This paper adopts social identity theory to address the question of how and why people living in Taiwan consider himself or herself as Chinese or Taiwanese. The developmental process of Taiwanese ideology is made explicit through analysis of the immigration history and intergroup political conflict in Taiwan. Two empirical studies were then conducted. In the first study, respondents filled out measures of ethnic identity, political party support, political ideology, traditional Chinese values, and explicit attitude towards Chinese culture. A comparison was made of respondents supporting the DPP (Democratic Progressive Party) and the KMT (Kuomintang). Results imply that a new abstract categorization of ethnic identity ("Taiwanese and Taiwanese" and "Taiwanese are Chinese") based on political ideology will substitute for the traditional categorization of ethnic identity based on the time period in which a person or his ancestors came to Taiwan from mainland China. When adding the classification category of mother tongue (Taiwanese or Mandarin), we found that DPP supporters whose mother tongue is Taiwanese strongly agreed that "Taiwanese and Taiwanese", and KMT supporters whose mother tongue is Mandarin clearly agreed that "Taiwanese are Chinese", but DPP supporters with Mandarin as their mother tongue and KMT supporters with Taiwanese as their mother tongue had more ambiguous ethnic identities. This result implies an adding/subtracting effect of mother tongue that roughly corresponds to the traditional categorization of ethnic identity. In the second study, a speaker was designated as either a KMT or DPP member. Subjects were asked to evaluate the quality of the speaker's communication as an index of ingroup favoritism. More ingroup favoritism was shown in those subjects with DPP political ideology than those with KMT political ideology.