Salaries tax plays vital role in maintaining our 'yo-yo' economy

PUBLISHED : Sunday, 21 November, 2010, 12:00am
UPDATED : Sunday, 21 November, 2010, 12:00am

Jake, according to today's paper [Nov. 17], the HKSAR will make a surplus of over HK$70 billion this year. Can you explain in layman's terms what the government will do with this? With a surplus of this size, why should I pay my income tax?

E-mail from a reader

Last question first: Why should you pay your income tax? Answer: you shouldn't pay it. We don't have an income tax. We have a salaries tax. If we had an income tax, a lot of rich people would have to pay tax on sources of income that are now tax-free and this would never do.

Okay, so why should you pay your salaries tax? Answer: Because if you don't, a policeman will eventually knock on your door and take you away to a place of correct thinking where they will feed you the diet your doctor always recommended until you answer the question the right way.

Simple, I would have thought.

But let's refine the question. Do we really need to pay salaries tax? Would the Hong Kong government fall apart if no one paid it?

Answer: no, it would not fall apart. The government could trundle along quite well for a long time with no one paying salaries tax. In the last fiscal year salaries tax brought in only HK$41 billion, less than 13 per cent of total fiscal revenue and certainly less than the fiscal surplus we are now running.

But let's look at that fiscal surplus again. The chart shows it to you on a 12-month rolling total, which is the best way of looking at it as revenues accrue very unevenly. Up to three quarters of the fiscal year's total comes in the second half and the figures at the moment take us only through the first half.

That surplus, however, is running at HK$72 billion a year just now and the odds are good that it will be even higher by the end of the fiscal year. It could easily come to twice the revenue from salaries tax. Why not just scrap the salaries tax then?Answer: because seven years ago we ran a fiscal deficit that was three times as great as the income from salaries tax and it could happen again. These fiscal balance numbers tend to be a little wild. Maybe it's a good idea to maintain a wide range of revenue sources.

There are two other reasons why keeping salaries tax may be a good idea. The first is that the higher income brackets pay almost all of it and we have already abolished wine duties and estate duties. Do the rich need yet another tax break?

The second reason is that if we abolish salaries tax we will have our government talking about a goods and services tax again. So, hush.

And now to that question about what the government will do with the big surplus. We can be pretty certain, as the HK$72 billion is only a small part of the HK$1.1 trillion in fiscal savings and accumulated surpluses that we already have in our reserves.

It all goes to pretty much the same thing. About 80 per cent of it is converted to US dollars and 75 cents out every US dollar is then put in bonds, mostly US federal government bonds.

What happens to that money in short is that we use it to help the US government adopt a quantitative easing programme to which we object because it threatens to unsettle our economy. Yeah, don't ask me. I never quite figured it out.

We also make it easier for the US government to borrow lots of money at low interest rates so that it has plenty available to fight national resistance movements in Afghanistan and other places where the US military likes to hold wars. Once again, don't ask me. I never figured that one out either.

Question: couldn't we invest it anything better?

Answer: Perhaps we could but, if you look at it another way, it's not really such a bad investment. What we're actually investing in is social programmes. The income from these bonds helps pay, among other things, for an excellent public health system that costs the individual user very little money.

We haven't formalised it that way but we have never needed to. The money just keeps pouring in. The US government, which has an abysmal public health system, has paid to help make Hong Kong's one of the world's best.

Now that's an irony I can appreciate.