With a narrow tax base, Hong Kong must consider other ways to raise revenue

It is only possible if all sides agree to make some sacrifices, with in-built protection for the most vulnerable in society

PUBLISHED : Tuesday, 10 May, 2016, 2:09am
UPDATED : Tuesday, 10 May, 2016, 2:09am

Everyone acknowledges Hong Kong has a narrow tax base. But politicians hate to talk about raising taxes. The two previous administrations had seriously debated the possibility of a goods and services tax, but each time the effort went nowhere. The current government has not even bothered revisiting the issue. But stamp duty is set to fall by 20 per cent in the fiscal year to next March, hitting tax revenue by 5 per cent. Despite recurrent surpluses, Financial Secretary John Tsang Chun-wah has repeatedly warned of structural deficits in the near future. Given our ageing population and shrinking workforce, his warnings are not unrealistic.

Some critics have reopened the debate about the need to broaden the tax base. Currently, only two in five workers pay salaries tax, with 60 per cent of revenue coming from the top 5 per cent. Only one in 10 companies pay profits tax, with the top 5 per cent accounting for 80 per cent of profits tax received. With new tax breaks announced in Tsang’s budget, tax revenue is expected to shrink by an annual HK$2.9 billion. Some workers will fall out of the tax net.

But GST is generally recognised as regressive, as the burdens it imposes fall disproportionately on low-income families and individuals who must spend most of their earnings on daily necessities. Many advanced economies have GST but also extensive welfare benefits for the poor; Hong Kong does not have the equivalent welfare services.

If we are to revamp Hong Kong’s much-envied low-tax regime, it must be done fairly. There are not too many revenue-raising alternatives. One area that is almost never discussed is levying a tax on dividends and capital gains. Another is to consider using revenue raised from land sales to subsidise the government’s recurrent spending. But any capital gains tax is anathema to the business community and the rich, while the government has refused to consider using land revenue to pay for education, welfare or public health care.

Given this impasse, there has been little progress in tax reform. Since government revenue depends heavily on land sales and stamp duty, it is exposed to the notorious volatility of the city’s economy. That’s why the government needs to hold on to its large fiscal reserves, which amount to HK$843 billion.

A more stable tax revenue regime will make the government less miserly. But it is only possible if all sides agree to make some sacrifices, with protection for the most vulnerable in society.