The Imputation Tax System was implemented in Taiwan, on 1 January 1998, as a means of integrating individual and business income taxes, with the overall aims being to eliminate the phenomenon of double taxation on investment income and to stimulate macroeconomic activity. This study uses a general equilibrium approach to undertake long-term dynamic analyses so as to empirically investigate the impact on macroeconomic investment, output and tax revenue from the implementation of this new tax system. The study designs a ‘Taiwanese Annual Macro-econometric Model for the Imputation Tax System’ for its analyses, a model which represents a combination and the modification of the ‘Taiwan National Pension Long-term Macroeconomic Forecast Model’ and the ‘Aggregate Supply and Demand Forecast Model’, both of which are official models used by the Directorate General of Budget Accounting and Statistics (DGBAS), at the Executive Yuan.
The modified model links together the monetary market, foreign exchange market, labor market and commodities market, whilst also taking into account the supply of energy resources, environmental constraints and income distribution. The integration of an additional factor, public finance, into the modified model, enables this study to demonstrate the effects of the tax reform on both macroeconomic investment and output activity. A simultaneous equations model is formulated as a result of the emergence of endogenous variables, with the Gauss-Siedel calculation method being employed to determine the optimal solution.
The empirical results suggest that when compared to the former classical tax system, the new Imputation Tax System has resulted in positive influences on both macroeconomic investment and output. The simulation results demonstrate that if the additional 10 per cent tax levy on retained earnings is removed from the Imputation Tax System, there would be an even greater increase in aggregate investment and output than under the current system. However, from a perspective of public finances, the implementation of the Imputation Tax System has lowered tax revenue and, according to the forecasts, this loss in tax revenue can hardly be recovered by the expected growth in macroeconomic output.
