7.
Nevertheless, there does not seem to be much criticism of the way the system is operated at the moment. In particular, I heard no complaints that the potential conflict of interest arising from the fact that the Hong Kong Bank at present discharges some of the function: of a Central Bank, has in fact led to any difficulties. In general,
evarea.
I did not feel there was much need for pressure on Hong Kong in this
The situation continues to evolve, but needs to do so in a way that takes due account of the importance of confidence factors, and in particular of the need not to create any fears about the possible imposition of exchange controls.
Tax System
14
8. The standard line on this is that rates of personal and Corporation Tax will be raised if this is necessary in order to finance rising levels of public expenditure; but that no such need has arisen yet. It was also frequently emphasised to me that a more progressive system of personal taxation is not necessary because the poor do not pay income tax and there is no envy of the low rates paid by the rich; and that Corporation Tax must be kept low as an incentive to investment, since apart from the system of accelerated depreciation there are no other investment incentives in Hong Kong. In spite of all this, there seems to me no reason why Corporation Tax should not be raised to 20% or even 25%, though this probably would require the introduction of some fiscal incentives for investment. Similarly, since the gap between Corporation Tax and Salaries Tax could not be allowed to widen too far, I see no reason why the maximum rate of Salaries Tax as well should not be increased over time to 20% or 25%. This would ease one of the criticisms I did sometimes encounter, that it is unfair for middle-income people to be taxed at 30% at the margin while the very rich are taxed at only 15% at the margin.
9. I also see no good reason why much more should not be done to get away from the territorial source basis of taxation. Although the Financial Secretary's view was that any such change was politically a non-starter and administratively impossible, neither of these
5
CONFIDENTIAL
/objections