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Submission on “A Broader-based Tax System for Hong Kong?”

5 October 2001

Advisory Committee on New Broad-based Taxes
4^th Floor, Main Wing
Central Government Offices
Lower Albert Road
Central
Hong Kong

Dear Sir,

We are writing with our comments on the above consultation paper.

We note in paragraph 25 that measures such as reducing government expenditure are outside the purview of the committee. We therefore restrict ourselves in this submission to comments of the options for new revenue-raising proposed in the paper. However, we would preface our comments with three observations.

• Firstly, we believe that the true level of Government reserves, including the fiscal reserves, the retained earnings of the Exchange Fund, and Government shareholdings and operations that could be turned into cash by privatization, is truly enormous. We believe that there is no urgent need to consider new taxes and that assertions to the contrary are misleading.
• Secondly, it appears from paragraph 1 that the Government has no idea whether the small deficits of recent years are cyclical or structural; only in the latter case would new taxes be needed. We believe that this should be ascertained and explained to the taxpaying public before there is discussion of new taxes.
• Thirdly, whether or not there is a structural deficit, it is very clear that there is inefficient use of resources on a massive scale within Government, and that cutting Government expenditure and improving value for money from the expenditure that remains should be the highest priority.

Our detailed comments on the paper follow, and are subject to the foregoing observations.

1. Should Hong Kong seek to broaden the stability of its tax revenues by broadening its present tax base?
   
   Yes, but not at any price. The present system is clearly unstable, and should be improved if possible. But as stated above, since we do not believe there is a fiscal crisis, we would not wish to change the present system too abruptly.
   
   
2. Should tax rates on incomes derived by individuals from salaries, properties and businesses be increased?
   
   No. As shown in the paper, the proportions of the total tax take derived from these sources are relatively high.
   
   
3. Should tax rates charged on profits earned by corporations be increased?
   
   No need.
   
   
4. Should personal allowances and concessionary deductions under salaries tax be abolished?

 Personal allowances should not be abolished. Concessionary deductions, especially those that are property-related such as housing allowances and mortgage interest relief, are economically distorting and should be abolished.

5. If personal allowances are not abolished, should they be reduced? If so, in percentage terms, how much should the reduction be?

 Personal allowances were raised far too high in the budgets of the last several years. This was a mistake, and should be reversed. We would target a reduction of personal by at least 50% over, say a five-year term, and ideally reduction further than that. Since this would substantially increase the tax take, i.e. it would not be revenue-neutral, we would advocate "sweetening the pill" by concurrently reducing the actual tax rates by a few percentage points. More salary earners should pay tax, but at a low rate.

6. Should interest income, capital gains, dividends and offshore income received by Hong Kong residents be taxed?

No. All are difficult to tax effectively, and all introduced severe economic distortion and disincentive.

7. Should tax on land and sea departure be introduced? If so, what is the acceptable level of the tax?

No. Hong Kong should cleave to its original rationale as a free port as closely as it can.

8. Should payroll taxes and social security contributions be levied on – (a) employers; and (b) employees?

No. There is no fiscal need, and such taxes contribute to unemployment.

9. If payroll taxes and social security contributions should be paid, what is the maximum acceptable rate of contributions?

 N/A

10. Should some form of consumption taxes be introduced?

Yes, if there is a fiscal need. However, we believe there is no such need.

11. If so, should specific excise-type taxes be considered vis-à-vis a tax on general consumption?

No. We prefer a tax on general consumption.

12. If excise-type taxes are preferred, are taxes on mobile phone and signboards acceptable options?

N/A. (We wonder why these two items were singled out.)

13. Should excise-type taxes be imposed on other specific items? If so, on which items and at what rates?

No.

14. Should a broadly-based consumption tax levied at a single, low rate be introduced?

Yes, if needed. However, we believe that there is no need.

15. If a broad-based consumption tax should be introduced, what is an acceptable tax rate? What factors should be considered in designing the tax?

3%, but see above comments: we do not see a need to introduce such a tax at present.

16. Should a combination of measures be adopted? If so, what are the possibilities? What options should be ruled out?

See above, and further comments below.

We feel that the paper does not go sufficiently into the nature of the tax system that we currently have. Although the take from land taxes has been lower in recent years (the only years analysed in the paper), over the medium to long run, land-related taxes have been the mainstay of the fiscal system. The very high yield from land sales, premium on conversion, rates, stamp duty on property, rentals and other property-related income, has enabled the Government to keep direct tax rates relatively low. However, this benefit has come at the cost of massive distortion to our economy – through overreliance on property – and higher property prices for everyone. These disbenefits really constitute a second layer of tax on the population. A third layer of tax is constituted by Government fees and charges which are high and in many cases unrelated to cost, or in respect of services the cost of which is unknown. A proper study of the tax system would take these factors into account.

We hope that the above comments are helpful.

Yours sincerely,

Alan Lung Ka-lun
Chairman