In his consultation document on the 2009-10 budget, Financial Secretary John Tsang Chun-wah mentions a narrow tax base as one of our future challenges. The document says that, among the 3.55 million total working population, only 1.3 million (36.6 per cent) pay salaries tax. Is this problem really as serious as Mr Tsang suggests? And how shall we broaden the tax base?
Eleven years ago, the then-financial secretary, Donald Tsang Yam-kuen, in his 1997-98 budget, rejected the argument that increasing the basic allowance in salaries tax would make the tax base too narrow. 'I have looked carefully at the statistical evidence on this subject,' he said. 'In each of the last five years, we have raised the basic allowance in real terms. Yet the total number of taxpayers - the tax net - has remained relatively stable, at around 1.4 million. I hope that members will accept my assurance that today's tax concessions will not undermine the productivity of salaries tax as a source of revenue.'
At that time, 44 per cent of the city's workforce paid salaries tax. Since then, salaries tax concessions have been proposed in seven of the 10 subsequent annual budgets, including the last one. As a result, despite the increase of several hundred thousand wage earners in the past decade, the number of salaries-tax payers has declined by 100,000.
It was against this background that the government put forward a proposal in the second half of 2006 to broaden our tax base with the introduction of a goods and services tax (GST). A year later, it shelved the proposal in the face of strong opposition by the business sector and general public. Yet, in the same year, the then-financial secretary, Henry Tang Ying-yen, proposed a number of substantial salaries tax concessions that cost HK$4.9 billion annually and narrowed the tax base further. Last year, his successor, John Tsang, honoured the chief executive's election pledge and increased the level of personal allowances.
So is it not appropriate to conclude that the narrow tax base we face today is the result of the actions taken by successive financial secretaries over the past 11 years (except for Antony Leung Kam-chung, who raised salaries tax in the 2003-04 budget)? Is it not fair to say that, in winning the applause of taxpayers at the time, Donald Tsang, Henry Tang and John Tsang did not have sufficient regard for the long-term sustainability of our tax system?
The present situation is unsatisfactory and needs to be addressed. But a GST is not the answer, for two reasons. First, a tax based on goods and services is a most regressive and unfair one. It is not suited to a place with an increasing income disparity like Hong Kong. Also, while only one-third of our wage-earners pay salaries tax, almost all households pay rates based on the estimate of the annual rent of their properties. So, it is reasonable to say that most people already pay some tax.
Second, a GST is inherently complex and, once introduced, will have a lasting effect on our simple tax system. Shelving the proposal was the right decision; it should now be buried permanently.
