In Taiwan, individual income and business income are separately taxed. This produces double taxation (on dividends) which obviously discourages investment and creates various distortions in the allocation of resources–i.e., distortion between the corporate and noncorporate sectors, between dividends and retained earnings, between equity and debt financing, etc. Vertical and horizontal inequities are generated as well.
In this study the feasibility of integrating the two taxes is analyzed. From the criteria of efficiency, equity, capital formation, tax revenue loss, and tax administration, seven integrated tax methods are examined: partnership approach method, Carter-style full integration method, split-rate method, dividend paid deduction method, dividend full (or partial) imputation method, dividend received exemptive method, and a mixed method.
According to our findings, the dividend full imputation method would be the best choice for Taiwan’s income tax reform. It would remove the double taxation burden on dividends and simplify “The Statute for Encouraging Investment,” but would also cause a probable loss in tax revenue of approximately 8-9 billion NT dollars.
