|In concluding my response to the 1999/2000 Budget's
motion debate, I predicted that this year's Budget will
be a most trying one. Few would disagree with me today.
The reunification with China and the implementation
of our new mini-constitution (the Basic Law) have resulted
in significant political reforms of historic proportion.
The sweeping financial turmoil has also wakened us to
the fact that we have actually fallen far behind other
economies in the development and application of new
technology. It has also aroused the call for the third
economic restructuring since the Second World War.
In the midst of these major political and economic
changes, government departments and private sector organisations
are all repositioning their corporate strategies to
adapt to the changing environment - a new trend for
Hong Kong is now emerging.
In stark contrast, our taxation system and revenue
policies have remained fundamentally passive. They still
depend heavily on land prices and a profits tax base
designed primarily to net local manufacturing, services
and trading businesses. But can these outmoded systems
survive major changes to the Government's land policy,
the stormy emergence of e-commerce or the globalisation
of business organisations?
Under the present revenue collection system, land sales
and premium payments probably yield between HK$40 billion
and HK$70 billion (total annual revenue being just above
HK$200 Billion). In the Inland Revenue Department's
latest Annual Report, the real estate sector is cited
as contributing 62% and 31.7% of stamp duty and profits
tax respectively for 1998/1999.
In addition, the real estate sector directly and indirectly
employs countless professionals, namely contractors,
architects, engineers, etc. When these gigantic corporations
raise capital in the financial markets, they also become
major clients for merchant bankers and accountants.
So, although it has been necessary to try and stabilise
land and property prices, the Government's coffers will
suffer as a direct consequence.
Most people would rather blissfully assume that tax
revenue will rise proportionally to the rate of economic
recovery and that the lingering budget deficit will
disappear quickly. However, I ask accountants to think
twice about this superficial presumption.
Of course, there will be a natural increase in the
revenue as the economy gradually recovers. However,
the process is likely to be slow and there will be a
time gap of about two years before profits are captured
in the accounts; reported to the Inland Revenue; assessed
after deducting possible recent tax losses; and tax
paid on the balance.
If we look closer at what is leading the present economic
recovery, we can easily see that it is predominantly
international trade and e-commerce.
This means that these activities are not going to yield
much immediate tax revenue. And even if the profitability
of these activities does eventually grow, Hong Kong's
source of taxation rule will impact on whether tax can
be collected on related business transaction.
Personally speaking, I am still strongly in favour
of the Government not taxing cross-border transactions.
This will help us maintain our competitive edge as an
international financial and services centre. But if
we are to stand back and tolerate a continuous erosion
of our traditional tax base, something else will have
to be done to replace the revenue.
History has taught us that when a government runs short
of funds, it can either increase the progressiveness
of its direct tax base or widen the tax base with new
regressive taxes. Most governments would attempt the
former rather than the latter. However, governments
have invariably failed because in times of sustained
economic depression, progressive direct taxes are an
unreliable source of revenue which penalises capital
However, the recent world trend is obvious: governments
have started reducing direct tax rates to enhance international
competitiveness and prevent a drain on their human resources
and capital. Also, when facing daunting political difficulties,
governments have managed to shift the burden of financing
public services by introducing a widely based indirect
tax, such as sales taxes. For those economies, such
as Hong Kong's, that have not done this, some would
say it is not really a matter of choice, but rather
a question of when.
Although Hong Kong's tax systems may be outmoded, there
is much beauty in its simplicity. The basic structure
easily accommodates reform and with the right political
courage and skill, we can avoid many of the mistakes
made by other governments.
We are still in a position to leap-frog unnecessary,
but traditional, solutions and deal directly with the
identified fundamental problems of land dependency,
revenue instability and the narrowness of the present
tax base, which may not be able to cope with new emerging
Notwithstanding logical analysis, implementing tax
reforms is easier said than done. With sectoral interests
deeply entrenched in today's political structure, even
a small adjustment to the taxation system will ignite
requests for an overall review. The Government's entire
monetary policy will also be unavoidably scrutinised.
I believe the Government must now be prepared to take
the following step:
- reaffirm that it has contained public expenditure
such as possible
- establish clear revenue targets with quantitative
analysis and numerical evidence
- provide possible mixed-bag revenue raising measures
upon which the public can focus its debate
- balance political interests by demonstrating that
the principle of vertical equity is still being observed
and that the more affluent groups are still contributing
- begin reform by taking smaller steps first, namely
increasing fees, charges and rates, and scaling down
personal allowances. If the recurring deficit still
persists in a year or two, the time will be ripe for
more permanent reforms and to put our legislator's
political wisdom and moral courage to the test.