DE 18-77
Reference...
8. The bulk of the report deals with more tractable problems. Taxation of wives. At present the income of husbands and wives is aggregated and a married persons allow- ance is given against this income. The allowance is less than twice a single persons allowance reflecting the feeling that the taxable capacity of a married couple is higher than that of two single people. Because the marginal tax rates rise with income (until an average tax rate of 15% is reached) a further tax disability is put on married couples when the wife has income. The Report does not advocate separate assessment for husband and wives but suggests the introduction of what in the UK is known as a wife's earned income allowance - except that in Hong Kong the .allowance will be available against both earned and unearned income. The use of the allowance as an offset against profit, rent and interest income seems unwise. Its effect will be that if a wife is not working and the husband transfers financial assets to the wife, a substantial amount of financial income will be untaxed. The Report recognises the need for precautions against income splitting but it is hard to see how the above type of income splitting can be avoided. For couples where the wife does not work, the effect of the allowance will be that a substantial unearned income will be tax free.
Taxation of rent. The Report proposes a move away from the taxation of a property to the taxation of the individual owning the property. At present the taxation of rent is based on a system similar to that used for property rates. The market rent for the property is assecsed and then the owner is liable to a tax of 15% on this assessed rent. Under the proposed Lystem of rented property will have to declare their actual incone from rent and this will be taxed along with other income. Because the point of origin for the current tax is the property there is minimal evacion. When the individual owner is responsible for declaring the rent tax evasion may increase, but against that the assessed rent levels have generally lagged well behind actual rent levels. Provided evasion is limited the reform is worthwhile. Taxation of dividends. The Report rejects the idea of a dividend withholding tax whereby dividend.. would be subject to income tax. It does so on the grounds that dividends are not an in lependent source of income. The source of the income is the profit made by the company and the dividend merely represents the distribution of the profit. The company i, taxed at the standard rate and so any further taxation would represent in the view of the deport, an undesirable move towards double taxation of the same flow of income. The Report recognises that shareholders do obtain benefits from the existence of limited liability companies and so suggests that the standard rate should be slightly higher for companies. (The current UK practice is to tax dividends from company profits at higher rates than interest payments and these at higher rates than income from employment.) Economically, the Hong Kong system is preferable as it is neutral between different types of income though some would argue that such a system ought to be complemented with a small wealth tax. The committee also refused to allow owner occupied mortgage interest as an offset to earned income. The Report argues that as the liability of an owner occupier to pay tax on the notional rental value of his property has been abolished, the mortgagee cannot expect to benefit as well from tax relief on interest paid. Economically this is a very sound point, ac to allow tax deductibility of mortgage interest (as in the UK) while allowing no deduction for people who pay rent ensures that the long term availability of rented accommodation will be limited. Social policy might suggest that it is beneficial to encourage home ownership but the Report ruled out consideration of social policy. Taxation of income in kind (fringe benefit..) It is here that the Report falls down most. It is at pains elsewhere to ensure that neutrality of the tax system between different forms of income but this is not carried through for fringe benefits. The current arrangements means that employers can pay that part of the rent of an employee which exceeds 10% of the employee's income and the employee will not be taxed on this payment. Alternatively, an employer can provide accommodation and
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value of the benefit is