ལ་ ་"་ -་་ ་ ་
CONFIDENTIAL
There would be a 17% increase in recurrent expenditure to be financed from taxes and charges at existing rates. There would be a 47% increase in capital expenditure financed from an overall increase of GDP at about 16%. However he did not want this last figure to bulk too large; it was an estimate only and continually fluctuating. Mr Haddon-Cave thought the growth rate in 1976 would probably hit 16% (this including the effects of stock-building). For Hong Kong in the early stages of an upswing it was not a surprising rate of growth. Hong Kong had just experienced a trade cycle for the first time in 15 years. It had been very clearly defined and the Hong Kong economy had recovered faster than had been anticipated.
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Lord Goronwy-Roberts asked if there was any intention of an increase in company taxation and Mr Haddon-Cave said that in the last budget he had found it impossible, for technical reasons, to increase the rate of corporation profits tax more than half a point. Lord Goronwy-Roberts understood that the Inland Revenue Ordinance Review Committee was to report on 15 December on the performance on the whole of the existing tax system of progressive taxation. Mr Haddon-Cave said that Hong Kong's tax system was based on two principles:
(a) Hong Kong did not aggregate, but it taxed income streams separately;
(b)
Hong Kong used the territorial source criterion; there was no "world income" concept. The Inland Revenue Ordinance Review Committee was looking at these two principles to see if any changes were necessary in the law. Previous Committees had looked merely at the operation of the arrangements exist- ing then. If the Committee recommended aggregation and its recommendation were accepted, then a further degree of progressivity would be possible. The present system was proportional rather than progressive except in the case of salaries tax. But even salaries tax was only progressive up to a certain income level; income above that level was taxed at the standard rate. There would always have to be a degree of proportionality, even for personal taxation. But he was on public record as saying that there must be a greater degree of progressivity. Lord Goronwy-Roberts said that he was not arguing for progressivity. Nor, he thought, would the Secretary of State be dogmatic on this point. What was funda- mental was: (a) equity in contribution and (b) a bias in favour of lessening the burden on the lower-paid. Progress- ivity might not achieve either of these. It was the end- result therefore which was important rather than the means used in achieving it. He was concerned that there should be the maximum possible progress in social development. The system should be biased in favour of this at the lower end of the income and social scale. It was for Hong Kong to decide on the techniques to be used in reaching this end.
5. Mr Haddon-Cave said that there was no question of those at the lower end of the income spectrum paying any personal tax at all. A married man with two children had to earn more than HK$25,000 before he became liable to salaries tax and he paid very little to indirect taxa- tion. Without a high rate of investment Hong Kong was not competitive; hence the need for a low standard rate of profits tax. As to indirect taxation, Hong Kong could not have a general customs tariff on imports
CONFIDENTIAL