Tuesday, 25 July 2006

Challenge the Assumptions for GST in Hong Kong

Government officials and political players in Hong Kong are kept busy this summer on various sizzling issues, with the consultation document of the goods and services tax (GST) as the latest addition to the long-winded agenda.

Not surprisingly, an overwhelming majority of the local population opposes to the introduction of GST in Hong Kong, citing various reasons. It is somewhat out of expectations, however, that the Government has chosen to launch the consultation document at this point of time when there is a handsome surplus in the Government treasury. Few could be left unsuspicious of the political agenda behind this move.

In any case, the arguments in the consultation paper are incredibly weak. Economics students of Hong Kong Certificate of Education Examination level should be able to provide counter arguments without much difficulty.

I am no longer an economics student, and I did poorly in this subject more than a decade ago. But GST is something that, once applied, would affect the livelihood of every single person in this city. Perhaps I should also present my two-cents here on the subject, despite my limited knowledge in economics and public finance.

In my opinion, one of the major flaws in the Government's arguments for GST comes in the highly questionable assumption. In essence, the Government has nothing other than "Hong Kong's tax existing tax base is very narrow by international standards", which forms the shaky foundation for all the Government's support for GST. According to the consultation paper, a narrow tax base means "we need a new source of secure and steady income from a broader and growing tax base". By having more taxpayers to finance government expenditure, it is hoped that not only Hong Kong would be better prepared for economic challenges and downturns in future, but would also enjoy an enhanced sense of civic responsibility.

What is more eyebrow-raising is the philosophy of our public finance minister, "Were we to do nothing, then in any future economic downturn we might need, as in the past, to increase tax and cut expenditure on public services." Isn't it an economics ABC to increase public spending at times of economic hardships to help revitalise domestic demand and thus the economy? No wonder it took Hong Kong more than five years to overcome the recession (and believe me, our economy hasn't really recovered nor has transformed into a knowledge-based one as the Government enjoys proclaiming) when our neighbours only took two or three.

The consultation paper also ruled out such options as increasing salary tax, profits tax, stamp duties and rates; and drastically reducing personal allowances for salary tax so that more working people would become taxpayers. The Government said that the first option fails to address the problem of a narrow tax base in Hong Kong, and the latter would not be able to address Hong Kong's excessive reliance on taxation of income as more people grow old and retire. GST is, therefore, the solution.

What bothers me with the Government's arguments summarised above is the absence of depth and logic. It is simply hard to believe that the core members of our highly educated social elite have written such statements with little sense.

My counterarguments are by no means rocket science. Firstly, while Hong Kong's tax base is narrow compared with other leading economies in the world (and, essentially, the West, of which most senior officials still have unrealistic fantasy), it does not threaten Hong Kong's status as one of the world's financial centres. We have a generous surplus in the Government treasury and a huge foreign reserve that enables Hong Kong to maintain normal operations for at least 12 months even if all sources of income are cut off. And under extreme circumstances like the notorious financial crisis in 1997, every responsible taxpayer does expect some temporary tax hikes. And don't forget our unique advantage that Beijing might also be able to offer a hand if needed. Simply put, the fact that the advanced and developed economies in the West have GST in place does not necessarily mean that Hong Kong needs to be yet another copy cat so that it would be recognised as one of the few developed economies in the region. This senseless pursuit for hollow identification with the West without taking into account the unique circumstances of Hong Kong is appallingly worthless.

From another perspective, I would rather question how effectively the Government's five billion Hong Kong dollar annual expenditure on salaries and wages and pensions for the civil service? My experience shows that so many civil servants out there are incompetent and simply not suitable for their jobs. They should have been replaced years ago but they are still sitting where they are, being fed on generous salaries but without achieving what they are expected to. Moreover, recently there have been worrying signs that the Government is expanding again, creating unnecessary positions and structures to accommodate members of those greedy, ambitious but bungling political parties. This is a sharp contrast to the much-touted slogan of "a small government". Why hasn't the Government considered taking concrete steps to motivate and rationalise its workforce and structure, including the countless commissions, advisory boards and statutory bodies, so that the taxpayers' money are more wisely spent before thinking of anything else? Should the Government have exercised better care and a higher degree of responsibility when they deal with taxpayers' money, I'm sure Hong Kong's public finance would be even stronger to the envy of many other governments around the world.

Secondly, GST actually represents a harsh challenge to Hong Kong's well-established reputation and competitive advantage as "shoppers' paradise", which essentially means that shoppers enjoy a wide range of commodities at competitive prices and, more importantly, no sales tax to the buyers. It is true that many other economies already have or are considering introducing GST to help finance government expenditure, but Hong Kong has no pressing reason to follow suit. At a time when other economies levy taxes on consumers, Hong Kong's tax free shopping would be more appealing than ever.

In an attempt to mobilise more support for the introduction of GST in Hong Kong, the Government proposed significant reductions in salary and profit taxes after the launch of GST. It was emphasised that GST is revenue-neutral for at least five years, meaning that it would be devised to widen the tax base, but not to snatch more money from taxpayers' pocket.

What a nice word, but try your luck next time, Mr Tang. Few fellow Hong Kong citizens would believe in this type of clumsy hypocrisy. The five-year grace period doesn't mean anything. All we are looking for is a well-thought, long-term proposal, but not lip service without substance. Your term as the Financial Secretary may expire in five years or less, but our citizenship with Hong Kong is a lifelong matter.

For many years Hong Kong has remained competitive with low and simple income taxes, and it will continue to be so at least in the foreseeable future. I would be surprised to see any economy in the region that would reduce their income tax rates to 10 per cent or lower in order to compete with Hong Kong. This is simply unrealistic. Forget Cyprus, Hungary, Iceland, Ireland and Lithuania, Mr Tang. Comparing Hong Kong with these economies in Europe is simply unreasonable and inappropriate. We have different economic structures and social systems and, more importantly, our target markets are just not the same.

What is even more irritating is that the consultation paper insisted that GST is fair because everyone pays. This is precisely why I consider GST an unfair tax because the Government has turned a blind eye to the widening income gap in Hong Kong and diversified spending powers of the local population. When only less than 10 per cent of Hong Kong's entire population owns or controls more than 70 per cent of its assets and wealth, how could you say it is fair for everyone to pay GST? Isn't it weird and poor logic to think that consumption is always on an upward trend, bringing predictable and stable revenue for the Government? Isn't it obvious that consumption would drop as a result of higher spending costs, Mr Secretary? Or have you forgotten how Hong Kong suffered from economic recession and diminishing domestic demand over the last couple of years?

From the shoppers' perspective, the red tape of tax refund application is yet another problem with GST. According to experience from the West, the fantastic role model for Hong Kong, GST is never easy to administer. Hong Kong tourists to Europe and North America should remember how troublesome it is to apply for tax refunds. I have once received a cheque of some 10 Canadian dollars but when I cashed in the cheque, the bank charged me 30 Hong Kong dollars as the handling fee, eating into a substantial proportion of my refund.

In conclusion, I don't agree with the Government that GST is the solution to better prepare Hong Kong for future economic downturn and financial crises. More prudent and responsible public spending should be sufficient at least for the time being. Taking more money from taxpayers and citizens' wallets and put it in the Government treasury is simply not the right way to go. At the end of the day, more taxes will be unable to fund impulsive and senseless spending. Neither is keeping the money in the safe without spending a penny even when you have to, Mr Secretary.

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