Civic Exchange today released today a report entitled: “Taxation and Democracy in Hong Kong” written by Richard Cullen and Tor Krever. This report looks at the creation and maintenance of the revenue and political systems in Hong Kong. It is widely agreed that both these systems are in need of reform. The report looks, in some detail, at the linkages which may apply in the restructuring of these two systems.
Hong Kong’s tax system is comparatively outmoded and Hong Kong’s political system is notably outdated. The report shows, however, that the tax system is not primarily a product of the lack of democracy which has been a feature of Hong Kong’s colonial-style political system. Both systems have been crucially shaped, over many decades, by alliances between consecutive Hong Kong Governments and elite business groups. But they have each developed separately.
In the modern world, in both rich and poor jurisdictions, citizens are concerned about their political rights. But when it comes to taxation, the research shows that what they seek above all, when they turn their minds specifically to this issue, is value for the money they pay to government. Thus, Hong Kong, with its comparatively sound record on fiscal policy, is fairly well placed to initiate major tax reform as a stand alone project. The research also indicates, though, that the HKSAR Government itself does not feel confident about
implementing an energetic tax reform program. What is the explanation for this apparent paradox? The reasons include, the Government’s unease about its post-1997 track record, generally, and an appreciation that its entirely appointed status creates an ongoing, structural legitimacy problem.
“Substantial reform of the revenue system in Hong Kong is coming. Our research shows, though, that this will not necessarily add significant impetus to the calls for increased democracy. Despite this, the most sensible way forward for Hong Kong would be to mesh serious tax reform with meaningful political reform. This would help close the Government’s credibility-gap and enhance its tax reform resolve” said Professor Richard Cullen, Monash University (Australia) and Research Fellow at Civic Exchange.
The report suggests some fundamental issues which need to be addressed as Hong Kong prepares for tax reform. The issues include:
• How can the HKSAR Government best be “weaned” from its continuing, excessive dependency on revenues derived from land-related transactions?
• Would Hong Kong benefit from the introduction of a new general Goods and Services Tax?
• Is it time to reconsider Hong Kong’s reliance on source-based or territorial taxation?
• Is it time to consider replacing the operationally separate, schedular system in the IRO with a single general income tax?
• Should other reforms be considered in order to widen the tax base?
• How can the tax burden be shared most fairly under any reformed system?