HONG
KONG - The next several months promise to be long
and thankless for Financial Secretary Henry Tang
as he tries to convince this city's famously
tax-averse populace that a proposed 5% levy on
goods and services is exactly what they need.
Although the idea of implementing a sales tax has
been brewing here ever since the 1997 Asian
financial crisis turned perennial government
surpluses into a string of alarming deficits, the
unpopular proposal has sat on the back burner
until this month.
Now a goods and services
tax (GST) is the subject of a formal government
consultation paper with a nine-month time frame
for a citywide exchange of views. If the debate
continues in the same way it has begun, however,
Tang, who has championed the tax, may find himself
out of a job before the consultation period is
over. So far, supporters of a GST have been hard
to find, but critics
have
greeted the proposal with a searing chorus of
disapproval, asserting that it will only do
further damage to Hong Kong's already waning
competitiveness.
One of the more
interesting repartees over the proposed tax
involved the financial secretary and Hong Kong's
last colonial governor, Chris Patten, who had
returned to the city on a five-day visit to
promote his latest book, Not Quite the
Diplomat. After the former governor, now
chancellor of Oxford University, questioned the
wisdom of introducing a sales tax, Tang complained
that Patten's shortsighted management of Hong
Kong's economy during his governorship (1992-97)
had violated basic economic principles and left
the city ill-prepared for the Asian financial
crisis.
Using an off-color Cantonese
colloquialism, the financial secretary said of
Patten: "He patted his butt and left; then we went
through seven years of hardship."
Never
one to pull a punch, Patten shot back that the
financial secretary while he was governor was none
other than Hong Kong's current chief executive,
the popular and able Donald Tsang.
In the
end, the Patten-Tang sideshow only detracted from
the serious debate heating up over a GST.
Most economists agree that Hong Kong needs
to widen its tax base. Critics of the current tax
regime lament its heavy reliance on the volatile
property market and point out that most Hong
residents presently pay no tax at all on their
salaries. In a city with a population of nearly
seven million, only 1.2 million of the 3.4 million
working people pay salaries tax and, while the
system is graduated, no one pays more than 16%.
The city imposes a profits tax of 17.5% on
corporations and 16% on other businesses. There
are no taxes on dividends, interest or capital
gains.
The worry is not the present but
the future. The city's rapidly aging population
and low birth rate mean that the tax base will
shrink further. Government data show that Hong
Kong's fertility rate (0.93) is the second lowest
in the world, and research done by accounting firm
CPA Australia projects that nearly a quarter of
Hong Kong's population will by older than 65 by
2033, whereas that age group represents just 10% a
present.
These figures not only portend
less tax revenue but also have profound
implications for the city's heavily used and
inexpensively priced public health-care
system-another political hot potato, but one the
government has chosen to keep on the back burner
for now.
So it is reasonable for the
financial secretary to ask how, under its current
tax regime, Hong Kong can afford its future. Many
analysts are asking the same question. But a GST
is not necessarily their answer. Alternative
suggestions have included the introduction of an
energy tax and an increase in property taxes,
which currently generate only 7% of the
government's revenue.
Tang estimates a GST
would raise annual revenue of $2.6 billion, and he
promises it will not result in an overall increase
in taxation. "We will not be looking to
increase revenues if we introduce a GST," he said.
Instead, he said, a GST would create a
more stable form of revenue and allow the
government to cut profits and salaries taxes while
also providing better social services. Many
countries have implemented a GST - New Zealand,
Australia, Canada, Singapore, to name of few-and
the financial secretary has pointed to their
examples in an attempt to assure Hong Kong people
of all classes that there is nothing to be alarmed
about.
Despite these assurances, however,
skeptics abound.
Hong Kong's simple,
low-tax regime has long made it a favorite port of
call for international business. That
attractiveness, critics say, will take a big hit
if a 5% GST is implemented. The increased time and
bureaucracy required to manage such a tax would
alone discourage business, they maintain.
In addition, the argument goes, to
undermining Hong Kong's competitiveness, a
regressive sales tax would also disproportionately
hurt the city's poor.
"The GST is
fundamentally a scheme to rob the poor to help the
rich," said Lee Cheuk-yan, a member of Hong Kong's
the Legislative Council (Legco).
And
neither did any of Lee's 59 fellow lawmakers have
anything positive to say about the proposed tax.
Indeed, if the proposal were put to a vote in
Legco tomorrow, it is hard to see how the
government would muster a single vote. The reason
is simple: overwhelmingly, the voters and
interests groups represented by the legislators do
not favor a GST.
With the local economy
finally booming again - gross domestic product
grew 8.2% in the first quarter - and the
government recording a surplus of US$ 1.8 billion
for the 2005-06 financial year, it does seem an
inopportune time for the financial secretary's GST
sales pitch. To many observers, the consultation
seems a doomed effort from the start.
In
fact, the timing of the proposal is so bad that it
has led to a "conspiracy theory." The theory holds
that Tang, a potential rival to Tsang in the
election for chief executive next March, is being
set up as the fall guy for GST to undermine his
popularity.
While this line of thinking
might be more fancy than reality, it is true that
Tang is taking a battering while the chief
executive remains blithely above the GST fray.
The taxman cometh to Hong Kong, but he may
very well be sent packing.
Kent Ewing is a
teacher and writer at Hong Kong International
School. He can be reached at kewing@hkis.edu.hk.
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