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)