Wednesday, July 12, 2006

New Taxes - yes please!

The Hong Kong Government has released proposals for a 5% goods and services tax (GST). This will be controversial but I really hope it does go through. My reasoning is as follows: will result in a broader and more stable tax base - during the Asian crisis this was a factor affecting confidence in Hong Kong's ability to deal with the crisis; will enable the income tax rates to be cut, potentially to 11% (the standard rate is now 16%) - this will make Hong Kong more attractive as a place to do business (with some offset for higher rentals on office space etc); will encourage people to save more (I can hope);

4. more people (almost everyone) will be brought into the tax net. At present only a very small fraction of Hong Kong residents pay income tax which I view as being something of a moral hazard. Also, if more people have to pay tax we can hope that it will put the government under a bit of political pressure to make some long overdue cuts to its bloated payroll and silly spending projects.

GST is form of tax which generally favours savers over consumers. It is often introduced with the promise of matching cuts in income tax. Experience in other countries has consistently shown that the amount of tax raised by GST is always a lot higher than the tax revenue lost through the income tax cuts. In effect, the taxpayers lose out rather badly when GST is introduced. However, as I save a reasonable portion of my income I should be personally better off - if the tax rate is reduced to the proposed rate of 11%.

Hong Kong's greatest sustainable comparative advantage is its low tax rate for businesses and individuals who work for multinationals. This will help to build on that advantage and reduce the risk of losing it through future tax increases. The gains here may be partially offset by the increased accomodation costs for businesses (residential rentals should be exempt but I need to check this).

If the proposals become more definitive, it should provide a short term boost to economic activity as people rush to buy goods ahead of the tax (and a slow down after?). One longer term consequence is that housing prices should experience some permanent upward pressure. New properties will be subject to GST making them more expensive relative to existing properties and therefore boosting the price of the latter (at least that was the experience in other countries).

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