Keep the GST in perspective

PUBLISHED : Thursday, 27 July, 2006, 12:00am
UPDATED : Thursday, 27 July, 2006, 12:00am

The government says its aim in proposing a goods and services tax is to broaden the tax base. Is this true? The purpose of taxation is to raise revenue for the government to spend on public needs. It is also a way to redistribute wealth within a society.

Hong Kong taxes people's salaries, not their total income. The business lobby has always resisted taxing income beyond what one earns as an employee.

For example, if Hong Kong had an income tax like many other parts of the world, then we would pay tax on dividends. The truly wealthy in Hong Kong do not earn salaries. Many of them take dividends from their companies, which are not taxed as their individual income.

Some argue that dividends are indeed taxed, since companies pay them out of after-tax profits. While that is true, a company is a separate entity from a person, and dividends are a source of individuals' income.

If Hong Kong taxed dividends, how much revenue would it raise for the government? And what is the logic of not taxing dividends in Hong Kong? These questions were not addressed in the GST consultation document the government released last week.

Nor does Hong Kong tax capital gains, unlike many other jurisdictions. The GST document is also silent on this. So, the government's consultation is not a tax-reform exercise, as it claims, but a mere GST promotion.

A genuine tax-reform debate would require the government to explain the current tax system comprehensively. It should then produce an objective assessment of the pros and cons of the system.

That explanation would need to include land taxation in Hong Kong, because that is a crucial revenue-raiser for the government. The city has relied on land revenues for much of its history to fund public spending. The financial secretary should remind us of his revenue projections for the next few years from this source.

If he were honest about it, the financial secretary would also explain to the people that taxing land in this way affects most people: we bear a part of the burden indirectly.

If the government truly wanted to engage the people to discuss tax reform, it should have produced a much richer and more interesting document, providing comparisons with other tax systems.

A fair comparison would show the uniqueness of the Hong Kong system, where land taxation plays a large role in government revenues. It would also show that money from this source is put into a special account called the Capital Works Reserve Fund which, as its name implies, is used for capital works.

Thus, income from land cannot be used to pay for recurrent expenditures such as education, welfare, health care and environmental protection. The financial secretary could again remind the people that he intends to spend some $29 billion a year on capital works, under his budget projections.

A genuine tax-reform exercise would presumably pose the question of whether money derived from land should go into the general account - so that it could also be used to cover recurrent expenditures. Further, if this were done, how might it affect the government's total financial picture?

Alas, the GST consultation document does nothing of the sort. The best arguments it puts forward are: many places have a GST, so Hong Kong should as well; and, important international bodies like the International Monetary Fund have suggested Hong Kong should adopt a GST.

But, with respect, the IMF has not undertaken a tax review of the Hong Kong system. No other jurisdiction has a tax system like ours. So, could we have something more honest than the paper that has been put before us?

Christine Loh Kung-wai is chief executive of the think-tank Civic Exchange.