SUBSCRIBE TO THE BULLETIN TODAY!

Sharing the Burden

Hong Kong has the narrowest tax base in the developed world. As we move toward greater representation in government, this has to change, writes ANTHONY NIGHTINGALE

January is tax time, and as you write your cheque to the Inland Revenue, you should remember two things.  One is that what you all are providing on the revenue side may not be enough to cover the expenditures of the government regardless how much better the economy gets.  In short, we may have a structural deficit in Hong Kong which requires great sacrifices on the expenditures side and action on the revenue side.   The second is to remember that 80-plus percent of the SAR population (including over 64 percent of all employees) pay no salaries tax. The remainder -- barely 18 percent of the population -- pay all the salaries tax, and of that, less than 3 percent pay more than three-quarters of the revenue collected.

This makes our tax base the narrowest in the developed world, and it is getting narrower year by year. Since 1997-98, Hong Kong's population has grown by 5.9 percent, yet the number of taxpayers shrank 6.4 percent. During that same time, the salaries tax collected decreased by 1.8 percent, but the average tax paid by those who did pay taxes rose by 4.9 percent.

At the corporate level, 1.6 percent of companies pay 65.7 percent of the profits tax, and less than 5 percent pay over 78 percent. We are taking in less tax, but asking those who pay to pay more. This simply cannot go on. If we continue to depend on an ever-dwindling number of people to support the more than 80 percent of the population (and over 90 percent of companies) who pay no direct tax, we shall drive away the tax base.

Hence, there are good arguments for broadening the tax base, and several ways to do so. I am acutely conscious that it is never a good time to introduce new taxes or raise existing rates, but we are in a fiscal crisis and need workable solutions. Cutting expenditure can no longer be delayed, but neither can widening the tax net.

We need a multi-pronged approach, and many believe that approach should be both reduced spending and wider collection. The business community continues to believe that the first priority is to cut spending.  Only then should the government ask the people for more money.   What are the options?

Some suggest we could reap more income by expanding jurisdiction to include worldwide corporate and personal income. However, this would not only be counter-productive (the core of the tax base would move out of our jurisdiction), it also would directly undermine our status as a business and financial center.

Many feel that as we move toward greater representation in government, we need to ensure that people have a stake in society. Paying taxes would make the people at large more keen on controlling public spending.  Therefore, this line of argument goes, we need to collect tax from more people, by lowering the personal allowance, which is the highest in the developed world, and, many think, by instituting a goods and services tax (GST).

While a GST is not perfect, it is generally thought to be efficient, economical and equitable. The cost of collection is said to be relatively low (less than two cents for every dollar of tax received). The more one spends (which generally means the wealthier one is), the more tax one pays. And, companies collecting the GST on behalf of government improve their cash flow by benefiting from the float between when the tax is collected and when it is remitted to the Inland Revenue. This latter point might benefit cash-strapped SMEs.

However, there are legitimate concerns that need to be addressed, and that is why we suggest that the government produce a GST White Paper for consultation during the coming fiscal year. The argument for not doing so -- that the economy is not strong enough now – doesn't stand up: it typically takes 3-5 years to implement a GST. Even at an accelerated pace, we are unlikely to see any revenue from a GST until 2007 or later. Starting the two-way consultation now makes sense.

One criticism of the sales tax is that it unfairly takes a larger share of the income of a poor family than that of a rich one.  There are various ways to get around this inequity, including exemptions and direct subsidies to poorer families. These issues need to be discussed, and sooner, rather than later. The Chamber's Economic Policy Committee has examined the lessons learned in Singapore, Australia and other places and come up with some basic principles that we would introduce into any public discussion on the details of a GST proposal.

There are those who say that a GST would be "politically unacceptable" at this time but a recent Chamber survey (highlighted in last month's edition of The Bulletin) indicated a solid level of support for its introduction among Chamber members. And we need to remember that a sales tax is not exactly revolutionary: in East Asia only Hong Kong and Brunei have no sales tax.

Your Chamber has made several representations to government this year on the need for a credible, comprehensive recurrent spending reduction plan before any revenue enhancement measures are considered. That plan has not yet been forthcoming. We will continue to press for reducing spending, but in the meantime we also need to pay urgent attention to the need to broaden the tax base, to ensure that we do not run into such deep fiscal trouble in future.

Anthony Nightingale
Chairman
HKGCC