Government should shelve GST proposal and tackle first things first
AT SOME POINT this year, the government will launch its publicity campaign for a goods and services tax, or GST.
There is a strong economic case for the tax, and an equally good argument against it. Expect some spirited advocacy from both sides. Don't look for a meeting of minds.
As long as backers and opponents of the tax both focus on the economics of the debate, none of the reasons they advance either for or against a GST will carry enough weight to be convincing. The bickering will continue. The rancour will mount and the problem will seem insoluble.
Instead of finance, they should be concentrating on philosophy. It is an axiom of joined-up thinking that when a question appears insoluble, then you are probably asking the wrong question.
In this case, the question for both sides should not be: 'How can we raise new tax revenues?' but: 'What sort of a place do we want Hong Kong to be?'
The root problem here is that Hong Kong's government is overly dependent on income from property sales for its revenues. When property prices plunged in 1997, so did demand at land auctions, pushing the government into deficit. Quite rightly, officials decided that they needed a new, less volatile revenue source to diversify and stabilise the government's income.
One obvious solution would be to collect more income tax. This could be done most easily by reducing personal allowances. Accountants PricewaterhouseCoopers estimate that cutting current allowances by half would raise an extra $15 billion to $16 billion a year. This is a big sum, almost as much as the unexpected windfall from land sales that pushed the budget back into surplus last year for the first time in five years.
The trouble with cutting allowances is that it would further burden taxpayers. While most wage-earners pay no tax at all, a mere 300,000 Hong Kong residents stump up 90 per cent of the income tax collected.
Leonard Cheng, professor of economics at Hong Kong University of Science and Technology's business school, argues that it makes little sense for one segment of the population to pay all the tax, while another group, which pays none, reaps the benefit in the form of comprehensive social security and other programmes.
This is a fair point. People who contribute nothing while accepting handouts risk developing a belief in their own entitlement. They can become increasingly dissatisfied, demanding more and more, and placing unreasonable calls on the system that supports them.
In an equitable society, everybody should pay something, however small, to discourage a culture of dependency and encourage a sense of stakeholding, says Professor Cheng.
The preferred answer is to introduce a goods and services tax. Acting Chief Executive Donald Tsang Yam-kuen has repeatedly pointed out that Hong Kong stands out among developed economies for not levying a GST. In his budget last month, Financial Secretary Henry Tang Ying-yen talked about the tax as if its introduction was a foregone conclusion.
A range of external bodies from the International Monetary Fund to credit rating agency Standard & Poor's also back a GST, portraying it as the answer to Hong Kong's budgetary problems.
Sure enough, charged at 3 per cent, a GST would raise an estimated $18 billion a year, neatly filling the government's revenue gap. The trouble is that a GST would be deeply regressive. In other words, it would fall disproportionately heavily on the poorest members of society.
A householder earning $6,000 a month who is forced to spend all her wages on living expenses would pay tax on 100 per cent of her income.
In contrast, a wealthy householder who takes home $100,000 and spends $50,000 would be taxed on only half his earnings. In relative terms, the rich would get richer and the poor would get poorer. That is hardly equitable either.
So far, so familiar. Now comes the philosophy. If the question is: 'How can we raise new tax revenues?' we soon run into this awkward paradox. But if the question is: 'Do we want an equitable society?' and the answer is 'yes', the solution is suddenly straightforward.
For a society to be equitable, contributors must also be stakeholders. At the moment, only a handful of people in Hong Kong pay tax. But they also tend to be the stakeholders. They are the people with some say in how the city is run, whether because their wealth and education ensure they can make their voices heard, or because they are directly represented through functional constituencies.
Levying a GST may improve the government's financial position, but while it would turn the majority of Hong Kong's population into contributors, it would not by itself make them stakeholders. That would require a more pluralist form of political representation.
As that's not on the table yet, the government should shelve its proposals for a GST for the time being.
With $290 billion in fiscal reserves and a clutch of saleable assets, the government has enough in the coffers to plug any revenue gaps for a decade or more, which should be plenty of time to work out how to extend representation, as well as taxation, to the population at large.