A good tax in service of democracy

South China Morning Post  |  Mar 3, 2005

By Sin-ming Shaw

On a normal day, only fools, tax-and-spend politicians or billionaires with a conscience seek higher taxes. But not every day is normal. Raising taxes can be good, and lowering taxes may be bad.

Under US President George W. Bush, taxes have been lowered while the country has runaway fiscal and current-account deficits. The US dollar has dived. A better policy would have been to keep president Bill Clinton's higher tax rates, plus add a new fuel tax to cut imports and reduce dependence on Middle East oil. Of course, Mr Bush has done neither.

Hong Kong is only just recovering from six years of recession - raising taxes here is a bad idea. There is, however, a strong case for a goods and services tax (GST) - provided that it is part of a tax reform which must include a cut in direct tax, from the current maximum of 15.5 per cent to, say, 8 per cent.

This is necessary to offset the economic drag of a new sales tax. It would also put a cap on government profligacy that took the administration's share in gross domestic product from 17 per cent in 1997 to 21 per cent last year. Under the reform, every working person must pay income tax.

The Tung administration knows that such a task is too daunting, but the next chief executive will have to tackle the issue. A leader who can summon the best in people could convince them that it is a good idea.

There are three important reasons for a GST. First, it will enable a future government to avoid being over-dependent on property sales and in that process influenced by the private interests of a handful of tycoon underwriters. That relationship is unhealthy for a free society. The government must get revenue from a new source.

Second, a GST introduces more equity. At present, the tax burden falls on a small number of people. Out of a labour force of 3.2 million, nearly 2 million (62 per cent) pay no direct tax. About 300,000 income-tax payers account for 80 per cent of the total tax revenue from the payroll. That is unfair.

Many object to the regressive nature of a GST because the poorer classes would pay more, as a proportion of their earnings, than high-salary earners. This is true, and therefore, we should limit the GST to a less onerous 1-1.5 per cent.

Third, a tax regime that makes every citizen pay into a common "pot" also makes that person aware that everyone has a stake in how the money is spent, and by extension, how the government is run. This would effectively lay a more solid foundation for democracy. Everyone would become far more concerned with public affairs and, out of that concern, future leaders are born. Those unhappy with the way their hard-earned dollars are spent may wish to get elected to kick out those in power.

The people who always say that Hong Kong is not ready for democracy should be pushing for an overhauled tax regime, and should trust the public to vote for its own interests. The end result will be more stability, less chaos. That is what democracy is about.

Sin-ming Shaw is a visiting scholar at Columbia University. This is the third of a five-part weekly series on Hong Kong's economy and leadership

 Back to home page