Hong Kong, opting to remain a shopper's paradise, takes a risk

http://www.iht.com/articles/2006/12/06/business/hkecon.php

Hong Kong, opting to remain a shopper's paradise, takes a risk
By Patrick L. Smith
Published: December 6, 2006


HONG KONG: The Hong Kong administration's abrupt decision to drop the introduction of a sales tax will probably make tourists happy in this shopping paradise. But it is also likely to send leaders in search of other revenue sources, some of which could cut into profits of those who make the city into a financial capital as well.

Prominent among the options, according to those involved in the consultation process, may be taxes on dividends, interest, capital gains or the global income of corporations and individuals.

Such taxes were among more than a dozen listed in a government document issued in 2002, after lengthy discussions among tax experts in the private sector and in the administration about how best to reduce Hong Kong's long dependence on an outsized property sector.

Other ideas included taxes on billboards or cellphones, a poll tax and increased property taxes.

Hanging in the balance is Hong Kong's long-term economic vitality and its ability to innovate, economists and other analysts said Wednesday.

"We've got to back to 2002 and all the rejected alternatives," said David O'Rear, chief economist for the Hong Kong General Chamber of Commerce. "Dividend taxes, taxing investments or global income - these were the also- rans, and we decided against them precisely because they would damage Hong Kong as a place to do business."

There is general agreement that Hong Kong needs to diversify its public revenues, which are heavily skewed toward land values and property development.

The imbalance has long been viewed as unhealthy among analysts and many executives here because it raises the cost of doing business and leaves the government dependent on highly cyclical sources of income.

Public consultations on a sales tax, known here as a general services tax, or GST, began last summer and were to have extended into the first quarter of 2007. But on Tuesday, the financial secretary, Henry Tang, announced that the administration was cutting them off, citing "insufficient public support."

The secretary had been an ardent proponent of the sales tax, which the administration considered to be the best alternative because it would have spread the burden most effectively among taxpayers.

Advocates also asserted that Hong Kong was one of the few economies of its sophistication that did not have a sales tax. Singapore, whose economy has long been considered comparable to Hong Kong's, has a sales tax of 5 percent and plans to raise it to 7 percent.

But the opposition to the tax was widespread, notably in the commercial and retail sectors and among political leaders and community groups.

The primary complaints were that the tax would damage both tourism and Hong Kong's reputation as a global shopping center, and that it would unfairly penalize those with low incomes.

"I unreservedly called for the abolition of the GST consultations," said Alan Leong Kah Kit, a member of the Legislative Council, Hong Kong's equivalent of a parliament. "We can look at the tax structure in some other context later on."

While figures vary according to what is counted as land-related, economists say that about a third of Hong Kong's government revenue is dependent on land sales, property taxes and the like.

This has left government finances highly uncertain during economic downturns, requiring unusually high government reserves.

The Hong Kong tax system is also top-heavy - that is, narrowly focused - in terms of how it taxes corporate profits and individual incomes. Roughly 17 percent of the territory's seven million residents pay personal taxes. The rest earn less than minimum taxable incomes. About 500 companies account for 80 percent of the taxes paid on total corporate profits.

Critics of the decision to drop consultations said that the government's retreat raised questions as to its ability to restructure the economy to maintain its competitiveness.

It also reflected the difficulty in pushing through change, even when proposed by the administration, since politicians tend to preoccupy themselves with playing to their constituencies without having to worry about the long- term consequences for the economy.

"We're a politically immature system," O'Rear said.

"It's not about considered policy, it's about megaphones. He who shouts first and loudest wins."