HK gov't should spell out benefits of new taxes
By Hong Liang (China Daily)

The Hong Kong government is good at many things. But salesmanship is not one of them.

This is not usually a problem. Hong Kong people trust their civil service to do a good job with devotion and integrity.

But when it comes to taking money from their pockets, salesmanship counts.

It is clear that many citizens in this commercial town have an intellectual understanding of the need to broaden the tax base. But they are yet to be convinced of what they get from paying more taxes.

The difficulties of building a case for higher or more taxes are compounded by the huge annual budget surplus flooding into the government coffers. With the economy humming along at a brisk pace, there is no indication that the gravy train is going to stop running anytime soon.

What's more, the property market's rosy outlook is expected to generate large income for the government from land sales and premiums paid by developers for land-use conversion in the foreseeable future. There is no policy constraint on the government for dipping into the capital account, where such revenue goes, to cover shortfalls in recurrent expenses.

The strongest argument for a broader tax base is built around the premise that the open economy of Hong Kong is highly vulnerable to external factors that are outside its control.

Without a large enough domestic market to soften the blow, the Hong Kong economy is subject to sharp cyclical swings, whose disruptive effects cannot be mitigated with limited fiscal and monetary tools.

In an economic down-cycle, the Hong Kong government would have the option to either drastically cut expenditure on social services or draw down reserves. The first option is widely seen to be politically unacceptable and can only be considered a last resort.

The second option can be most unsettling in a prolonged downturn. The anguish of the six-year economic recession that was triggered by the Asian financial crisis in 1997 is still fresh in the collective memory of the Hong Kong government and its people.

Many economists and financial experts have long noted that the root of the problem lies in Hong Kong's narrow tax base, or more specifically, on the fact that the salary tax burden is shouldered by no more than 20 per cent of the working population. The narrowly defined salary tax is the second largest source of government revenue after corporate tax.

Room for tinkering with the tax rates is extremely limited. A low and simple tax regime has always been an integral part of Hong Kong's social and economic foundation. To maintain its competitiveness as an international financial centre in Asia, Hong Kong must be perceived to be committed to low tax rates.

The Hong Kong government has made great efforts in past years to search for alternative sources of stable and sustainable income to help finance its projected expenditure on medical care, education and subsidies to an enlarging pool of unemployed workers displaced by economic restructuring. The ageing population of Hong Kong is also putting increased stress on its social services system that has been growing at an ever faster rate in recent years.

But the middle class in Hong Kong has remained largely unconvinced of the direct benefits that can be derived from higher taxes. Many middle class families are sending their children to private schools, which they believe will give their children a better chance of getting into Hong Kong's top universities, as well as those abroad. What's more, many taxpaying middle class families are covered by employee insurance schemes that provide adequate private hospital care.

The less well-off families, which are paying little or no taxes, are of course most inclined to object to new taxes, which are seen to be designed to capture them in the tax net.

It is most difficult to convince them at a time of economic boom that they could be denied adequate social and medical services because of budgetary constrains.

The government and its advisers have done a commendable job in arguing for the broadening of the tax base. Many documents putting forward the case in irrefutable terms have been produced and distributed to the public. Individual government officials have done their best to explain the new taxes in private meetings and public forums.

But perhaps what is needed to provide a further push for the new taxes is something more simple and direct that clearly specifies exactly what Hong Kong people can gain by paying more taxes. Public opinion in Hong Kong is traditionally fairly short-sighted. Tangible results must be spelled out to convince people to take a longer-term view.

(China Daily 12/26/2006 page4)