Sales tax goes against sound HK fiscal logic

Opinion / Liang Hongfu

 Sales tax goes against sound HK fiscal logic
By Liang Hongfu (China Daily)
Updated: 2006-03-08 06:04

Supporters of the proposal to introduce a new sales tax in Hong Kong
believe that it can broaden the tax base, which, in its present form, is
widely believed to be too narrow to cope with rising public aspirations.

Citing the well-known fact that more than 80 per cent of the population
falls outside the tax net, Eden Woon, chief executive of the Hong Kong
General Chamber of Commerce, wrote that broadening the tax base is
essential for Hong Kong's sustained competitiveness because "we cannot
forever count on revenue from the elite group of professionals and
companies that form our tax base."

As for now, "the only way to sustain the level of expenditure Hong Kong
expects is through excellent economic good luck," he wrote in a
commentary published in a recent edition of the South China Morning Post.

In that case, Hong Kong must have been extremely lucky for a long time.
Before the economy was knocked off balance by the sudden outbreak of the
Asian financial crisis in 1997, Hong Kong enjoyed an almost unbroken
record of budgetary surplus for decades.

After seven lean years from 1997, the Hong Kong economy is once again on
a roll and is beginning to produce a strong stream of revenue that fills
the public coffers to overflow. Such resilience cannot be attributed to
luck alone.

The underlying strength of the Hong Kong economy is multi-faceted. A
simple tax regime has long been regarded as one of the most important
elements in the success formula that has catapulted Hong Kong from a
low-cost manufacturing base to the premier services centre in the region
within two decades.

It is a formula that should not be tinkered with simply because too few
people are paying tax. Those "few" are the elite of the society who have
benefited the most from Hong Kong's economic success. What's more, the
so-called "tax burden" that they have been bearing is rather light.

With their salaries taxed at a maximum flat rate of 17 per cent,
taxpayers in Hong Kong are the envy of their counterparts in many
developed countries in the world where the income tax rate can go up to
more than 40 per cent. The low tax rate in Hong Kong should have minimal
impact of "competitiveness" no matter how narrow the tax base may be.

The much-maligned narrow tax base in Hong Kong is a reflection of the
widening salary gap between the highly-skilled managerial and
professional segment and the rest of the workforce. This phenomenon is
particularly apparent in fast growing service economies where the demand
for highly trained professionals far exceeds supply. As such, a narrow
tax base is not a reflection of a deficiency in the tax regime.

To widen the tax base by lowering the taxable threshold is not a socially
viable alternative because the revenue generated would be small compared
to the groundswell of discontent from the majority of the people in the
lower income group.

A sales tax, in whatever form it may be, is unlikely to address the issue
because the people who are likely to spend more, and therefore pay the
bulk of the tax, will be those in the higher income group who are already
paying most of the salary tax. What's more, sales tax can be seen as a
form of double taxation, which goes against the core principle of the
Hong Kong tax regime. A strict reading of that principle seems to suggest
that salaries should only be taxed once and not again when they are being
spent.

Email: jamesleung@chinadaily.com.cn

(China Daily 03/08/2006 page4)

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