It appears increasingly clear that Hong Kong is not going to have a fiscal deficit, despite the global financial tsunami. Hong Kong's current fiscal structure is adequate to generate enough revenue to meet its needs. There is no imperative to find new revenue sources. There's also no need to attempt to reduce the "volatility" of the tax intake, since that "volatility" actually makes life easier for people during times of economic stress. Yet there is a case for some adjustments to make our tax regime fairer and make our economy more competitive.

There have been calls to reduce the profits tax from the business sector. I support this. A lower corporate income tax rate will certainly make Hong Kong more attractive as a place to conduct business. With more investment, we can expect more jobs and then higher wages, which will help reduce our still high unemployment rate and alleviate poverty. Although it may be felt that the big corporations who make big profits can afford to pay higher taxes, as long as the profits are not distributed in the form of dividends they will be invested and this may generate another round of hiring and economic activity that will benefit more people.

Hong Kong currently does not tax dividends. A decline in the tax rate on profits may lead to a bigger payout to shareholders. But typically only part of the profits are distributed, and moreover, today many working class people also own shares in big companies. I would not be troubled if some people get a fatter dividend.

On the other hand, there are people who make very, very high incomes. They make millions, tens of millions, or even over a hundred million dollars a year. Taxing their marginal incomes a few percentage points higher is not going to reduce their work incentive or their quality of life.

Following the same logic, I would consider landlord's rental incomes being subject to a more progressive tax rate structure.

To start with, I think we should immediately remove the Standard Tax Rate arrangement, which does nothing but protect the super-high income earners from paying taxes according to the tax bracket rates. With the top marginal tax rate at 17 percent and the current standard tax rate at 15 percent, removing the Standard Tax Rate arrangement would at most increase the marginal tax rate of top earners by two percentage points. This is not much, but a good start.

I would respect the Basic Law and would not call for a dramatic hike in tax rates for top income earners. But in the past we gradually cut the top marginal tax rate from 25 percent to 17 percent. I consider it perfectly acceptable to apply up to a 20 percent marginal tax rate for top earners making more than HK$2 million.

The author is director of the Centre for Public Policy Studies, Lingnan University

(HK Edition 02/12/2010 page1)