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This form of taxation presented itself at an early point in our discussions as an obvious sphere in which considerable additional revenue might be found. A large part of the public expenditure incurred by this Colony is properly municipal expenditure and it would seem appropriate that an increase of this nature should be met by a raised assessment.
A suitable increase in the rate would, no doubt, yield extra revenue of the order we assume to be contemplated, e.g. an addition of 8% would produce about $3,000,000. It would be appropriate to a large section of local public expenditure and would present little difficulty in collection by com- parison with other forms of increased taxation. We believe, however, that the final test of its acceptability must lie in the justice of its incidence, a matter to which our attention is clearly directed by our terms of reference.
The burden of an increase in the rates would be likely to be divided in the first place between tenant and landlord. If there were a shortage of houses most of it might be shifted at once to the tenant; if there were a surplus the landlord might have to suffer it temporarily. In the long run most of it would probably be shifted to the tenant, since capital seeking investment in property would still expect more or less the same net return after deducting rates. The tenants or occupiers consist partly of business enterprises, on whom the effect would be to tax disproportionately those, e.g. factories and dock companies, whose businesses require a large area of land, and partly of private occupiers, predominantly the dwellers in tenement houses. On the private occupier the assessment acts as a very approximate income tax, which, however, bears more heavily in proportion to income on the poor than on the better off, instead of bearing progressively more heavily on the higher incomes, as is expected of a modern taxation system. An increase in the rates would, in fact, be what is called a regressive, rather than a progressive tax.
In so far as an increase of rates was not passed on to the tenant, it would constitute a tax on a particular class of investor, the landlord, and would be discriminating as between him and others deriving income from capital invested in the Colony.
We have also been impressed by the view that any increased taxation having the effect of forcing up rentals and/or comparatively overtaxing "pro- perty capital" may be expected to encourage the slums, the eradication of which is one of the purposes for which, we assume, Government expects to have to find further funds. Any tax must force the taxpayer to adjust his mode of living to a reduced net income, but a tax bearing directly on housing accommodation necessarily forces such adjustment into a socially undesirable channel.
Having regard to these considerations of inequity and social evils likely to arise from the incidence of an increase in the rates, we recommend that, in spite of ease and economy of collection and the size of the yield to be expected, this means to additional revenue should be regarded rather as a last
resource.
Corporation Profits Tax.
(b) A tax on the profits, or dividends, of public companies operating in Hong Kong is a second suggestion which, in common with an increase in the assessment, could be made to produce additional revenue of substantial amount. It is estimated that the profits liable to such a tax might be something like $50,000,000 per annum, yielding annually, at 5%, $2,500,000. It would present, however, some difficulties of assessment and collection and it is open to objection on the score of equity. The effective administration of such a tax would require expert scrutiny of companies' accounts by something like an embryo Income Tax Department. Evasion (i.e. illegal concealment of profits liable to tax) would probably be small, but extensive efforts at 'avoidance" by devices within the law, e.g. transfer of registry, manipulation of accounts with associated companies outside Hong Kong, might be expected. No doubt such avoidance would be partly met by suitable safeguards in the law, and there would be a substantial body of company profits which would
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