Hong Kong Tax Increases Likely To Backfire, Report Warns

by Mary Swire, Tax-News.com, Hong Kong

07 February 2003

In a report published on Thursday, the Taiwan-based Taipei Times warned that the Hong Kong government should look around for alternative ways in which to reduce the jurisdiction's budget deficit, arguing that increasing the tax burden could lead to 'an accelerated exodus of capital from the territory'.

Both chief executive, Tung Chee-hwa and Financial Secretary, Antony Leung Kam-chung have indicated that the SAR authorities intend to increase taxes in order to deal with the burgeoning budget deficit. However, writing in the Taipei Times, economics expert Professor Christopher Linge warned that:

'Most observers mistakenly believe there is ample room to raise taxes in Hong Kong. They support their argument by stating that business and individual income tax rates are set at 16% and 15% respectively. Yet most tax revenues are derived from levies on properties with inflated rent. Taking this into consideration, the effective rate of taxes is quite high.'

'Since global capital can move freely, especially towards the Pearl River Delta, this approach is very likely to backfire. Indeed, raising taxes might be the worst possible solution for balancing government books.'

Professor Linge went on to observe that the Hong Kong government is in a difficult position in that it needs to attain fiscal balance, but is reluctant to finance its structural deficit with borrowing lest this should result in a ratings downgrade which would make it more difficult to attract foreign investment, and could also increase the burden on local businesses.

By way of a revenue-raising solution, he proposed the privatization of large physical infrastructure projects, civil service cutbacks, and a reduction in tax rates to stimulate entrepreneurship.

'Higher economic growth brought about by lower taxes will bring in more revenues even at lower tax rates. Meanwhile, lower marginal rates decrease the incentive to evade or avoid taxes,' he explained, continuing: 'As businesses expand, overall tax revenues would rise so that the budget deficit would be reduced.'

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