President-elect Lai Ching-te (賴清德) has advocated expanding social investments to rescue Taiwan’s beleaguered middle class, drawing inspiration from Scandinavian countries in pledging to forge a new support system covering all age groups.

From the campaign trail to the present day, however, the new government, which takes office on May 20, has failed to inform the public just how much it will cost to fulfill these campaign promises, so CommonWealth Magazine decided to try to come up with an estimate of its own.

Using government budget documents and estimates from private institutions, we found that just financing social investment projects aimed at alleviating middle-class anxiety, such as a long-term care 3.0 scheme, measures to address declining birth rates, and education equality and housing policies, will cost more than US$10 billion annually.

Beyond that, Taiwan needs to increase spending on defense in response to the evolving geopolitical landscape and subsidize state-owned enterprises facing sizable deficits and labor and health insurance funds that could face bankruptcy in the not-too-distant future. Funding those needs will also cost more than US$10 billion in 2024 alone. The government has also committed to investing US$30 billion from now until 2030 to back a national energy transition.

Added all up, the cost of the new government’s pledges could easily exceed US$32 billion, based on Commonwealth’s conservative estimates, yet the total central government budget is only US$90 billion.

"This is probably the largest check any president has ever written," criticized Taiwan People's Party Legislator Huang Shan-shan (黃珊珊). She believes that if Lai’s government fails to find new sources of revenue, it will either renege on its promises or significantly increase borrowing.

In an ageing society with fewer children, long-term care will become long-term expenditure, and there is an urgent need to stabilize financial resources. (Photo: Ming-Tang Huang)

In interviews conducted by CommonWealth with multiple legislators, everyone agreed these investments were necessary, but when asked where the money would come from and whether taxes should be raised, they dodged the questions.

"It's as if the government has been telling the people that they can have a free lunch, offering abundant benefits while also cutting taxes," said Joe Chen (陳國樑), head of the Department of Public Finance at National Chengchi University, with palpable frustration.

Does Taiwan really have the means to emulate Scandinavian countries and embark on a social investment spree?

Probably not, in terms of either taxation or borrowing.

First, Taiwan is a low-tax haven even when compared to Singapore.

Lower Taxes than Tax Haven Singapore

When including social security contributions like labor insurance and national health insurance, Taiwan's tax revenues as a percentage of GDP totaled only 19 percent, the lowest in Asia.

That’s also far below the tax rate in Scandinavian countries that the new government wants to emulate. In Denmark, tax revenues accounted for 47 percent of GDP in 2021, a ratio 2.5 times higher than Taiwan’s.

Taiwan has emerged as one of the countries with the lowest tax burden in the world because many other governments have raised taxes in recent years in response to aging populations.

Chen said developed countries have realized that as their labor forces shrink over time, income tax revenues will fall, necessitating higher consumption taxes to make up the shortfall.

In Asia, Japan has led the way by gradually raising its consumption tax rate from 8 percent to 10 percent starting in 2019, while Singapore has raised its rate from 7 percent to 9 percent.

In contrast, Taiwan's sales tax rate is 5 percent, the second-lowest globally, higher only than in Andorra, which has a population of 80,000.

Lagging Behind in Taxing the Wealthy

“Demographics have a huge impact on public finances. As the number of taxpayers decreases and the number of tax recipients increases, the government's financial pressure will undoubtedly increase," said former Legislator Tseng Chu-wei  (曾巨威),  an expert on tax and financial issues.

He recently approached the Ministry of Finance to calculate Taiwan's fiscal deficit for the next 50 years.

Another trend is taxing wealth. Five years ago, an OECD report titled "Under Pressure: The Squeezed Middle Class” described how the global middle class has struggled as their incomes failed to keep up with the rising cost of living. The report recommended expanding the taxation of income from capital and capital gains, lowering exemptions for inheritance taxes for the wealthy, and implementing tax credits for labor income.

The report pointed out that in OECD countries, the effective tax rate on the wealthy is lower than that on the middle class because a significant portion of their income comes from returns on capital, and the tax rate on these capital gains is much lower than on labor income.

Iceland has tried to reverse the trend, increasing its capital gains tax rate by 2 percentage points to 22 percent in 2018.

A similar concept is reforming inheritance taxes. Japan, for example, cut the tax-free exemption for high-income groups by 40 percent in 2015, which reduced the transfer of hereditary wealth and increased tax revenues. 

Singapore has also targeted the wealthy to increase its fiscal revenue. After raising property taxes on luxury homes, it imposed an additional registration fee on imported luxury cars such as McLarens and Lamborghinis.

Taiwan's rent tax is not enough and unfair. The rich only have to pay a very small amount of tax when they buy a luxury home. (Photo: Ming-Tang Huang)

Taiwan might want to also consider taxing the rich, having yet to do so in a meaningful way.

Using the research methodology of the World Inequality Database to calculate Taiwan's wealth gap from 2004 to 2020, professors from National Chengchi University and Academia Sinica found that the wealthiest 10 percent in Taiwan held over 60 percent of national wealth, and that their share has steadily increased. 

They also found that real estate is the main source of growth in wealth for Taiwan's richest individuals, yet they have seemingly been spared by the tax code.

Taiwan's most recent tax reform was to create a joint real estate transaction tax, seen as the first step in reforming the land tax system. The result, however, has been that property holding taxes have actually fallen rather than increased.

Unlike the joint real estate transaction tax, which is only levied when a property is sold, property holding taxes consist of the land tax and house tax and are assessed annually on property owners.