For its flawed logic, GST initiative deserves to be shot down

PUBLISHED : Thursday, 20 July, 2006, 12:00am
UPDATED : Thursday, 20 July, 2006, 12:00am

'Hong Kong's existing tax base is very narrow by international standards. We rely on a very limited range of taxes and non-tax income to support our public expenditure. Income from these sources varies widely according to economic conditions outside our control. This has greatly constrained the government's ability to make long-term plans and investment decisions ...'

GST consultation paper

OKAY, RING MY BELL. Let's take apart this justification for introducing a goods and services tax as there are more than just a few omissions and flaws of reasoning here.

We shall start with the claim that our existing tax base is 'very narrow by international standards'. The consultation paper bases this claim on a chart showing a percentage comparison of revenue sources for Hong and for the average of OECD countries. The numbers for this chart are in the first two columns of the table.

The authors of the paper then point out how much these figures show that we rely on profits tax compared with the developed-country average and how askew we are on other measures as well.

Doctored figures I call this and doctored figures is what I mean. What these people do not tell you is that they show these revenue sources only as a percentage of operating revenue in Hong Kong and even then, after omitting the 'others' source of operating revenue.

They entirely forget to mention that they have excluded our government's capital revenue, which is substantial compared with other countries and they treat the Mandatory Provident Fund as if it does not exist.

The third column in the table sets things straight again. It shows the real percentage contributions in fiscal 2005 to consolidated revenue after including capital revenue, other operating revenue and the MPF.

What it says is that our tax base is not narrow at all. It is a wide one by international standards. Pull the wool over someone else's eyes, fellas.

But there is more here. These figures are all based on cash accounts rather than the more accurate and more comprehensive accrual accounts, which is odd because the government has started compiling accrual accounts at last and they are a much better basis for long-term fiscal planning than cash accounts.

In particular, the accrual accounts show that in recent years the government has shown a consistent operating account deficit and a consistent capital account surplus.

This is important because back in 1982 we separated the two with the creation of something called the capital works reserve fund, the idea being that capital revenue would go entirely to capital projects and this fund would smooth out the streams in capital revenue and expenditure.

So, why are we now being told that our government's ability to make long-term investment decisions has been 'greatly constrained' when in actual fact it has ample capital revenue to make these investments? Why, furthermore, is some of this capital revenue not being pumped back to the operating account? Stop your wool-pulling tricks, fellas.

Then we get to that bit about 'income from these sources varies widely according to economic conditions outside our control'.

Not so. What our government particularly has in mind here is land sale revenue and investment income from international reserves.

But it has itself made this investment income volatile. It chose in 1999 to take out unrealised investment gains as cash revenue. A better way of making this revenue source rocket up and plummet down from year to year could not possibly be found.

Why did it not instead choose to book an annual 2 per cent or 3 per cent of the net assets of the fund as revenue? This would have given it the revenue stability it wants.

Similarly, its land revenue is volatile because it has refused to reconsider its outdated lease conversion premium system for redevelopment of moribund buildings or use its position as head landlord of all land in Hong Kong to establish more stable recurrent revenue from land.

It has locked itself into the old colonial way of doing things and will not countenance change. It thus has only itself to blame for this problem.

But while land revenue is volatile from year to year, it is relatively stable from one economic cycle to the other. This is not really such a big problem after all.

In any case, a GST will not change this. It does not touch land revenue, which is market dependent. Will our government ever charge less than it can for public land in good times? Can it ever force developers to pay more than they choose in bad times?

In short, the reasoning for a GST is seriously flawed on many counts. I have taken just one paragraph from a long consultation paper and found specious argument in it everywhere. This initiative almost begins to look like one devised to be shot down.