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HONG KONG -- How do you sell a general sales tax to a commercial mecca that
has never had one?
Cautiously.
Hong Kong has long thrived as a bustling center for merchants and a
destination for shoppers. From the humblest market stall to the toniest
boutique, the city is famous for its brisk commerce with little government
interference. Last year more than 23 million visitors spent more than 105
billion Hong Kong dollars, or US$13.5 billion, here on everything from expensive
electronics to designer clothes to cosmetics, most of it tax free.
Now the government is arguing that Hong Kong must broaden its narrow tax base
to avoid the fiscal ups and downs that have rocked it in the past. The
administration is pushing for a 5% sales tax and last week issued an 89-page
report with its first detailed analysis of how it would work. The tax would
exclude financial transactions such as mortgages and loans but cover almost
everything else, from subway fares to fast food. The proposal also might be used
to trim the corporate-tax rate.
The tax, if it becomes law, wouldn't take effect for several years, but
already the very idea has everyone from shopkeepers to economists to the last
British governor of Hong Kong sounding off.
Jack Maisano, president of the American Chamber of Commerce, fears "a new
layer of bureaucracy and complexity" for businesses and tourists alike, though
tourists could apply for a refund on some purchases.
"The fact that Hong Kong is the only developed economy without some kind of
consumption tax is a unique competitive advantage," Mr. Maisano says. "Why give
that up?"
Corporations operating in Hong Kong might enjoy a huge windfall under one of
the proposal's scenarios. The government, intent on broadening its revenue base
without exacting more taxes, plans to use the HK$20 billion or so it expects to
reap each year from the sales tax to reduce the personal-salaries tax or the
corporate-profits tax or to enhance public services. If the money goes toward
cutting the already-low 17.5% maximum tax on incorporated businesses' profits,
that rate could be sliced by as much as five percentage points.
Such a corporate bounty -- together with a sales tax the average Joe would
feel most keenly -- isn't going down well with many in this city, where
investment bankers in Maybach sedans glide by hunched old men and women peddling
trinkets in the street. "You are robbing the poor to help the rich," legislator
Lee Cheukyan of the Confederation of Trade Unions said at a Legislative Council
session on the sales tax last week.
Even the popular and plainspoken Chris Patten, Hong Kong's last British
governor, has gotten into the act, on a visit to the city last week to tout his
new book, "Not Quite the Diplomat." In not-quite-diplomatic remarks to a local
newspaper, he criticized Financial Secretary Henry Tang for the proposed sales
tax, calling it "socially inequitable." Mr. Tang parried with a colorful
Cantonese colloquialism.
The idea of the tax is "a surprise," says Jeff Lau, manager of Sun
Electronics Co., a small shop in Hong Kong's jam-packed Wan Chai district. "We
are not used to tax for more than half a century in Hong Kong."
Actually, it is more like a century and a half, since Hong Kong was ceded to
Great Britain in 1842 at the end of the First Opium War. It then blossomed as a
nexus of free trade between China and the West. Today, nine years after the
British returned Hong Kong to Chinese control and nearly two decades since the
idea of a general sales tax first was broached, it remains a hot topic in these
parts.
Most everyone agrees the tax base should be broadened somehow. Hong Kong
relies on a volatile revenue stream from taxes on income, property sales and
business profits, all of which fell drastically during the Asian financial
crisis of 1997-98 and plunged Hong Kong into a crippling deficit. While
sales-tax revenue also would be somewhat cyclical, the broader base would add an
element of stability.
Today, Hong Kong is flourishing economically, yet a July report from UBS
Securities Asia Ltd. concludes that "Hong Kong's current fiscal position is far
too dependent on pro-cyclical revenue sources such as land prices and investment
income." Only the wealthiest 35% of Hong Kong people pay any income tax at all.
"Both local and foreign companies in Hong Kong would gain from the
[corporate] profit-tax cuts," says Joe Lo, a senior economist for Citigroup.
"Hong Kong will have a stronger attractiveness to foreign companies, and this
would increase Hong Kong's competitiveness as a regional business sector."
The current, narrow tax base is "not sustainable," says David O'Rear, chief
economist of the Hong Kong General Chamber of Commerce, who notes that besides
Hong Kong, the only places in East Asia that don't have a sales tax are the
Chinese special administrative region of Macau, the tiny sultanate of Brunei and
North Korea.
"It's been done in almost every other developed economy of the world," Mr.
O'Rear says. "This is not rocket science."
