Net gains
In his consultation document on the 2009-10 budget, Financial Secretary John Tsang Chun-wah mentions a narrow tax base as one of our future challenges. The document says that, among the 3.55 million total working population, only 1.3 million (36.6 per cent) pay salaries tax. Is this problem really as serious as Mr Tsang suggests? And how shall we broaden the tax base?
Eleven years ago, the then-financial secretary, Donald Tsang Yam-kuen, in his 1997-98 budget, rejected the argument that increasing the basic allowance in salaries tax would make the tax base too narrow. 'I have looked carefully at the statistical evidence on this subject,' he said. 'In each of the last five years, we have raised the basic allowance in real terms. Yet the total number of taxpayers - the tax net - has remained relatively stable, at around 1.4 million. I hope that members will accept my assurance that today's tax concessions will not undermine the productivity of salaries tax as a source of revenue.'
At that time, 44 per cent of the city's workforce paid salaries tax. Since then, salaries tax concessions have been proposed in seven of the 10 subsequent annual budgets, including the last one. As a result, despite the increase of several hundred thousand wage earners in the past decade, the number of salaries-tax payers has declined by 100,000.
It was against this background that the government put forward a proposal in the second half of 2006 to broaden our tax base with the introduction of a goods and services tax (GST). A year later, it shelved the proposal in the face of strong opposition by the business sector and general public. Yet, in the same year, the then-financial secretary, Henry Tang Ying-yen, proposed a number of substantial salaries tax concessions that cost HK$4.9 billion annually and narrowed the tax base further. Last year, his successor, John Tsang, honoured the chief executive's election pledge and increased the level of personal allowances.
So is it not appropriate to conclude that the narrow tax base we face today is the result of the actions taken by successive financial secretaries over the past 11 years (except for Antony Leung Kam-chung, who raised salaries tax in the 2003-04 budget)? Is it not fair to say that, in winning the applause of taxpayers at the time, Donald Tsang, Henry Tang and John Tsang did not have sufficient regard for the long-term sustainability of our tax system?
The present situation is unsatisfactory and needs to be addressed. But a GST is not the answer, for two reasons. First, a tax based on goods and services is a most regressive and unfair one. It is not suited to a place with an increasing income disparity like Hong Kong. Also, while only one-third of our wage-earners pay salaries tax, almost all households pay rates based on the estimate of the annual rent of their properties. So, it is reasonable to say that most people already pay some tax.
Second, a GST is inherently complex and, once introduced, will have a lasting effect on our simple tax system. Shelving the proposal was the right decision; it should now be buried permanently.
The solution to the narrow tax base lies in increasing the percentage of salaries-tax payers to at least the previous level of 44 per cent and, preferably, higher. In the consultation document on a GST, the government did offer another option to broaden the tax base: a major reduction in personal allowances. As the administration did not favour this option, it was presented as a one-off exercise. But, if our present narrow tax base is the accumulated effect of 10 years of concessions, it is not fair to resolve the problem in one go, nor is it necessary.
The government may have to incur substantial expenditure in 2009-10 and even in the next two to three years as we brave the worst impacts of the financial crisis. But we have one of the largest foreign-exchange reserves in the world and the unfailing support of one of the financially strongest economies, in the mainland, whenever we need it. The government could afford to spend more than it receives for several years without putting our financial system or currency at risk.
The financial secretary should, therefore, propose a target for the percentage of wage earners in the salaries tax net, say 50 per cent to 60 per cent, and set a timeframe, of say 10 to 12 years, for achieving it. He should initiate a public debate on the matter. There is no urgency to reduce personal allowances. But he should send a clear message to the public that any future salaries tax concessions would be limited. Given the government estimate of a medium-range annual inflation rate of 4 per cent, our tax base will be widened substantially in the next five to 10 years, even without a major reduction in personal allowances in any year.
Widening the salaries tax net is fair and reasonable. There is no reason why most wage earners should not pay a small percentage of their income to benefit the community. It is a simpler and more equitable alternative to a GST.
In last year's budget speech, the financial secretary challenged Hong Kong citizens to have courage and aspirations, and 'dare to hope' for our future. May I, in return, challenge him to take decisive steps to broaden our tax base, starting with a clear commitment that the present base will not be further narrowed during his term in office?
Joseph Wong Wing-ping, formerly secretary for the civil service, is an honorary professor at the University of Hong Kong
