Tax Reform? Prof. Stephen Cheung Professor (Chair) of Finance City University of Hong Kong

Tax Reform?

Prof. Stephen Cheung

Professor (Chair) of Finance

City University of Hong Kong

Contents

Do we need a tax reform?

How we can broaden the tax base?

GST or other alternatives?

Concerns of Hong Kong Future Development

Narrow tax base

Aging population

Economic growth is not sustainable

Increase the public expenditure

Why Hong Kong Should Broaden the Tax Base?

Reliance on a few taxpayers Salaries Tax

Working population: 3.4 millionNo. of salaries taxpayers: 1.2 million

(≈35%)Contribution of the top 100,000 (≈3%)

salaries taxpayers = 60%Contribution of the top 500,000 (≈15%)

salaries taxpayers = 95%

Source: Broadening the Tax Base, Ensuring Our Future Prosperity Consultation Document


Reliance on a few taxpayers Profit Tax

No. of registered business: 750,00060% of the total profit tax are paid by the to

p 800 companies (≈1%)



Aging population Life Expectancy at present

Male: 78.8 (No. 1 in the world)Female: 84.4 (No. 2 in the world, after

Japan) Life Expectancy at birth in 2031

Male: 82Female: 88

Sources： Health, Welfare and Food Bureau and IMF Working Paper (WP/06/87)


Aging population Fertility rate decrease

In the early 1970s ≈3.5 In 2004 = 0.9

% of persons aged 65 or above In 1996 = 10% In 2005 = 12% In 2033 ≈ 27% Working population decrease

→ Tax revenue reduce Aging population increase

→ Medical and social welfare expenditure increase


Life Expectancy at Birth, 2004

Source: IMF Working Paper (WP/06/87)

Hong Kong Demographic Projections, 2005-45


Old-Age Dependency Ratio



Expenditure on health care services Expenditure on public health care services in 2004-

05: 30.2 billion (14.4% of the recurrent public expenditure)

Every $100 received tax revenue

→ $22 was spent on public health care Expenditure of Hospital Authority increase sharply

1994-95: 14.5 billion 2004-05: 27.8 billion

Source: Building a Healthy Tomorrow – Discussion Paper on the Future Service Delivery Model for our Health Care System


Expenditure on health care services Aging population

49% of bed days in public hospitals are occupied by the elderly (65 years old or above)

In 2005-06 services of Hospital Authority are used on the

services for elderly

Sources： Health, Welfare and Food Bureau


Expenditure on health care services Over-reliance on the public health care system Assume that there is no change in government

policy, the Government would have to spend

above $50 on health care services out of every

$100 tax revenue collected by 2033 to provide

the health care services currently provided

Source: Building a Healthy Tomorrow – Discussion Paper on the Future Service Delivery Model for our Health Care System

The Effects of Aging on Public Finance

Scenario 1: Assumes that current labour market productivity is maintained, the private sector shares part of the aging-related health cost and the Mandatory Provident Fund becomes the growing source of financing retirement income by 2030.

Scenario 2: Explore similar assumptions in scenario 1 but with higher labour productivity growth.

Scenario 3: The extreme scenario. It assumes a significantly lower productivity growth than in scenario 1 and 2, combined with the unchanged policies scenario where the government would have to bear a large part of the aging related cost. Negative fiscal reserves after 2030 denote accumulation of government debt.


Good taxation system

1. Efficiency Minimize compliance costs for taxpayers and

administrative costs for government

2. Flexibility Adapting to changes


3. Certainty and simplicity Transparent Easy to understand

4. Effectiveness Revenue-productive


5. Fairness Progressive tax

6. Neutrality Individuals and business with the same ability-to-

pay are taxed equally


7. Revenue stability Less sensitive to economic cycle Stable revenue for the government

8. International competitiveness Attractive investment environment Simple and efficient

Tax Base Broadening Options

1. Increase salaries tax rate

2. Increase profit tax rate

3. Increase stamp duty on land property transaction

4. Reduction in personal allowances and concessionary deductions under salaries tax

5. Increase rates on tenements

6. Capital gains tax

7. Tax on interest

Tax Base Broadening Options

8. Tax on dividends9. Tax worldwide income of businesses and

individuals10. Land and sea departure tax11. Payroll and social security taxes12. Poll tax13. General consumption tax14. Taxes on mobile telephone services and

signboards

Revenue Yield*

Percentage Revenue yield

Increase salaries tax rate Increase 1% $2.2 billion

Increase profit tax rate Increase 1% $2.6 billion

Increase stamp duty on landed property Transaction

Increase 20% $1.0 billion

Reduction in personal allowances and concessionary deductions under salaries tax

Decrease 10%

Decrease 25%

Decrease 50%

Decrease 100%

$2.0 billion

$6.0 billion

$14.0 billion $40.0 billion

* As at 2000-01

Revenue Yield*

Percentage/ Method

Revenue yield

Increase rates on tenements


Capital gains tax ? ?

Tax on interest ? ?

Tax on dividends - Not significant

Tax worldwide income of business and individuals

- Not significant

Land and sea departure tax $18 per departure $1.0 billion

* As at 2000-01

Revenue Yield*

Percentage/ Method

Revenue yield

Payroll and social security taxes


Poll tax $200 per person $1.0 billion

General consumption tax Increase 1% $6.0 billion

Taxes on mobile telephone services and signboards

A flat rate $10 monthly charge on mobile phone user

A $1,000 annual tax for signboard owners

$460.0 million

$200.0 million

* As at 2000-01

Conclusion

The Government is facing a structure fiscal problem

The general public understand the seriousness of the problem

People will object the option which affects their own interests

Rational discussion on the tax base broadening options

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Documents

Tax Reform? Prof. Stephen Cheung Professor (Chair) of Finance City University of Hong Kong