Tax-and-spend Hong Kong

What does a government that recently announced its biggest budget surplus in years do? In Hong Kong's case, the answer is to unveil a blueprint for a new sales tax, says the Wall Street Journal.

Hong Kong's prosperity since World War II is sometimes referred to as a "miracle." But much of the country's success is built on its low and simple tax regime:

Hong Kong's maximum tax rates of 16 per cent for individuals and 17.5 per cent for business provide great incentives to invest and take risks.

And with no complex deductions or exemptions, the tax system is transparent and user-friendly; even the mathematically challenged can fill out their tax forms in just a few minutes.

The introduction of a sales tax would jeopardise that status as well as introduce a huge new tax-collection bureaucracy as the government extracted its due across town.

The Hong Kong government says a 5 per cent sales tax is only a proposal and that it hasn't made up its mind; even if the new levy is introduced, it says, it will be offset by cuts in other taxes.

The government says it needs to broaden the tax base because it is heavily dependent on revenue from the city's volatile property market. But according to the Journal, a system that has just delivered a HK$14 billion ($1.8 billion) surplus for 2005-06 is in no need of fixing. Instead of talking about new taxes, Hong Kong could be returning this surplus to its citizens. And if it's worried about running short the next time the local property market takes a nose dive, a better option would be to take a hard look at soaring spending. The city now spends HK$33.8 billion a year on social welfare, almost double the figure a decade ago.

Source: Editorial, Tax-and-Spend Hong Kong, Wall Street Journal, July 19, 2006.

For text (subscription required): http://online.wsj.com/article/SB115325719288410249.html

For more on Taxes: http://www.ncpa.org/sub/dpd/?Article_Category=20

FMF Policy Bulletin/ 25 July 2006