Taiwan close to passing luxury tax in response to widening wealth gap

Taiwan's government is poised to approve a tax on luxury items as it battles a politically volatile wealth gap that has widened as jobs move offshore and business owners tap the once-forbidden China market.

The "luxury tax," which was given tentative legislative approval on April 6, would tax nonowner-occupied homes by 10 to 15 percent if sold within two years of a purchase, a measure aimed at fighting the speculation that can shut middle- and lower-income people out of the market. Rising housing prices were the driving force behind the legislation.

Sales of automobiles, yachts, helicopters, and airplanes that cost more than 3 million New Taiwanese dollars (about $103,000) as well as ivory, coral, furs, and furniture worth more than 500,000 New Taiwanese dollars (about $17,200) will also be taxed 10 percent.

Cabinet officials made the move, a first for Taiwan, to ease complaints about a wealth gap not seen since 2001. Average household income of 1.79 million New Taiwanese dollars (about $62,000) for the richest 20 percent stands 6.34 times higher than that of the poorest 20 percent.

"The only people who would oppose the tax are rich people, because that's their game," says George Hou, a mass communications lecturer at I-Shou University in Taiwan. The wealth gap makes home ownership increasingly difficult for people in their 20s and 30s who could spend their whole life working to try to afford it, say Mr. Hou. "This is something my students must face once they graduate."

Taiwan's dependence on China

Taiwan's growing dependence on economic powerhouse China over the past decade has seen jobs move to the other side of the Strait, while putting returns largely in the hands of business owners rather than the population at large.

Investment in China jumped after 2008, when the two political rivals began signing historic trade and transit accords. Beijing claims sovereignty over self-ruled Taiwan, where past governments had kept a distance from China's economy to protect the island's autonomy.

"Taiwan is still a relatively equal society, but things have worsened in the last decade or so," says Mark Williams, senior China economist with Capital Economics Ltd. in London. "In trends familiar to many in the US, the economy has expanded but wages for most workers have stagnated as companies have relocated their factories to China."

The world financial crisis in 2008 hit Taiwan's lower class again, economists say. That led to a deep recession in Taiwan in 2009 and raised unemployment to more than 6 percent, which is high for the generally well-off island of 23 million people.

The government said it had studied models in Singapore, South Korea, and the United States before proposing the tax, which could take effect in June if given final parliamentary approval later this month as expected.

But will it close the widening wealth gap?

Experts doubt that the tax itself can close a wealth gap. The super-rich can afford luxuries even with a tax – though the "semirich" might hesitate – and sellers of the targeted goods could find ways around it, said Alexander Huang, strategic studies professor at Tamkang University in Taiwan.

The European Chamber of Commerce Taipei has grilled the government, calling details of the tax unclear.

"The luxury tax has a disproportionally adverse impact on European car imports," says Freddie Hoeglund, CEO of the chamber that represents 400 member companies. "The ECCT supports the government's objective to reduce the income gap. The luxury tax will not achieve this objective."

But the government must go on record as trying to close the wealth gap before presidential and parliamentary elections due early next year, when President Ma Ying-jeou's Nationalists face the more populist opposition Democratic Progressive Party, political analysts say.

"The gap between the relatively wealthy and the relatively poor has apparently widened in Taiwan since Ma took office and this has been a point that has been used by the [opposition] to its advantage," says Bonnie Glaser, a senior fellow with the Center for Strategic and International Studies think tank.