Tax Reform?

1. Tax Reform? Prof. Stephen Cheung Professor (Chair) of Finance City University of Hong Kong

2. Contents • Do we need a tax reform? • How we can broaden the tax base? • GST or other alternatives?

3. Concerns of Hong Kong Future Development • Narrow tax base • Aging population • Economic growth is not sustainable • Increase the public expenditure

4. Why Hong Kong Should Broaden the Tax Base? • Reliance on a few taxpayers • Salaries Tax • Working population: 3.4 million • No. of salaries taxpayers: 1.2 million (≈35%) • Contribution of the top 100,000 (≈3%) salaries taxpayers = 60% • Contribution of the top 500,000 (≈15%) salaries taxpayers = 95% Source: Broadening the Tax Base, Ensuring Our Future Prosperity Consultation Document

5. Why Hong Kong Should Broaden the Tax Base? • Reliance on a few taxpayers • Profit Tax • No. of registered business: 750,000 • 60% of the total profit tax are paid by the top 800 companies (≈1%) Source: Broadening the Tax Base, Ensuring Our Future Prosperity Consultation Document

6. Why Hong Kong Should Broaden the Tax Base? • Aging population • Life Expectancy at present • Male: 78.8 (No. 1 in the world) • Female: 84.4 (No. 2 in the world, after Japan) • Life Expectancy at birth in 2031 • Male: 82 • Female: 88 Sources： Health, Welfare and Food Bureau and IMF Working Paper (WP/06/87)

7. Why Hong Kong Should Broaden the Tax Base? • Aging population • Fertility rate decrease • In the early 1970s ≈3.5 • In 2004 = 0.9 • % of persons aged 65 or above • In 1996 = 10% • In 2005 = 12% • In 2033 ≈ 27% • Working population decrease → Tax revenue reduce • Aging population increase → Medical and social welfare expenditure increase Source: Broadening the Tax Base, Ensuring Our Future Prosperity Consultation Document

8. Life Expectancy at Birth, 2004 Source: IMF Working Paper (WP/06/87)

9. Hong Kong Demographic Projections, 2005-45 Source: IMF Working Paper (WP/06/87)

10. Old-Age Dependency Ratio Source: IMF Working Paper (WP/06/87)

11. Why Hong Kong Should Broaden the Tax Base? • Expenditure on health care services • Expenditure on public health care services in 2004-05: 30.2 billion (14.4% of the recurrent public expenditure) • Every $100 received tax revenue → $22 was spent on public health care • Expenditure of Hospital Authority increase sharply • 1994-95: 14.5 billion • 2004-05: 27.8 billion Source: Building a Healthy Tomorrow – Discussion Paper on the Future Service Delivery Model for our Health Care System

12. Why Hong Kong Should Broaden the Tax Base? • Expenditure on health care services • Aging population • 49% of bed days in public hospitals are occupied by the elderly (65 years old or above) • In 2005-06 • services of Hospital Authority are used on the services for elderly Sources： Health, Welfare and Food Bureau

13. Why Hong Kong Should Broaden the Tax Base? • Expenditure on health care services • Over-reliance on the public health care system • Assume that there is no change in government policy, the Government would have to spend above $50 on health care services out of every $100 tax revenue collected by 2033 to provide the health care services currently provided Source: Building a Healthy Tomorrow – Discussion Paper on the Future Service Delivery Model for our Health Care System

14. The Effects of Aging on Public Finance Scenario 1: Assumes that current labour market productivity is maintained, the private sector shares part of the aging-related health cost and the Mandatory Provident Fund becomes the growing source of financing retirement income by 2030. Scenario 2: Explore similar assumptions in scenario 1 but with higher labour productivity growth. Scenario 3: The extreme scenario. It assumes a significantly lower productivity growth than in scenario 1 and 2, combined with the unchanged policies scenario where the government would have to bear a large part of the aging related cost. Negative fiscal reserves after 2030 denote accumulation of government debt. Source: IMF Working Paper (WP/06/87)

15. Good taxation system • Efficiency • Minimize compliance costs for taxpayers and administrative costs for government • Flexibility • Adapting to changes

16. Good taxation system • Certainty and simplicity • Transparent • Easy to understand • Effectiveness • Revenue-productive

17. Good taxation system • Fairness • Progressive tax • Neutrality • Individuals and business with the same ability-to-pay are taxed equally

18. Good taxation system • Revenue stability • Less sensitive to economic cycle • Stable revenue for the government • International competitiveness • Attractive investment environment • Simple and efficient

19. Tax Base Broadening Options • Increase salaries tax rate • Increase profit tax rate • Increase stamp duty on land property transaction • Reduction in personal allowances and concessionary deductions under salaries tax • Increase rates on tenements • Capital gains tax • Tax on interest

20. Tax Base Broadening Options • Tax on dividends • Tax worldwide income of businesses and individuals • Land and sea departure tax • Payroll and social security taxes • Poll tax • General consumption tax • Taxes on mobile telephone services and signboards

21. Revenue Yield* * As at 2000-01

22. Revenue Yield* * As at 2000-01

23. Revenue Yield* * As at 2000-01

24. Conclusion • The Government is facing a structure fiscal problem • The general public understand the seriousness of the problem • People will object the option which affects their own interests • Rational discussion on the tax base broadening options

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