GST: A monster unleashed

SCMP July 20, 2006

The government's consultation paper on a proposed goods and services tax (GST) is an appalling document. It is repetitive, intellectually dishonest and based on dubious economics. Worst of all, it lacks any creative thinking while displaying the single-minded greed of the Hong Kong bureaucratic and business elite. Described as "revenue neutral", it no longer even has the justification of plugging a budget deficit.

The bottom line of the proposals is to shift the tax burden away from taxes on salaries, property and profits, towards the vast bulk of the population. Although it does not conclusively opt for cutting salaries and profits taxes, those are the outcomes it most favours. It endlessly repeats the unsupported mantra that, without the ability to make such cuts, Hong Kong may become uncompetitive. And it suggests that, because only a minority pay salaries tax, the rest of the population has a free ride. Tell that to a worker on $7,000 a month who smokes, drinks a few beers and bets on the horses.

Incredibly, though the paper devotes many pages to the business and economic impacts of a GST - and accompanying tax changes and relief measures - nowhere is there a word on its impact on income distribution. Yet, this is a government that claims to be concerned about the widening income gaps in this society - gaps that are already far greater than in comparable developed countries in Asia, let alone Europe.

The government's own forecast in the document makes it clear that income disparities would increase. Households receiving social-security assistance would be protected from adverse effects, but all others - except those currently in the higher tax brackets - would be worse off.

The document also makes the spurious claim that, with Hong Kong's ageing population and low birth rate, there should be less reliance on salaries tax - and therefore it should be reduced! That would help higher-income earners with dependants, but would do nothing to help the masses look after their aged dependants, or encourage couples to have children.

There are two fundamental arguments put forward for a GST: first, that the government needs more stable revenue sources; and second, that there is no viable alternative other than a much broader extension of taxes on income.

The first argument has some validity, given the volatility of revenue from land sales and stamp duties. However, the government fails to admit that its own actions have increased that volatility and eroded the recurrent tax base over the past decade in three ways.

It has done that, first, through erratic changes in the land-sales policy to suit the needs of property developers - who have led the former and current chief executives around like dogs on a leash. Second, it has changed the accounting of investment income to reflect unrealised changes in asset values rather than, as previously, the more stable income from cash, interest and dividends. Third, the salaries tax base has been eroded to benefit upper-middle income-earners, and tax relief is offered on mortgages.

The document also claims that revenue volatility threatens the city's financial stability and the government's creditworthiness. This is complete nonsense, as any of the much-cited member nations of the Organisation for Economic Co-operation and Development can testify. In fact, the way the system currently works has a useful counter-cyclical effect. When times are good, the government accumulates reserves, which has a mild deflationary impact on the economy. When times are bad, deficit spending provides a cushion. A GST would tend to strengthen the economic cycle.

Objectionable, too, is the suggestion that the profits tax needs to be cut in line with competing jurisdictions, and because it constitutes such a large proportion of tax revenue - 35 per cent - compared with most other places. Whether out of ignorance or embarrassment, the document fails to note that Hong Kong benefits massively from the fact that many companies prefer to book their profits here - rather than in high-tax jurisdictions or in obvious tax havens, which would attract attention.

Reducing the profits tax would reduce yield without benefiting this economy.

The paper lists some nations - including Iceland, Lithuania and Cyprus, amazingly - as potential competitors that have reduced their profits tax rates. But there is not a word about mainland China, Taiwan or Japan - the economies with which we actually do business, and whose firms take care to generate profits here rather than face much higher taxes at home.

Is Financial Secretary Henry Tang Ying-yen so ignorant of the real world of business? Or does he think his audience is?

Scattered through the document are many references to the fact that most other jurisdictions have a GST, and that it is recommended by the International Monetary Fund. But most other jurisdictions also have much higher taxes on salaries, payroll, social security and so forth. Hong Kong is different, and shouldn't change its system just because the bureaucracy has no imagination of its own. As for the IMF, its one-size-fits-all solutions to financial and fiscal problems have already done enough damage in Asia.

The GST is a cumbersome tax to administer, which may be why bureaucrats love it and its paperwork. The government claims this process would be simplified by having no exceptions, apart from exports and financial services. But exports are a huge part of this economy. And why should financial services be favoured, over hairdressing, say?

The document dismisses other solutions to the revenue problem without so much as a cursory examination. In particular, there is not a word addressing two suggestions previously made in these pages, which could provide revenue equivalent to a GST in the simplest way - remaining neutral both economically and socially. They would allow some other taxes and charges to be eliminated, reducing volatility.

The first is a 20-25 per cent tax on the consumption of energy - electricity and gas - which would have environmental benefits and raise revenue with minimal paperwork. It would hit consumers and producers alike, in direct proportion to their use of energy.

The second is an increase in property tax rates, which currently generate only 7 per cent of revenue. Again, this would fall fairly equally across all sections of society, and be neutral between producers and consumers. It would also reduce reliance on land-sales revenue, and hence the government's fixation on keeping land prices high - despite the obvious impact on competitiveness.

In sum, the GST document is a rich man's charter. Look at it from the point of view of making revenue less volatile, eliminating some taxes and charges, and reducing reliance on stamp duties: it does nothing that could not be achieved by reverting to the 1995 profits and salaries tax levels, and implementing the simple energy tax and rates increases outlined here.




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