Hall and Rabushka (1995, Figure 3.2)

- 7 (capital gains)hall and Rabushka (1995) 10% 10% Hall and Rabushka (1995) Hall and Rabushka (1995) 1993 19% 2,650 3,620 6,270 5,100 1,180 6,280 19% Grecu 2004; Edwards 2005; Teather 2005; Heath 2006 Hall and Rabushka (1995) 5 2006 6 2006 5 Heath (2006) Hall and Rabushka (1995) pure flat tax model 6 2007 1 1 (Iceland) 35.72% 18% 30% 2006

8 47 2008 7 % 2006 2006 (Estonia) 1994 16, 24, 33 26 23 35 26 23 (Lithuania) 1994 10, 18, 24, 28, 33 33 33 29 29 15 (Latvia) 1995 25, 10 25 25 25 25 15 (Russia) 2001 12, 20, 30 13 13 30 35 24 (Serbia) 2003 10, 15, 20 14 14 20 14 10 (Ukraine) 2004 10, 15, 20, 30, 40 13 13 30 25 25 (Slovakia) 2004 10, 20, 25, 35, 38 19 19 25 19 19 (Georgia) 2005 12, 15, 17, 20 12 12 20 20 20 (Romania) 2005 18, 23, 28, 34, 40 16 16 25 16 16 2006 33% 2006 7 1 27% 25% 23% 12% 25% 24% 23% 10% 1994 Mart Laar 26% 2009 20% 2000 1995 6% 2001 2001 13% 30%

- 9 20% (Keen, Kim and Varsano 2006) (40% 25%) Hall and Rabushka (1985, 1995) 91 91 649,451 (98 ) 4 649,450

10 47 2008 7 59 1. (57 ) 2. (99 ) 3. (98 ) 101 ( ) 7 (60 ) (95 ) (98 ) 8 20% (60 )(59 ) 7 (60 ) (112 ) (95 )(113 ) (62 ) (63 )(64 ) (65 ) (95 ) (60 ) (95 ) 20% 8 91 98 20% 0.8 6% 6% 91 7 24 92 7 23 6%

- 11 ( ) 1. (59 ) (57 ) (99 ) (98 ) 57 99 98 2. (1) 50,000 (2) 50,000 50,000 1/2 13% 13.5% 14% 0.5% 18% 9 10% 10% 9 (95 ) (112 )(113 ) (62 ) (63 )

12 47 2008 7 91 ( ) 9010% 1. (60 ) (95 ) (98 ) 20% 91 1,791.3 20% 74.3 1,791.3 2. 91 13% 13.5% 0.5% 18% 15% 1,757.4 15.5% 1,815.9 1,791.3 15% 15.5% 13.0% 1,523.3 13.5% 1,581.8 14.0% 1,640.3 14.5% 1,698.9 15.0% 1,757.4 15.5% 1,815.9 16.0% 1,874.5 16.5% 1,933.0 17.0% 1,991.5 17.5% 2,050.0 18.0% 2,108.5 3. 15% 15.5% 15% 25%

- 13 15.5% 15% 25% 15% 15% 45,076 7% 321,600 49.5% 305,197 282,774 43.5% 15% 45,076 321,600 282,774 649,450 1 724.7 1.1 1,031.7 1,757.4 2 1,607,744 325 364,832 270,598 1 213.4 1.1 1,576.9 1,791.3 2 473,381 325 557,640 275,816 3 1,214.3 3.7 119.9 1,337.9 4 1,224.8 (451.1 ) (261.6 ) 512.1 5 84.9 0 286.5 371.3 6 389.8 0.9 102.7 493.4 7 * 4.41% 2.76% 22.91% 15.2% 20% 1. 213.4 12% 41% 473,381 1,607,744 2.4 1,576.9 88% 59% 557,640 364,832 2. 7% 7% 93% 91% 79%

14 47 2008 7 2.4 3. 4.41% 15% 22.91% 15% 49.5% 43.5% 7% 7% 4.41% 15% (15%) 25 15 [91 +90 10%] 91 1,791.3 1 1,753.4 90 10% 221.0 10 1,791.3 221.0 1 1,753.4 17.12% 17% 15% 17% 10 (2005 37

- 15 10% 10% 10% 10% 2 91 5,249,265 26,864 761 5,221,640 5,221,640 2,408,130 2,813,510 (1) (2) Hall and Rabushka (1985, 1995)

16 47 2008 7 ( ) 11 ( ) 1. (1) 12 (2) 74,000 (1) (2) (3) (4) (5) 13 11 12 17 1 1

- 17 91 74,000 50% 180,000 185,000 190,000 5,000 235,000 13% 13.5% 14% 0.5% 16% 1. 20% 6% 2. 91 216.3 8.0 4.3 228.6 599.7 49.2% (294.8 ) 13

18 47 2008 7 91 91 0% 1,521 9.6% $ 63.4 10.6% 6% 3,244 20.6% 26.9 4.5% 13% 4,050 25.7% 51.1 8.5% 21% 3,554 22.5% 85.4 14.2% 30% 1,946 12.3% 78.1 13.0% 40% 1,469 9.3% 294.8 49.2% 15,784 100.0% $ 599.7 100.0% 40% 372 9.3% 49.2% 41 4.1 3 9.4% 0% 1,521 161 1,000 2,426 2,845 6% 37 46 3,321 3,192 9,908 40%

- 19 91 5,554 16.5 3. 91 4,754.6 2,695.8 92.8 0% 6% 13% 99 91 37 4 74,000 91 1.7 4.

20 47 2008 7 15 15 15 15 ( ) 91 1,829.2 1,856.2 26.9 1 5,814.7 1,829.2 91 91 * 0% 1,581,131 0 0 0.00% 6% 2,427,163 245.0 10,095 1.82% 13% 866,974 402.1 46,377 4.07% 21% 253,788 373.5 147,191 7.11% 30% 70,481 279.7 396,853 11.44% 40% 22,103 528.9 2,392,761 22.16% 5,221,640 $ 1,829.2 $ 35,032 4.73% 1. 2.

- 21 ( ) 180,000 185,000 190,000 5,000 235,000 13% 13.5% 14% 0.5% 16% 190,000 74,000 13% 1,846.8 17.5 205,000 14% 1,844.8 13% 13.5% 14% 14.5% 15% 15.5% 16% $180,000 1,944.5 2,019.2 2,094.0 2,168.8 2,243.6 2,318.4 2,393.2 185,000 1,894.7 1,967.6 2,040.5 2,113.4 2,186.2 2,259.1 2,332.0 190,000 1,846.8 1,917.8 1,988.8 2,059.8 2,130.9 2,201.9 2,272.9 195,000 1,800.5 1,869.8 1,939.0 2,008.3 2,077.5 2,146.8 2,216.0 200,000 1,755.9 1,823.5 1,891.0 1,958.6 2,026.1 2,093.6 2,161.2 205,000 1,713.0 1,778.9 1,844.8 1,910.6 1,976.5 2,042.4 2,108.3 210,000 1,671.5 1,735.8 1,800.1 1,864.4 1,928.7 1,993.0 2,057.3 215,000 1,631.5 1,694.2 1,757.0 1,819.7 1,882.5 1,945.2 2,008.0 220,000 1,592.8 1,654.1 1,715.3 1,776.6 1,837.9 1,899.1 1,960.4 225,000 1,555.5 1,615.3 1,675.1 1,734.9 1,794.8 1,854.6 1,914.4 230,000 1,519.4 1,577.8 1,636.2 1,694.7 1,753.1 1,811.5 1,870.0 235,000 1,484.5 1,541.6 1,598.7 1,655.7 1,712.8 1,769.9 1,827.0 1,829.2 220,000 15% 1,837.9 1 2,252.3 460.3 15% 13% 15% 15% 220,000 74,000 1,833,011 35% 1,883,165 36% 1,505,464 1,504,824 29%

22 47 2008 7 A 1. 6% 1,400,647 6% 58% 9,605 943 (1) 6% 28.6 0.6 88% 99% (2) 3.5 220,000 880,000 513,000 14 270,000 25,000 808,000 880,000 6% 15% 1.56% 0.15% 2. 40% 20,651 40% 93% 2,439,321 1,287,531 20,651 42% 92% 4 25.14% 40% 22.16% 13.27% 40% 15% 14 $74,000 4+ $67,000+$75,000 2 $513,000

- 23

24 47 2008 7 B 1. 0% 76,307 0% 4.8% 0 22,130 (1) 76,307 96% 64.9 4% 1,000 163 1 6 6 8.9 9.9 9.9 40% 6 2,200 14.8% (2) 4% 96% 11,091 3.13% 1.3 6% 1,025,904 1.3 10,770 25,901 2. 40% 1,452 40% 6.6% 1,730,558 3,770,617 6.56% 14.3% (1) 1,452 245 70 245 688,943 1,358,976 (2) 1,207 2,000 1,941,988 4,260,138 35 1 35 112 96

- 25 94 40% 38.4 35 1,566 4.88% 4,686 14.61% 15% Hall and Rabushka (1985, 1995) 91 15 (1,757 ) 49.5% 0 43.5% 22.91% 15% 7% 7% 79 91 4.41% 10% 17% 10% 22 91 74,000 15 91 15 35%522 36% 29%

26 47 2008 7 (1) 74,000 22 88 (2) (3) (4) 15 87 90 200 300 91 700 92 1,520 91 93 91 93 15% 10 15 15 15 15 10 2006 15

- 27 10% 16 91 1 91 117 22 1 122.5 1 2006 2002 34 3 5 64-78 2005 200594 12 36-73 2002 34 1 57-75 2003 22 1 1 127-151 20062006 2006 Edwards, C. 2005. Catching up to global tax reforms. Tax & Budget Bulletin no. 28, Washington D.C., Cato Institute. <http://www.cato.org/pubs/tbb/index.html>. 16 2006 10 2

28 47 2008 7 Grecu, A. 2004. Flat Tax The British Case. London, Adam Smith Institute. <http://www.adamsmith.org/pdf/flattax.pdf>. Hall, R. E., and A. Rabushka. 1985. The Flat Tax. Stanford, CA: Hoover Institution Press. Hall, R. E., and A. Rabushka. 1995. The Flat Tax, Second Edition (Updated Revised Edition). Stanford, CA: Hoover Institution Press. Heath, A. 2006. Flat Tax: Towards a British Model. Stockholm Network. <http://www.stockholm-network.org/publications/list.php>. Keen, M., Y. Kim, and R. Varsano. 2006. The flat tax(es) : Principles and evidence. Working paper 06/218, International Monetary Fund. Mitchell, D. J. 2005. A brief guide to the flat tax. Heritage Foundation. <http://www.heritage.org/research/taxes/bg1866.cfm>. Teather, R. 2005. A flat tax for the UK: A practical reality. Adam Smith Institute, London.<http://www.adamsmith.org/pdf/flattaxuk.pdf>.