Numerous economists and pundits derided this costly media blitz, reportedly financed by a major national industrial association, as both self-interested and simple-minded, but the restored Chinese Nationalist Party (Kuomintang) government of President Ma Ying-jeou has evidently enthusiastically embraced this "Friedman vision" of free-market fundamentalism, radical deregulation and "individual freedom."

The proof is in the pudding or, in this case, the tax cuts.

Following in the wake of the media blitz and taking advantage of the shock of the plunge of the Taiwan stock exchange and the current global financial crisis, KMT Premier Liu Chao-shiuan's Cabinet approved yesterday a radical "reform" of the inheritance and gift tax.

If approved by the KMT - controlled Legislature, the "reform" will cut the levy from its former progressive scale with a maximum 50 percent for inheritances to a flat 10 percent and similarly substitute a nominal 10 percent flat rate for the current progressive scale for gift taxes and hike the tax - free deductions for these levies from NT$7.79 million and NT$1.11 million to NT$12 million and NT$2.2 million, respectively.

KMT officials claimthat this "reform" will "simplify" the tax regime, avoid "unfair" double taxation, reduce incentives for tax avoidance and encourage rich Taiwanese to move back to Taiwan and increase their "capital utilization rates" and boost investment in the depressed Taiwan Securities Exchange and even in high technology start-ups.

Boost for social inequity

To put the matter mildly, this story has a few loopholes.

First of all, as with the Ma government's position that full liberalization of economic and financial ties with the People's Republic of China will "save" the Taiwan economy, the claim that low inheritance tax rates will spur an inflow of capital is ideological in nature and is bereft of empirical foundations.

Indeed, reducing the inheritance tax will not erode the existing advantage held by investors who have their funds in offshore tax havens and can simply invest in the Taiwan stock market as "foreign capital" and invest virtually tax free.

Moreover, whether industry or investors and their capital remain in Taiwan depends primarily not tax rates but on the overall combination of the investment climate and opportunities, political stability, the availability of needed and suitable manpower, while whether human talent stays or leaves depends primarily on the quality of living, education and social welfare.

Indeed, numerous countries with high ratings for global competitiveness have even higher inheritance taxes (such as the Netherlands with 68 percent) without complaints of capital flight precisely because they have improved their overall industrial business, education, environment and social welfare conditions.

Hence, neighboring economies similar to our own have recently modestly reduced but still retained relatively stiff inheritance tax rates, such as Japan's cut from a maximum 70 percent to 50 percent and South Korea's cut from a ceiling 50 percent to 33 percent. Similarly, the former DPP government had proposed a pragmatic reduction to a maximum 40 percent levy and a simplification to five brackets from the current 10 slots.

The claim that imposing a flat 10 percent inheritance tax is a move for tax equity is a true "whopper."

The fact of the matter is that Taiwan's effective income taxes, for the rich at least, are far lower than in Hong Kong and Singapore, because of the features such as the unification of individual and corporate income and numerous loopholes and the total absence of capital gains taxes on investments or dividends.

The virtual elimination of inheritance taxes will benefit only a small minority of Taiwan residents, as shown by the fact that only 88,170 inheritance tax reports were filed last year and tax was charged on only 4,684 of these taxpayers, or 5.3 percent, a sign that this levy is only a tax on the rich.

Instead of promoting social equity, this action sends a ringing signal to our society that the KMT government believes that the people who have the highest incomes should pay the least tax.

The KMT Cabinet's "tax reform plan" confirms this judgment by avoiding any mention whatsoever of a complementary imposition of capital gains taxes, such as a reintroduction of a securities income tax, or an increase in the property capital gains levy or any proposals to close the innumerable loopholes that allow many wealthy Taiwanese to avoid the payment of any income taxes whatsoever.

In the future, readers should not be surprised if the KMT government cites the huge NT$3 trillion national debt, which will not be reduced by the annual loss of up to NT$35 billion in inheritance and gift taxes, to further take advantage of the global financial shock as an excuse to cut back on social welfare and education spending in continued compliance to the precepts of Friedmanite free market fundamentalism.