Background
The issue of introducing a new taxation scheme in Hong Kong in 2006 gave rise to a series of consultation, controversies and debates. Goods and Services Tax or GST is a value-added tax proposed in the middle of 2006 which generally tackles the demand for tax and what appropriate modifications should reshape the current structure. However, at the conclusion of the same year, levying GST is dropped which is a sign of incompatibility with the country’s institutional framework and larger economic problems if implemented.
This paper is aimed to relive the debate on GST for the purpose of analysis on the post-GST issues. Relevant question is eminent on how justifiable this abandonment is and if there are regrets from the authorities on potential benefits. Specifically, the comparison between GST regime and current income tax regime will be evaluated. In doing this, this paper can contribute to reduce debates through research-based approach.
The GST Approach
GST is developed with the idea to increase funds for public welfare. In the belief that Hong Kong has a constricted tax based, GST is meant to improve the tax base classification for strategic collection of tax and benefits would be felt on a long-term timeframe. Further, the Government would slash and abolish current tax rates in favor of a flat tax rate for all (e.g. 5%). There are two prominent protests against GST which attended by at least 500 and at most 6,000 people.
There are key features of GST. First, there are economic activities that will be exempted on paying GST like exportation, global supplies, sales on residnetional real estates including rentals, and financial investment. Second, importers that would be adversely affected by GST will enjoy defer payment to prevent cash flow difficulties. Third, the Government will pay GST to ensure that its operation and profits are equitable with the private sector. Fourth, tourists who want to bring goods bought in Hong Kong on their home countries can have the privilege to refund GST on such merchandise. Lastly, charities will be taxed to enable them to claim input GST.
GST proceeds will be allocated on both household and business levels with general benefits on all taxpayers confronting reduced tax rates. For households, some portion of GST will aid them on their contribution on Social Security fund. Low-income families and non-recipients of CSSA will also get yearly cash allowance. Finally, households can also use their annual GST credit to reduce their water and sewage bills that can be consumed minimum of five-years which can be extended.
For businesses, levies on their profits will be reduced and capital charges will be eliminated. In addition, registration tax and duties on some products such as liquor, methyl alcohol and various types of industrial oil will be minimized. Other industries in export-import trade, hotel, charity and small business will be benefited. The first will enjoy lower charges on their declarations, the second will faced lower accommodation levy, the third will benefit from raising deduction limits for donations and the fourth will be offset on their initial GST payments if they will register to the scheme early.
GST is targeted to provide positive return after five years. All proceeds excluding operational costs will be distributed to the public to extend tax relief, compensation solutions and increasing spending on core institutional areas such as education, law, health and infrastructure. It will stabilize tax revenues of the country and also increase its global competitiveness as investment destination. The limited industries that were exempted in the GST are meant to maximize the potential volume of collections with numerous industries.
The Current Tax Rate System
The current system is based on prudence and strategic management of fiscal policy in Hong Kong. The country hedged budget deficits through the current system by merely managerial skill. It has a low-interest rate which is conducive in raising alternative forms of capital for public expenditure. One is issuance of bonds which can pump the revenues of the government on the long-term that is actually a replication of what GST can do for the economy based on timeframe. This can be done, however, if only the country is willing to distribute a huge part of Government bond to the market.
The system evolves on a very risky environment as its major sources of revenue are affected by international factors. First, it has its land sales that are the property of the government. Most buyers are foreigners particularly those assets abroad. But this source is depleting due as land mass of Hong Kong abroad are located mostly in metropolitan areas. Second, lease exchanges and treaty grants are reliable but decreasing source of revenues for the Government. This is affected by the situation of the economy and the income of the people. Lastly, tax revenue is a source of revenue that is highly dependent on salaries of employees. But the system has setbacks.
In 2005 to 2006 figures, it is reflected that six percent of the employable population (e.g. at least 3 Million) contributed 75% of tax against their salaries and only one percent of the enterprises disbursed at least 60% of profit tax. It is obvious that small number of people tends to shoulder the tax burden which is contrary to equitable distribution of tax burden. This implies that the current tax structure is supported by the wealthy and working entities. This situation disabled the capacity of the Government to support the economy on a differentiated manner. This means that taxpayers are not evenly-distributed which can disrupt economic activity.
Analytical Tools
Common characteristics of a developing country are its agricultural-based economy, corrupt/ inefficient government and existence of informal sector/ black markets. Those in the poverty level do not pay taxes. Household incomes of the working class are sufficient only to the needs of the family. And few wealthy and influential families can evade and minimize their tax payments. The problem arises if tax policies do not cope with these situations due to lack of information or simply bureaucratic form of passing legislations about taxation. One problem is the difficulty of collecting tax in exact quantities and identifying those who are evaders as well as exempting those that do not have capacities. The growth and maturity of a developing economy seemingly is very fast of traditional knowledge and values of people to be able to understand tax policies. In this view, there is a need to investigate the impact of the above factors from the perspective of tax administration department.
It is widely known that taxes are very important to developing countries due to following reasons. Every government distributes the burden of providing social services in which local people are entitled to use such as roads, public schools and parks. Taxes are also used to allocate wealth of a nation more equally so poor, unemployed, retired and disabled people can enjoy quality of life through government-funded projects even if they give minimal or no taxes at all. They also have macroeconomic effects to fiscal policy. For example, tax exemption can be applied to industries that can contribute more to the economy like foreign companies engaging in information technology. However, these cited facts are triggered by government-led and pro-poor advocacies. The challenge occurs when these are offered to working, wealthy and influential individuals for the purpose of continuous and diligent payment of taxes.
Squaring the welfare circle can mean how the government funds welfare provisions. To be able to fit the circle into the square, the latter should have a larger surface area than the former. Unless the government will opt to collect higher taxes or obtain external debt, the square should be self-supporting. The government can adopt income-based model in which the circle is adjusted to the square. By doing this, it can reduce the need for dependency in other sources except on its own resources. However, due to the political structure of developed countries government, the circle had come to the point of circling the square. This of course is an unlikely situation. In simple terms, the public is consuming more than it can chew. This can either result to swallowing the whole food or leave the uneaten ones until they expire. The question here is that is the public satisfied with the available food being supplied by the government? How about with inferior quality or other negative effects of post-consumption? In effect, the circle should be within the square not only for the sake macro-factors but more importantly for the sake of the freedom of micro-factors.
Public services are oftentimes cheaper than private ones. This is the subsidy being applied by the government as a way to offset the tax being paid by the citizens. For a student enrolled in public schools, not only monetary subsidies are being held, but more significantly, their right to express their views in terms of new or modified school policies like tuition fees. They are under the extension of the government’s subsidy in its welfare provision. However, in times of recession, this can lead to students overpopulating public schools for the purpose of exploiting minimal fees or expressing their disgrace to the present government. Would the circle still be beyond the square dimensions if the outcome is both monetary and non-monetary jeopardy for the government?
In the same manner, a patient may face the same implications of circle beyond the square scenario. The cheap hospital services provided by healthcare program will drive private ones from operations, probably due to price discrimination of the former. In effect, the patient is left with minimal choices of public hospitals that are oftentimes having sub-optimal level of service. No body wants their health to be simply judged by savings particularly when most of the population can afford a more service-oriented approach to health. Thus, another review for government to pump-prime the economy and not become the economy.
Politicians are responsible for the general welfare of the public particularly in the areas of security, education, health, housing and other public infrastructures. However, private decisions should not be curtailed by the government since people have their own value judgments that are not parallel to those what the government prioritizes. Thus, squaring the circle is necessary to weight the benefits and costs of public expansion or contraction. It will not only create affordable welfare estate, but more importantly, those which directly satisfies the need of the people. If the economy is in boom, it is unlikely to demand public service due to price rather private service due to quality.
Comparative Analysis
There are debates that a broader tax base offered by GST from the proposals of politicians is not good for Hong Kong economy. Also, the community will suffer since such policy run against social interest particularly on the issue of accountability and governance. The administrative branch in opening the GST proposal directly superseded the task of Monetary Office. In effect, it inflames the notion that the Government in doing this can simply print new money to finance public spending.
However, when the administrators of the Government did not interfere and emphasize division of labor between it and Monetary Office, there will only be two available financing alternatives. These are issuing Government bonds to the financial market and execution of tax management. With Government-Monetary Office independence, Hong Kong economy will grow on a smooth manner towards economic stability and expansion. The idea of printing money lacks fiscal restraint which implicates incentive problem causing lack of economic sovereignty and a sign of reverting from market-based model.
The Government must not hamper the interaction of the private sector by intervening on their cost structure. GST application will only aggravate the bottleneck that the fast-phased and ever-changing Hong Kong economy is experiencing. With more money in the economy due to GST, inflation will ensue and necessarily give rise to inflation tax. This kind of tax adversely affects everyone. From working or rich to household or businesses, hyperinflation can result to economic recession.
Pro-GST highlights the lack of unison of Hong Kong with other developed economies. In fact, virtually Hong Kong is in this classification that never has adopted GST. Although it is a valid argument that the country has a limited internal sovereignty due to “one country, two currencies” rule, inability of Hong Kong to integrate with other developed economies will undermine its historical successes in attractive foreign investments. Its previous tax strategies are lagging behind the adopters of GST which gives the latter the advantage in terms of the level of attractiveness of host country.
The current tax system of Hong Kong implements multi-tax rate systems compatible to the capability of the entities and individuals to pay them. This is an advantageous model because they will pay tax on what their income reflects. In effect, GST will hurt poor and working families and also small and non-profitable companies due to the flat rate. As the economy relies on the activities of SMEs, GST will basically hinder public welfare for the purpose of public welfare assuming that most of national residents and companies are living well. The setbacks of GST are also experienced by early implementers like Australia and Singapore economies.
Australia experienced initial economic down-turn with the application of GST but regained stability on the long-term. However, failure to influence the public behavior towards the acceptance of GST will equally be problematic as economic adversaries. Resistance to change on tax landscape requires social cohesion to avoid excessive debates and political turmoil. Exempted sectors are crucial in this undertaking because there could be a broadening negative connotation such as favoritism or under-the-table deals. The shift from the current to GST system is not only an economic and political issue but also a social and demographic subject.
Conclusion
The left wing blamed GST proponents due to excessive public spending. This is associated with earlier prediction that a rise in public expenditure leads to economic problems. Further, it is dubbed as discouragement for private investments and fall of profits with simultaneously increasing wages and taxes. There is also minimal control on the mobility of workers to transfer to service sector, thus, weakening the production capability of the country. On the other hand, the right wing critique combined the shortfall of welfare state in both political and economic lenses. In effect, it does not only address the increasing bargaining power of labor unions but more importantly the over reliance of the public to the government.
Credit:ivythesis.typepad.com
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