Hong Kong to Pay Less Tax in 2016, Working Class Could Lose Out
The tax reduction proposal in the 2016 budget may disguise danger in the long term.
In the government’s 2016 budget talk last week, among highlighting food truck allowances, a film development fund to bring more Cantonese films into the mainland, and supporting more R&D and startups in the city, Financial Secretary John Tsang Chun-wah also announced that salaries tax will be reduced by 75 percent, with benefits given up to a ceiling of $20,000. Profits tax for corporations will also be reduced by the same percentage.
It can be seen as an attempt to ease the burden of taxpayers and boost local consumption, but is this a short term benefit disguising danger in the long term?
Hong Kong has a relatively low tax rate: For individuals, it’s a progressive rate of up to 17 percent, depending on how much you earn.
That's why Hong Kong is so attractive to big business: Whether you're netting in just more than $252,000 per year or up to $1.7 million, you're paying 17% on your earnings. Actually, if you're single and earning even more, you then calculate your tax through a standard rate of 15% instead.
Only two in five workers pay salaries tax, with 60 percent of the revenue coming from the top five percent. With just one in 10 companies paying profits tax, the top five percent similarly make up 80 percent of revenue as well. There's not a lot of tax being paid here, but it may spell out trouble down the line, if we’re relying so heavily on such a narrow tax net—the top five percent of Hong Kong—to feed the government income.
The most immediate benefit of the salaries tax reduction is for individuals who pay tax. The wealthy owners—those who own properties and companies rather than derive the greatest chunk of their income from salaries—may find it easier to plan around tax, and will still pay proportionately less than those wedged in the middle. Again, this really only affects those who pay taxes in the first place: The lower underprivileged who fall under the tax net, who don’t earn enough to pay tax, aren’t getting any benefits.
Wong Shek-hung, Oxfam Hong Kong's program manager, expresses her concern over the shortsightedness of this year’s budget. “It’s only full of one-time-only poverty relief measures that will only stimulate the economy on a short term basis,” she says.
She points out that Oxfam has been urging the government to pay attention to issues affecting the underprivileged sectors of society ever since Chief Executive Leung Chun-ying began his run. Oxfam has asked to cancel the current method of Mandatory Provident Fund (MPF) offsetting, where employers are able to offset an employee's MPF to settle long service or severance pay.
“MPF offsetting is a problem and completely reduces the function of a retirement pension program,” says Wong. “The government should lead the way and target their contract employees and non-civil servant blue collar employees—who often change contracts every two years—they are the victims in the MPF offset scheme.”
Cancelling the offsetting scheme will cost the government $1.1 billion. “Our current reserves certainly have enough to handle that and more,” says Wong.
One of the measures outlined in this year’s budget to help Hong Kong at the grassroots level is increased welfare allowances: It’s equal to one month’s payment of Comprehensive Social Security Assistance (CSSA), Old Age or Old Age Living or Disability allowances. For those signing up for allowances under salaries tax and personal assessment, such as for those living with dependents or single parent allowances, the basic allowance will cover much more—from $120,000 to $132,000 for single parents, and from $240,000 to $264,000—so again, taxpayers will be able to pay less.
“The government hopes to lessen the burden of ‘the whole basket.’ But aside from doing something for the middle class, the government should do even more for the grassroots level as they face the most pressure here,” says Wong. “To please the middle class, you can reduce taxes… you can give out an extra month’s worth of CSSA, is that not a good thing? Of course not. You’ll get an instant soothing effect, but you can’t see how you want society to develop in the long term.”