JAKE’S VIEWJAKE VAN DER KAMP
Jake's View
by

An appeal for tax overhaul to rise above placard-waving populism

Here’s why a two-tier profits tax and a negative income tax won’t work in Hong Kong

PUBLISHED : Wednesday, 08 February, 2017, 3:44pm
UPDATED : Wednesday, 08 February, 2017, 11:17pm

The former financial secretary also called for a review to look into introducing a two-tier progressive profits tax to lessen the burden on small and medium-sized enterprises and a negative income tax that would help low income groups. SCMP, February 7

Politics generally bores me, but let’s give credit where credit is due to one of the political masterstrokes of the age.

British diplomats have known from their monarchical history since the Magna Carta proclamation 800 years ago what a mess can be made of government when you put an unelected chief executive on top of an elected assembly.

Thus, in order to make their own colonial administration of Hong Kong look good in contrast, they left us in 1997 with an unelected chief executive on top an elected assembly. Don’t tell me it wasn’t deliberate. Beijing has since confirmed the fractious nature of this arrangement by declining to change it.

I think of this job of chief executive as a poisoned chalice. The winner can only be embittered by drinking from it, as the three incumbents so far have been.

A CE who asserts his or her authority on any major initiative only stirs up legislators. Real achievement is invariably frustrated. It is inherent in the system.

Thus I don’t put great store by the manifestoes of the four largely identical government servants who have so far declared, “Me, me, pick me! I want to drink the poison.”

But I think John Tsang was particularly muddle-headed in advocating a two-tier tax regime.

It implies a moral judgment – Big Corporation bad; Small & Medium Enterprise good.

It is a commonly held opinion but I expect a former financial secretary to consider it a little more closely than a placard waver would.

Try to imagine a small and medium international airline, one that employs only 25 people, or does less than HK$1 million of business a year. Try think of a bank like that. The United States had such banks in the 1930s and hundreds of them went bust.

Alternatively try to imagine a big corporation in home renovations or hair styling. It just doesn’t fit. The best size of any corporation is largely determined by the business it is in.

I think it offensive, in fact, to cast aspersions on my grocer because he is employed in a supermarket chain. This is what a two-tier tax system would do, however, by taxing that supermarket more heavily. Does Mr Tsang really think it better that I should always pay higher prices for toothpaste in a commercially less efficient mom’n’pop shop?

This is not to mention that government itself generally prefers dealing with bigger corporations. They accommodate themselves better to regulatory oversight.

Government may talk small but it likes big.

And think of the muddled definitions that such a two-tier system would introduce. Profit is an accounting convention, not a hard fact like a five-dollar coin. That’s why the longest statement in any set of accounts is the one on principal accounting policies.

Set a maximum profit limit for SMEs and you will find a curiously large number of them reporting just less than that limit every year.

Set a limit on the maximum number of employees and a curiously large number of them will find it convenient to subcontract their work.

Oh yes indeed, the accountancy profession would just rub its hands at the prospect of a two-tier tax law. We could as well call such a law the Accountants Employment Act.

And then we get this idea of a negative income tax that would help low income groups. I assume this means that you would collect rather than pay income tax if you fall below a certain income level.

But stop. We don’t levy personal income tax in this town, only a salaries tax and I can think of several very rich individuals who would be eligible for these negative income tax subsidies.

They can claim technical poverty as they pay themselves no salaries. They rather take their billions from dividends, interest and capital gains, none of which is taxable or declarable.

Think it over, John. Populist appeals are all very well but these are daft ideas and you really should know it.