Taxation and Economic Development in Taiwan. By Glenn P. Jenkins, Chun-Yan Kuo and Keh-Nan Sun. [Cambridge, MA: John F. Kennedy School of Government, Harvard University and Chung-Hua Institution for Economic Research. Distributed by Harvard University Press, 2003. 284 pp. Paperback £10.95, ISBN 0-674-01133-3.; hard cover £20.95, ISBN 0-674-01102-3.

Abstract

This book analyses the evolution of the tax system and economic development in Taiwan over four decades, and argues that three crucial factors – prudent public sector expenditure, an effective revenue system and a set of export-oriented trade policies – contributed to the achievement of macroeconomic stability and growth in Taiwan from 1955 to 1995. It is divided into seven broad themes: evolution of the tax system; various stages of Taiwan's economic development; assessment of tax incentive policies in relation to investment, savings and economic growth; the evolution of Taiwan's trade policies; the correlation between tax policies and other macroeconomic variables; innovation and pragmatism in the inland tax administration; and the management of transaction costs with respect to the trade administration.The authors argue that like many other countries, Taiwan experienced hyperinflation and fiscal crisis after the Second World War. In order to solve the difficulties, instead of relying on foreign borrowing or using domestic private savings to finance itself, the Taiwanese government effectively limited public spending, which not only pushed inflation rates down but also created a stable macroeconomic environment. In addition, the operation of the tax system played a significant role in promoting economic development. For instance, instead of emphasizing the importance of income tax as a main tool for raising revenues, the government introduced state-run monopolies in alcoholic beverages and tobacco in 1950 and enforced the value-added tax system in 1986, providing a solid foundation for the revenue system. The authors find trade and macroeconomic policies, rather than income tax policies or subsidized finance measures, to be the main determinants in successful industrialization. On this basis, the authors conclude that the trade policies and tax administrative systems in Taiwan have been pragmatic and innovative, resulting in lower compliance costs and improved effectiveness and thereby making a direct contribution to the country's rate of economic growth.