Tax cut no cure for woes of the sandwich class

REDUCING the tax burden on Hongkong's ''sandwich class'' through increased personal allowances would do little to help those trapped by last year's property price explosion, says Price Waterhouse executive Patrick Paul.

While political pressures on Financial Secretary Hamish Macleod are certain to grow in the month before he announces his next Budget, the senior tax partner believes the Government's ability to make meaningful improvements for those with incomes between $18,000 and $40,000 are extremely limited.

Mr Paul argues that not only is it impossible to treat the sandwich class as a separate group within the current tax system, but that no amount of tuning personal allowances can help to overcome their single biggest handicap.

''In that category, housing seems to be the main problem,'' he said yesterday during a briefing on the 1993 Budget.

''I don't think that doing anything to the tax system can possibly help that. If a flat is far, far beyond their reach, is reducing their tax burden by $2,000, $3,000, $4,000 or even $10,000 a year really going to help?'' Mr Paul blamed persistently high inflation, accompanied by low returns on deposits, for the property price spiral, but said the cooling of the residential property market in the second half of last year already was providing some relief.

He said Price Waterhouse believed the necessity and scope for tax changes in Hongkong was fairly limited. ''If the system ain't broke, don't mend it,'' he suggested.

Instead, there should be shifts of emphasis within the existing framework. Price Waterhouse would like to see the removal of last year's one percentage point increase in profits tax, but admits that it is perhaps expecting too much on that front.

''We felt it was very unnecessary to take it up by a full percentage point last year,'' said Mr Paul. ''It could well come down again, maybe by half a per cent. A full one per cent might be too much of a U-turn for the Government to swallow.'' But with Government revenue expected to generate yet another higher-than-expected surplus in the current fiscal year, there is scope for some generosity on Mr Macleod's part.

Price Waterhouse tax partner Kaushal Tikku said he was expecting a significant increase in personal allowances - probably of the order of 10 to 12 per cent - but agreed these probably would not be as high as some would like.

Price Waterhouse is also tipping a small reduction in the top marginal rates of salaries tax.

In the corporate sector, the accountants suggest Mr Macleod should look at simplifying depreciation allowances into one rate, say 20 per cent, rather than keeping the 10 per cent, 20 per cent and 30 per cent system.

A simple group relief system to allow offset of profits and losses within 100 per cent-owned groups also would be welcomed.

''This would obviate the need for shifting of profits (arguably artificial in some cases) round a group of companies to achieve an equitable group result,'' the firm believes.

But Mr Paul believes stamp duty on stock transfers, reduced in the last two Budgets to its present level of 0.4 per cent, is now at an acceptable level and Mr Macleod should ignore the lobby calling for total elimination of the tax.

''There is minimal evidence that such duty is restricting unduly the volume of business on the Hongkong stock exchange,'' he said.