Sandwich class set to pocket highest gains

PUBLISHED : Thursday, 03 March, 1994, 12:00am
UPDATED : Thursday, 03 March, 1994, 12:00am

ONE in four taxpayers will be excluded from the tax net under Sir Hamish's proposal to raise the basic personal allowance from $56,000 to $72,000, or 28.6 per cent - more than three times inflation.

The record increase was part of a wide-ranging tax-cut programme unveiled by the Financial Secretary.

It followed last year's trend in reducing the contribution of personal income tax to the revenue, cutting it by $3.2 billion in the next financial year.

Sir Hamish expected total government income to be reduced by $20.7 billion by the year 1997-98.

The proposal was welcomed by Legislative Councillors, but tax experts were cautious that further narrowing of the tax base could undermine the territory's financial stability in the medium and long term.

Apart from excluding 420,000 people from the tax net, the proposal also sought to cut the amount of tax paid by 1.13 million people.

In addition, the number of standard rate taxpayers will drop impressively by 60 per cent.

The allowances for the first and second children and dependent parents will be up 17.6 per cent to $20,000. Single parent families will be given an extra allowance of $32,000 - $5,000 more than the current year.

This is to be accompanied by the introduction of a new dependent grandparent allowance of $20,000.

Although there was no alteration to the tax band, the top marginal tax rate - payable by high earners on part of their income - will be cut by 25 per cent to 20 per cent.

Sir Hamish said: ''My concessions will bring the largest benefits to taxpayers earning less than $500,000 a year. The average household, with median monthly earnings of $13,000 will no longer have to pay any salaries tax.

''The typical sandwich class, with monthly earnings of $20,000, will be liable for only $343 a month in salaries tax, or the equivalent of the price of a restaurant meal. Indeed, this family's tax bill will be cut by over $7,000 a year,'' he said.

Under the new proposal, a married couple with two children earning $184,000 - who now pay $2,020 a year - or less will not have to pay tax.

A single person who earns $72,000 and pays $320 for tax this year will pay no tax in the coming year.

The tax committee chairman of the Hong Kong Society of Accountants, Tim Lui Tim-leung, said the increase in tax allowances was in line with the prospering economy of Hong Kong.

''But it could be worrying in the medium and long term of development,'' he added.

''A more steady budgetary approach is [for the Government] to maintain a wider tax base so that its revenue could be adjusted in times of poor economy. The current proposal will further narrow the base - it goes against the principle of solidity.'' But senior economics and finance lecturer at the City Polytechnic of Hong Kong, Li Kui-wai, disagreed.

Mr Li said the Government could still adjust income through the existing tax items.

He described the increment as an ''encouraging move'' by the Government to relieve the pressure on the sandwich class.

''The sandwich class will certainly be the main beneficiary of the new allowance, it will leave them more disposal income.'' But this would inevitably have an impact on inflation, he added.

Mr Li said the decrease in the top marginal tax rate from 25 per cent to 20 per cent would cut the tax burden for high earners and serve as an incentive for them to stay in Hong Kong during the transition period.

The vice-president of the Institute of Personnel Management, Paul Harrop, also welcomed the proposal.

He said the adjustment should not have any impact on the forthcoming salary adjustments.

The level of pay rises should be based on a number of factors, including the performance of individuals and competition between companies.

''The threshold of tax should not deter employers from increasing salaries,'' he said.