Strengthening the middle

Salaries and income taxes are less inevitable than the old canard about death and taxes would have you believe. Historically, income taxes were usually introduced to finance war. Similarly the salaries tax in Hong Kong was not introduced until 1940. Whilst suspended during the Japanese occupation, it resumed in 1947. For the greater part of the colonial era, Hong Kong financed itself without recourse to taxes on personal income.

Even post war, despite pressure from London, Hong Kong resisted high progressive tax rates. Chinese businessmen were the bulwark of that resistance. Hong Kong does not have a “pay as you go” system of withholding taxes. The result is transparency about the tax paid, and that has kept rates low.Despite this, Hong Kong’s government has consistently been well funded. In 2010-11, the surplus was HKD75bn. The fiscal reserves of the government were HKD 595bn at the end of March 2011.Does Hong Kong still need a salaries tax? Tax on salaries generated HKD 44bn in 2011, with personal assessment adding about 9% to that. Only 37% of the labour force pays salaries tax. The reliance on salaries tax for revenue has reduced from 17% to 11% of total revenue including investment, land premium and profit on government businesses.

The revenue is there to abolish the salaries tax and still deliver a surplus. Is there a case for abolition? Undoubtedly.Firstly, with a large surplus, the pressure on the SAR government to expand spending is relentless. Many of these proposals (like universal pensions), would not be sustainable even with very high tax rates; witness the deplorable fiscal health of most countries in the West. Abolition of the salaries tax would help to preserve fiscal discipline, which has been a cornerstone of Hong Kong’s prosperity.Secondly, there would be a boost to economic growth from both the additional spending and the funds available for private investment. It would further attract to Hong Kong talented individuals from around the world where tax burdens are higher. Income tax on individuals is effectively a cost to business. Reducing that cost will improve productivity and competitiveness. It will broaden the benefits from the tax reduction well beyond the individuals who pay lower tax.

Thirdly, costs of compliance with the tax system could be reduced.Finally, and perhaps most importantly, abolition would support the salaried middle class. It would offset the rising costs of health, education and housing. It would enable people to support their own families, retirement and welfare more efficiently than proposed government solutions. People in Hong Kong are rightly concerned about inflation and the cost of living. The government responds with stop gap measures like higher transfer payments, flirting with reintroducing the home ownership scheme or rebates on rates and utilities bills. A better answer would be to reduce the cost of salaries tax, leaving money in people’s pockets. The government can’t efficiently change market prices, but it can make sure that it does not unnecessarily add to the burdens on the middle class.

There are risks from abolition. In a period of weaker revenue, some might advocate a goods and services tax. Less transparent, that would be worse than the tax system that we have. Some might object that companies would shoulder more of the tax burden, but corporations are owned by individuals and would also face lower costs without salaries taxes.There are many merits to the Hong Kong tax system. Capital gains, dividends and interest are not taxed. This provides a powerful incentive to save and invest, building the capital stock of our city and the capacity to weather difficult times. The system is relatively simple and the tax paid is transparent to those who pay it. However, our government should not take money it does not use from the people who earn it. The easiest way to fix the current problem is not to take the money. Abolition or suspension of the salaries tax could strengthen the working people of Hong Kong who have built the city.

Bill Stacey is in his 10th year as a resident of Hong Kong and is Chairman of the Lion Rock Institute.We are now on Facebook

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