LettersWhy Hong Kong must resist pressure to raise taxes or change its tax system just now

Given the weak confidence and uncertain economic outlook, any attempt by the government to raise the tax rate or introduce new taxes could be disastrous

In hard times, city should fall back on its fiscal reserves, which are anyway built up for such a purpose

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Hong Kong’s taxation on a territorial basis has long been its competitive advantage. Photo: Xinhua

Published: 6:15am, 13 Jan 2021Updated: 12:38pm, 13 Jan 2021

As Financial Secretary Paul Chan Mo-po prepares the 2021-22 budget, the need to balance political expediency and financial discipline makes it his most daunting such task in office.

The Hong Kong government recorded a deficit of HK$318 billion for the eight months to November 30. The HK$300 billion deficit for the current year originally estimated by the financial secretary could well turn out to be optimistic.

We still have around HK$800 billion in fiscal reserves. This amount will no doubt be drained over the next financial year and the year after, despite the more optimistic economic outlook for the latter half of 2021. Yet it would be a mistake to try to change the basic structure of our tax system now to increase revenue. After all, reserves are built up over the years to support us in times of need.

Simple mathematics tells us that revenue can be increased by increasing tax revenue and/or cutting down expenditure. And tax revenues can be raised through increasing the tax rate, expanding our tax base and/or an increase in economic activities.

Given the weak confidence and uncertain economic outlook, any act to increase tax rates, moving away from our territory-based system of taxation, or introducing new types of tax is certainly a recipe for havoc.

The unique feature of our territory-based system of taxation is a competitive edge; why should we want to trim it down? For one thing, whether such taxation is fair to all other jurisdictions will be a topic to be studied by the Organisation for Economic Cooperation and Development when it rolls out its Base Erosion and Profit Shifting (BEPS) framework 2.0.