Not if, but when: Higher taxes needed in Hong Kong to ensure a sustainable future for its citizens

Alex Malley says with an ageing population and a growing income gap, the government will have no choice but to implement reforms to ensure the city can prosper

PUBLISHED : Wednesday, 06 January, 2016, 4:14pm
UPDATED : Wednesday, 06 January, 2016, 4:14pm

Hong Kong’s long-term economic and social challenges, from an ageing population to a widening income gap, are generally well known and have been discussed for many years. Given the constraints of a relatively narrow and increasingly volatile tax base, it is not a question of whether these challenges will place significant pressure on the government’s finances, but when.

Such a review is likely to conclude that a goods and services tax at a low rate with suitable compensation mechanisms should be a part of Hong Kong’s tax mix

I found it particularly encouraging to see the recent launch by the Commission on Poverty of public engagement on a retirement protection system. Similarly, the comments by Secretary for Financial Services and the Treasury Chan Ka-keung regarding the inevitability of the need to raise tax revenue and introduce new taxes due to the fiscal gap brought by an ageing population also ring true.

While Hong Kong’s business-friendly environment and low taxes are a distinct competitive advantage, no change may no longer be an option.

An essential part of addressing these challenges is to debate, develop and implement a long-term and comprehensive tax reform agenda. We made just such a recommendation to the government in 2012, when we highlighted the merits of a “root and branch” review of the system with a view to instigating reforms that would give Hong Kong the best opportunity to prosper.

Among other things, we recommended it should model the economic, revenue, social and household impacts of proposed reform options. Such a review is likely to conclude that a goods and services tax at a low rate with suitable compensation mechanisms should be a part of Hong Kong’s tax mix.

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Uncertainty comes from an overreliance on volatile property taxes which gives rise to concerns about the affordability of retirement protection. What Chan appears to be saying is that the tax mix needs to be adjusted. Yes, the retirement system is a part of the equation, but tax reform is about the ongoing sustainability and resilience of the entire economy.

Tax reform is about businesses – big, small and start-up – being encouraged to grow and empowered to be globally competitive.

Such a review is likely to conclude that a goods and services tax at a low rate with suitable compensation mechanisms should be a part of Hong Kong’s tax mix

It is important to note that other jurisdictions in our region facing the same challenges of ageing populations and the sustainability of social services and retirement incomes are not standing idly by. For example, eight months ago, Malaysia introduced its goods and services tax for the first time and India is on the cusp of doing so. In Australia, the new administration of Prime Minster Malcolm Turnbull is undertaking a root and branch taxation review, with changes to the GST front and centre of the debate. These are examples of jurisdictions that are taking action to ensure they can provide the level of services expected by their constituents, and at the same time to ensure they remain competitive in the global economy.

READ MORE: Tax rises ‘unavoidable’ if everyone over 60 gets a pension, warns Hong Kong treasury chief

Tax reform is not simply an abstract concept debated periodically between politicians, academics and economists: it has consequences for how all of us live our lives. Although it may be some years before some of the reforms considered should be implemented, the best time to start the process is now, while the government has the financial resources to reduce any short-term negative effects of a reform agenda.

It is a difficult case to make, perhaps the most fraught of all public policy issues, but by putting tax reform on the public agenda, Chan is showing a willingness to lead the debate and engage openly with the community on an issue crucial to Hong Kong’s future prosperity.

Alex Malley is chief executive of CPA Australia