Huge Asian budget deficits don't have to mean new taxes
Huge Asian budget deficits don't have to mean new taxes
By James T. Areddy
HONG KONG (Dow Jones): At first glance, record-sized Asian
budget deficits would suggest a pressing need for higher taxes
because less-than-stellar economic growth expected over the next
few years will limit government revenue.
Yet tax experts play down that possibility and predict
governments will focus on a more-immediate desire to solidify
economic recovery. In most countries, governments are saying they
believe recovery remains too fragile now for more taxes or even
much belt-tightening, which means deficits will become a more
permanent feature of the Asian landscape.
In fact, experts see merit in reducing some tax rates in the
face of the gaping budget deficits. That is particularly true
where lower taxes would prompt more investment and economic
restructuring, such as the way Malaysia has made bank, insurance
and brokerage company mergers more attractive by adjusting
technical tax law.
Until Asia's 1998 recession prompted the drastic spending that
is now helping to revive economies and pay for bank
restructuring, balanced government budgets and low tax rates were
key ingredients of the so-called Asian economic "miracle." But
economic growth rates are expected to lag for some time at below
pre-crisis levels, which will depress official revenue intake and
drag countries uncomfortably further into the red, analysts said.
"We're at a new phase in Asia where a number of countries are
running budget deficits and will be for some time," according to
Jim Walker, chief economist of Credit Lyonnais Securities (Asia)
Ltd. "It probably would be better if there were higher tax
rates."
He reasons that funding the deficits isn't the immediate
concern. But as governments increasingly compete more for
external funding with companies and home-buyers, interest rates
will be driven higher, curtailing growth prospects.
In a new report, the Asian Development Bank takes up that
point by saying the region's historically high budget-deficits
will ultimately require reins on spending, and that will threaten
prospects for domestic demand.
The fiscal balance of the four biggest Southeast Asian nations
-- Thailand, Malaysia, Indonesia and the Philippines -- will be
in deficit to the tune of 4.8 percent of gross domestic product
in 1999, compared with a surplus of 1.7 percent of GDP in 1996,
according to Goldman Sachs & Co.
In Singapore, Hong Kong, South Korea and Taiwan, the gap will
be 2.5 percent of GDP this year compared with a 1996 surplus of
0.7 percent of GDP.
Nevertheless, lifting taxes to make up the difference would be
"suicidal," according to Allan Aw, regional managing partner for
tax at Arthur Andersen & Co. in Hong Kong. In most countries
right now, big tax increases would "kill the economy," he said.
Tax-system analysts said that any Asian politician who
considers jacking up taxes to balance government books should be
dissuaded simply by recalling Japan's disastrous consumption-tax
hike to 5.0 percent from 3.0 percent in April 1997.
The move choked off Japanese recovery almost before it began
and impaled the political fortunes of Prime Minister Ryutaro
Hashimoto. A little over a year later, a disgraced Hashimoto
resigned after voters signaled their view that his party had
sacrificed the public trust by appearing greedy.
The reason Asian governments will pursue growth before higher
tax rates lies partly with the fiscal systems already in place.
Since most Asian countries get a high portion of their revenue
through either a value-added tax or a national sales tax,
government revenue rises when the economy does.
Although the same can be said for corporate and personal
income taxes, the "pay-as-you-go" systems are also are
"regressive." In other words, they gobble up a larger percentage
of income from a poor person than a rich one. Therefore, analysts
said higher VAT rates would only worsen the situation for those
at the bottom end of the income scale -- some of whom the fiscal
spending is aimed at helping.
Still, Asian governments will need to raise money somehow, and
analysts said they do see a few avenues for governments to take
in the immediate term.
"We think that the governments will have to be far more
creative in the way they're going to get revenue," said Arthur
Andersen's Aw.
A major one is through more effective enforcement of tax
codes. Getting tough on scofflaws is a proven revenue generator
since tax collection usually costs only a tiny fraction of money
collected. Tax professionals said Asian governments always face
acute manpower shortages in this area.
The weapon has already been fired in South Korea, where multi-
million-dollar charges of tax evasion have been leveled against
the heads of Korean Air Lines and at least one other big business
group. The high-profile charges in South Korea may have more to
do with politics than procedure, but accounting firms said they
say they see enforcement teams growing in many countries.
Rod Houng-Lee, a senior international tax partner at
PriceWaterhouseCoopers Inc., uses a simplistic example to show
why the tax law in some Asian countries should be adjusted to
encourage deal making. Right now in many countries, from a tax
perspective, if a bank writes down the value of debt owed by a
bankrupt company to US$1.0 million from $10 million in order to
entice a buyer for the company, the move is tantamount to handing
the buyer a taxable $9.0 million.
Houng-Lee said governments recognize how this is a
disincentive and are now changing laws related to foreign direct
investment and mergers and acquisitions. "You're seeing a batch
of those incentives in the region which are designed to
facilitate the restructuring," he said.
Malaysia's recent budget included a number of technical tax
changes designed along these lines. It announced that government
stamp duty and all expenses related to restructuring debt of a
bank now under government control can be deducted from the
buyer's income taxes. And for a limited amount of time, half the
value of losses incurred by brokerages and insurance companies
can be used as a tax credit by a buyer, while capital gains taxes
will be waived for a buyer of financial firms in some cases.
The government estimated that these measures will cost it
around $290 million in lost revenue and widen the budget deficit
to 5.0 percent of gross domestic product in 2000.
In addition, individual and corporate tax rates were reduced
and tax incentives designed to spur bank lending were announced.
"As the government believes that total national income will
increase with economic growth, the government will endeavor to
further reduce individual and company income taxes from time to
time," Finance Minister Daim Zainuddin said.
Like emerging economies everywhere, Asian nations are
typically poor at collecting taxes and analysts said the VAT
systems should be restructured make them more fair.
"The main thing is not increasing tax rates but to widen the
tax base to ensure more people pay taxes," according to David Li,
an accounting professor at Hong Kong's University of Science and
Technology. Lower tax rates mean there is less reason to skip
while simpler tax systems make evasion more difficult, he said.
Where tax charges are most likely to go up, analysts said, is
for the so-called "sin taxes" levied on alcohol and tobacco.
Meanwhile, as an alternative to direct taxes, almost every
government in the region has also either permitted more legalized
gambling or started considering it. But analysts see these
programs, such as Shanghai's lotteries or the gambling casinos in
South Korea and Manila, as minor revenue generators, typically
earmarked to fund sports teams, certain health programs and
education.
Window 1: Like emerging economies everywhere, Asian nations are
typically poor at collecting taxes and analysts said the VAT
systems should be restructured make them more fair.
Window 2: ...as an alternative to direct taxes, almost every government
in the region has also either permitted more legalized gambling
or started considering it.