A taxing proposition

The government and the ruling Grand National Party have agreed on a plan to implement a local income tax and a local consumption tax starting next year.

The current residence tax, levied at 10 percent on top of the national income tax, will be handed over to local governments. The government and the ruling party are also contemplating whether to subtract 10 percent from another national tax - the value added tax - and distribute it to local governments.

The plan appears to benefit local governments because tax revenues will be channeled directly into their accounts, giving them more financial independence.

But it isn’t that simple. Local governments may gain power when they begin collecting taxes directly, but their tax revenues will inevitably decline and the revenue gap among local governments widen.

The government concocted the idea of local taxes last year as a part of a broader plan for provincial development, thinking it would appease the local governments while announcing various property deregulation measures in the capital region.

Taxpayers must now endure the inconvenience and waste of paying taxes on their income and spending separately to the central and local governments. The explanation given is that this will help local governments become self-sufficient. But tax increases cannot promise greater returns.

Tax revenues don’t suddenly increase just because the collector shifts from the central government to local governments.

Merely renaming the tax will not bring in more money, unless local governments plan to squeeze out more from their residential and corporate taxpayers.

The government is also considering granting local governments the freedom to set tax rates, exemptions and cuts. But what if local governments start making even larger tax cuts and deductions to win popularity?

Richer local governments in the capital region would make fewer demands on their taxpayers while hard-up ones would be compelled to collect more, aggravating the wealth gap between the capital region and the provinces.

The consumption tax is also tied to the wealth of local residents and can disadvantage local governments collecting it independently.

The new tax system will also increase the number of tax officials in local governments and it will likely do more harm than good for the country as a whole.

Discussion on adopting a local tax system that has few if any tangible benefits should be stopped right away.